Earnest Money: How Much and Who Holds It

Earnest money is the deposit a buyer puts down after you accept an offer, to show the buyer is committed; it is credited toward the price at closing. California law does not set a required amount, so it is negotiated, and what matters most for a seller is not the size alone but who holds it and when it stops being refundable. It should go to a neutral escrow holder, such as a licensed escrow company or a title company, by the deadline in the contract, and never to the buyer or anyone working for the buyer. Whether you keep it if the buyer backs out depends on the contract's terms and, often, on both parties signing a release.

This article is part of the cash buyer vetting section. Earnest money is one line of the checklist in how to vet a California cash home buyer.

What is earnest money?

Earnest money, also called a good-faith deposit or EMD, is cash the buyer delivers to escrow once the contract is signed. At closing it counts toward the purchase price. Before closing, it sits in escrow as a stake: if the buyer walks away for a reason the contract does not allow, the seller may have a claim to some or all of it.

On a cash sale, the deposit is also the first time the buyer's money actually moves. Proof of funds is a document; the deposit arriving at escrow is evidence. That is why verifying proof of funds and confirming the deposit go together.

How much earnest money is typical?

There is no statutory amount for a cash sale or any other. The deposit is whatever the buyer and seller agree to, and it tends to move with the price of the house, how long the buyer's inspection period runs and how many other offers there are. Sellers should judge it by one test: would losing it actually cost the buyer something? A deposit too small to matter gives a buyer little reason to close at the agreed price.

The one percentage in California law is often misread. Civil Code section 1675 says that when a buyer intends to live in a house of one to four units, a liquidated damages clause that lets the seller keep no more than 3 percent of the purchase price is presumed valid, and anything above that must be shown to be reasonable. That rule is about how much a seller can keep after a default, not how much a buyer must deposit. Most cash investors do not intend to live in the house, so section 1675 does not apply to them; section 1676 applies instead, which ties the clause to the general reasonableness test for liquidated damages.

Who holds earnest money?

A neutral third party. In California, a business acting as an escrow agent must be a corporation licensed for that purpose by the Commissioner of Financial Protection and Innovation. The Financial Code exempts some holders from that license: banks, credit unions and insurance companies, title companies, an attorney with a genuine client in the deal, and a real estate broker acting as an agent or party in the transaction. A broker who holds a deposit must put it in a trust account or a neutral escrow under the Business and Professions Code.

Who holds the depositAcceptable?What to check

Independent licensed escrow company

Yes

The company is licensed; you have its contact details from a source other than the buyer

Title company handling escrow

Yes

It is the same company issuing the title policy

Real estate broker's trust account

Yes, when the broker is part of the transaction

The broker's license on the DRE lookup

The buyer, or a company owned by the buyer

No

Insist on escrow

A wholesaler or an "escrow" you cannot find

No

Insist on escrow you choose or approve

California's Department of Real Estate tells consumers to check licenses on the DRE and DFPI websites before working with anyone in a real estate transaction, and it lists requests for wire transfers or cash as a warning sign. Get the escrow company's phone number from its own published listing, and confirm the deposit by calling that number.

When does earnest money become non-refundable?

The contract decides. In most purchase agreements the answer turns on contingencies, the conditions that let a buyer cancel and get the deposit back.

StageIf the buyer cancelsWhat controls it

Before the deposit reaches escrow

There is no deposit to claim

The deadline to deliver the deposit

During the inspection or due-diligence period

The buyer usually gets it back

The length of the period and what counts as a reason to cancel

After contingencies are removed

The seller may have a claim to it

The liquidated damages clause, if both parties initialed it

If the seller defaults

The buyer usually gets it back and may have other claims

The contract and the law; ask an attorney

This is why a cash offer's inspection period matters as much as its deposit. A long period with cancellation for any reason makes even a large deposit refundable for weeks. During that window the buyer can come back with a lower price, and the deposit will not hold it to the original one. Contracts that let the buyer assign the deal follow the same pattern; wholesaling explained for sellers shows why a small, refundable deposit and a long inspection period often travel together.

Does the seller keep earnest money if the buyer backs out?

Only if the contract and the law allow it. Three points from the Civil Code are worth knowing before you talk to an attorney.

