What are Liquidated Damages?
When you decide to buy a house and then write a purchase agreement, you are to show you commitment to buy with what is called a “good faith deposit.” We usually recommend that a good faith deposit be between 1 and 3% of the purchase price, the higher the better. The reason we say the higher the better (and banks will counter to increase it anyway) is because it shows your commitment to buy the property.
This good faith money (usually a check made out to a title company) will go into escrow the day an agreement is reached between you and the seller. The title company will deposit it and hold it under your escrow number and file and address of the property. It will be tracked on the net sheet and only released to the seller at close of escrow.
However, you are usually given an inspection and contingency period to complete all inspections on the property. The default on the purchase agreement is 17 days, however it may be anywhere between 5 and 17 days. You must complete all inspections and approve all related disclosures within this period. If you find anything amiss, the contingency period is when you get to back out of the transaction and get your good faith money back.
If however the contingency period passes and you sign a removal of contingency form, your good faith deposit is essentially the seller’s. After this point if you decide you do not want the property, your deposit will get sent to the seller as “liquidated damages” for the time they stayed off the market in escrow with you.
