Q. I started looking for a house in Temecula last year but decided to take some time off and have recently started looking again. I found a home I like however I’m being told that I must pay larger good faith money (also known as earnest money) to the seller for a Due Diligence Period. What is a Good Faith Deposit and a Due Diligence Period? – JT
A. The state of California statewide real estate contract (used in 90% of real estate purchases) includes a Due Diligence Period (17 Days) and Good Faith Deposit requirement. The due Diligence Period is the time where the buyer should do all of their investigations such as home inspection and get final loan aprovals if needed. In a competative market as we are seeing currently in the Temecula and Murrieta area’s the more you place as a good faith deposit the more you show the seller that you are serious. Typical good faith deposits are 1% to 3% of the purchase price. The good faith or earnest money is deposited into escrow within 3 days from the date of the contract agreement.
After you have reached an agreement with a Seller and the home is under contract, the clock starts on your Due Diligence Period. During this time, you must complete any inspections, appraisal, order surveys, order title, negotiate inspection repair items, complete any lender requirements and uncover any reason that would prevent you from purchasing the house. If you have uncovered a reason during this period (or if you have no reason whatsoever) and wish to back out, you can without any ramifications so long as it is prior to the end of the Due Diligence Period.
If your contact involved Earnest Money, the Earnest Money would be refunded to you through the Seller signing a Release of Contract.
Once the Due Diligence Period expires, if a Buyer decides to walk away, they will forfeit their Earnest Money as well to the Seller (except in cases where the Seller committed a material breach of the contract).
In exchange for the Due Diligence Period, earnest money is collected at the time of contract and paid directly to escrow. If find yourselves involved in a Multiple Offer Situation and you want the house, consider offering the Seller more earnest money as an incentive to take your offer. Again, exercise caution with this.
So, in summary, the earnest Money is adeposited into escrow at the time of Contract essentially to show the seller you are serious while you conduct your personal Due Diligence (whether you want to / are able to purchase this home or not).