Sizing up purchase deposits

In most states, it's customary, or required by law, for the buyers to include a good faith deposit when they make an offer to purchase a home. The deposit should not be given directly to the seller, but held by a trustworthy third party that maintains a trust account specifically for home purchase deposits, such as an escrow or title company, real estate firm or real estate broker.

The deposit can be in the form of a check made out to the third-party company or it can be wired into the appropriate account. The size of the deposit you make is usually determined by market conditions and local custom, except for specific types of sales, such as probate sales or sales of homes in a housing development where a minimum deposit is required.

HOUSE HUNTING TIP: Your deposit will become part of your downpayment if the sale goes through. Depending on how your contract is written, your deposit should be refundable if you are unable to satisfy a contingency, after exercising due diligence to do so. Your contract should include contingencies for inspections, satisfactory condition of title to the property, your ability to line up financing and the lender's approval of an appraisal of the property.

For example, if your inspections reveal defects that can't be satisfactorily negotiated with the seller, your deposit should be returnable if your contract provides for this. However, the deposit won't be released by the holder to either the buyers or sellers without a release signed by both parties indicating how to disperse the funds.

Be sure to check with a knowledgeable real estate attorney to determine who is entitled to the deposit if you back out for a reason that's not provided for in the contract. Real estate agents who aren't also attorneys cannot advise you on this issue. If you end up in a dispute, the deposit holder won't release the money to either party until the dispute is resolved.

How large a good faith, or earnest money, deposit you make will depend on several factors. In any case, your deposit should indicate your intent to abide by the terms of the contract and close the sale. There is usually no set amount required by law.

In California, where home purchase contracts can include a liquidated damages clause, deposits are often 3 percent of the purchase price. This clause puts a limit on damages that could be awarded to the sellers if the buyers don't close the sale. ...CONTINUED

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