• The clause has to be initialed. A provision letting the seller keep the deposit as liquidated damages is invalid unless each party separately signs or initials it, and in a printed contract it must appear in at least 10-point bold type or in contrasting red print (section 1677).
• Escrow usually needs both signatures. When a sale does not close by the contract date, both parties are obligated to see that deposited funds go back to whoever is entitled to them. Escrow typically needs both to sign release instructions.
• Refusing in bad faith costs money. A party who fails to sign the release within 30 days after a written demand can owe the deposit plus treble damages of at least $100 and no more than $1,000, and reasonable attorney's fees, unless the funds are held over a good-faith dispute (section 1057.3). If a lawsuit is filed, escrow deposits the disputed sum with the court.

Whether a particular buyer's cancellation was allowed is a legal question about your contract. Mr. Cali Offers describes the mechanism; an attorney applies it.

Earnest money on a probate sale

When a sale needs court confirmation, the accepted buyer can be overbid in the courtroom, and the closing runs on the court's calendar, not the buyer's. The deposit should still sit with an independent escrow company while that plays out. What a probate court confirmation and overbid does to a cash offer covers how the process changes a cash offer; the estate's attorney handles the filings and any deposit rules the court applies.

Questions to ask about any deposit

1. How much is the deposit, and by what date will it reach escrow?
2. Which escrow or title company will hold it, and can I choose or approve it?
3. How long is the inspection period, and what lets the buyer cancel during it?
4. When does the deposit stop being refundable?
5. Is there a liquidated damages clause, and have we both initialed it?
6. Will escrow confirm receipt to me in writing?

What this looks like in practice

These are the kinds of files that come in, described without names or figures.

• An Ontario seller whose first cash buyer asked for an inspection period and lowered the price after it. The deposit was refundable the whole time, so it never held the buyer to the first number.
• A seller holding a contract that names no escrow company and says the deposit goes "to buyer's office". That line gets changed before anything else is discussed.
• A trustee who wants written confirmation from escrow that the deposit arrived before releasing any further information to the buyer.

Check the deposit, then check the price

A good deposit tells you a buyer means to close. It does not tell you the price is right. A second opinion on a cash offer lays one walkthrough and two written numbers next to the offer you hold: a second as-is cash offer and an open-market read, which is a preliminary estimate, not an appraisal, each with comps, line-item deductions and the net, plus a note on the deposit and contingency terms worth asking about. There is no cost and no obligation to get the two numbers and the written report. When the house is market-ready and you have time for showings, listing often nets more, and the written recommendation says so.

Sources

• California Civil Code section 1675 (liquidated damages when the buyer intends to occupy): leginfo.legislature.ca.gov (accessed October 31, 2026)
• California Civil Code section 1676 (liquidated damages in other real property contracts): leginfo.legislature.ca.gov (accessed October 31, 2026)
• California Civil Code section 1677 (liquidated damages clause must be separately signed or initialed): leginfo.legislature.ca.gov (accessed October 31, 2026)
• California Civil Code section 1057.3 (return of escrow funds; bad-faith refusal): leginfo.legislature.ca.gov (accessed October 31, 2026)
• California Financial Code section 17200 (escrow agents must be licensed corporations): leginfo.legislature.ca.gov (accessed October 31, 2026)
• California Financial Code section 17006 (escrow law exemptions): leginfo.legislature.ca.gov (accessed October 31, 2026)
• California Business and Professions Code section 10145 (broker trust funds): leginfo.legislature.ca.gov (accessed October 31, 2026)
• California Department of Real Estate, Consumer Alert: Targeted Real Estate and Property Scams (February 19, 2026): dre.ca.gov (accessed October 31, 2026)
• California Department of Real Estate, Consumer Alert: Phone Scams Targeting Consumers and Licensees (June 23, 2026): dre.ca.gov (accessed October 31, 2026)

Mr. Cali Offers is not a law firm; whether a deposit is refundable under your contract is a question for a California real estate attorney. Cash offers come from independent buyers and investors who buy for their own account and may resell for profit; a cash offer is generally below what the open market would bring. Any value shown is a preliminary estimate, not an appraisal. Nothing here is legal, tax or financial advice.