Are There Any Penalties for Backing Out of Escrow As a Buyer?

I was asked this today by a first time buyer and thought it would be a good question to blog about.  In California real estate, the buyer is protected by the contract.  First off, with most transactions the buyer will write what’s called an Earnest Money Deposit (also called an Initial Deposit or EMD).  This is generally 1-3% of the sales price and is put into escrow.  The money is taken out of the account and held.  Think of it like a security deposit when you rent a place.  The buyer puts some skin in the game and then has the option of getting it back.  How you ask?  Everything is negotiable but in a standard contract the buyer has 17 days after acceptance to get all inspections done, review disclosures from the seller, get the loan in order, and order and approval an appraisal.

Side notes (it’s easy to go off on many tangents but I will try and keep it simple):

1.   Notice that I say “the buyer has 17 days after acceptance…”.  Let’s say the buyer writes an offer on Monday and the seller counters the offer (Counter Offer #1) on Tuesday.  Then, after thinking about it for a day the buyer accepts the sellers Counter Offer #1 on Thursday.  All the time periods for the transaction will be based off the buyer’s acceptance date of Counter Offer #1 (Thursday).

2.  The seller can never cancel the deal… unless the buyer says they’re going to do something and then doesn’t do it.  For example, a standard contract says that the buyer has 17 days after acceptance to remove contingencies (meaning, the buyer has done all inspections, read all the disclosures from the seller, had the property appraised by the lender, etc and is willing to move forward and make their Earnest Money Deposit non-refundable).  If day 18 after acceptance comes around and the buyer hasn’t removed contingencies (as they said that they would do in the original contract), then the seller has the opportunity to take action.  The seller can give the buyer a “Notice to Perform” which gives the buyer 48-72 hours (depending on the contract and what’s been agreed to) to “perform” (in this case, remove contingencies).  If the buyer doesn’t perform in the time specified by the seller, then the seller has the ability to cancel the agreement.  Under section 14C of the Residential Purchase Agreement discussing the Seller’s Right to Cancel it states:

“If, within the time specified in this Agreement, Buyer does not, in writing, deliver to Seller a removal applicable contingency or cancellation of this agreement (in other words, if after the 17 day period or whatever was agreed upon in the original contract, the buyer hasn’t given the seller a removal of contingencies or a cancellation) then Seller, after first delivering to Buyer a Notice to Perform, may cancel this agreement.  In such an event, Seller shall authorize the return of Buyer’s deposit.”

3.  Long story, short: if the buyer backs out of the transaction within 17 days (or whatever is agreed upon) and never removes contingencies, in writing, then the contract says that the buyer is entitled to their full deposit.  In California you don’t a reason to back out of a transaction as a buyer.  Cold feet, changed your mind, spite, etc.  These are all acceptable answers.  (Not so in the famous Seinfeld episode of the “spite” coat.  Take a study break and watch the 1 minute video by clicking the link below)

\”You Said Spite\”

As is traditional with my blog posts, I’m getting long-winded.  The answer to the question, “Are there any penalties for backing out escrow as a buyer?” is that it depends on when you back out.  The only money you don’t get back is the money you pay for the physical inspection (since it’s a third party company coming to do it) and the appraisal.  Both are about $400-$500 each.  If you back out within the contingency time period (usually 17 days, as discussed) then you are entitled to your full EMD back.  If you remove contingencies in writing, you are making that money non-refundable and it goes to the seller for costs they’ve already incurred (moving vans, repairs, etc) as well as their time off the market.