It is customary in Los Angeles for The Earnest Money Deposit (EMD) to be 3% of the purchase price. For example, on an offer of $1,000,000- the security deposit would be $30,000. Everything in real estate is negotiable, so you could put down more or less. Most listing agents will think it is strange if the Earnest Money Deposit is less than 3%. For special sales, like probates they may require larger earnest money deposits of 10%.
Earnest money must be made within 3 days of acceptance. It is a good idea to deposit the Earnest Money on the first day after acceptance to get the escrow started on the right foot. If you can’t get the EMD into escrow right away because you need to sell some mutual funds or something just let escrow and the listing agent know, they will be more willing to work with you if you give them a heads up.
Earnest Money may be delivered to escrow via certified check/cashiers check, WIRE transfer, or personal checks (Never cash!). Not all escrow companies accept personal checks so make sure to double check they accept them before going with this method.
Wire transfer is my favorite way to send in the EMD to escrow and it is the easiest. If you are wiring, you will need wiring instructions, which escrow will give you. The wiring instructions will have their bank account number and bank routing number which you will need when filling out a wire transfer form at your bank. Wire transfers cost $25 or so. There is a cut off for banks at around 2pm or 3pm for a wire to go out in the same day. So if you want the wire to go out the same day make sure you get into the bank early!
One common mistake I see buyers make all the time with Wire Transfers is transferring money from one of their accounts to another before making the wire. Lets say the earnest money deposit is $30,000 and the buyer has two bank accounts: a checking and a savings. The checking account has $20,000 and the savings has $10,000. Some buyers will mistakenly try to transfer money from one account to the other so they have the total $30,000 in one account to do the wire. The problem with this is that when you transfer money from one account to another it “disappears” from the banking system for a day or two before it “shows back up” in the account you moved it to. This delays the wire by two or three days. In most situations you can notify the listing agent and they will be ok if the Earnest Money deposit comes in late- but in some deals this error could cost you the deal. The best thing to do in the scenario above is to make (2) wire transfers, from each account to escrow. You will incur the wire transfer fee of $25 twice but there will be no delay. Wires time deadline for being sent out the same day is 2pm, so make sure you get to the bank before 2pm if you want it sent the same day.
A lot of buyers wonder why the Earnest Money Deposit is 3%. Paragraph 25 of the residential purchase agreement, Liquidated Damages clause is the reason it is 3%. Liquidated damages protects the buyer in the event that they default. With this provision, the maximum damages the seller can seek from buyer due to non performance (only after ALL contingencies have been removed) is 3% of the purchase price. If Liquidate Damages is not initialed the damages the seller could claim are unlimited. I recommend for buyers to always initial this provision.
Many buyers are worried about putting their Deposit in Escrow, because if they don’t purchase the property they are afraid that they will lose it. The California state purchase agreement is very bias towards the buyer and has a lot of protection for buyers, so you shouldn’t worry.
There are 3 scenarios that can happen with your EMD
1. Wrote offer but not accepted
Earnest Money is never deposited with escrow
2. Wrote an offer, offer was accepted, but cancelled during contigency period
Earnest was deposited with escrow, and then returned to buyer (Buyer may incur costs of any inspection fees, a loan appraisal fee, and an escrow cancellation fee)
3. Wrote an offer, offer was accepted, contigencies were removed, buyer breaches contract and doesn’t complete purchase.
Seller may retain the Earnest Money deposit as liquidated damages. Make sure you are absolutely certain you will buy the property before you removal ALL contingencies. The first contingency to be removed is usually the inspection contingency, followed by the appraisal contingency, and finally the loan contingency. Don’t remove the loan contingency until you have final loan approval from your lender.