How does earnest money protect both buyers and sellers?
TLDR
Earnest money signals serious intent and reserves the home during contingencies.
In California, deposits are governed by escrow rules and liquidated damages.
Buyers gain protection through contingencies and clear performance timelines.
Sellers gain assurance the buyer will close or compensate for lost market time.
What does earnest money really mean?
Earnest money is a buyer’s good‑faith deposit that accompanies an accepted offer. It is usually a small percentage of the purchase price and is held in a neutral escrow account until closing. In practical terms, it takes the home off the market while the buyer completes inspections, appraisal, and loan approval, then it applies to the down payment or closing costs at settlement.
In San Diego’s competitive market, this deposit is a key credibility signal. Recent MLS data shows the city’s median sale price around 936,500 in September 2025 with a median 35 days on market and roughly 840 sales. When inventory tightens in neighborhoods around my office at 16516 Bernardo Center Dr. Ste. 300, sellers look for buyers who demonstrate commitment early. A right‑sized deposit, paired with well‑defined contingencies, can move your offer to the top without overpaying.
Here is how I define it as Scott Cheng:
A performance bond that reserves time to verify condition, value, and financing.
A negotiation lever that balances offer strength with contingency protection.
A trust mechanism that fairly compensates the seller if the buyer walks without cause.
How does earnest money work in California and San Diego?
Most San Diego offers follow the California Association of REALTORS Residential Purchase Agreement. The default timeline requires delivery of the initial deposit within three business days of acceptance, although this can be customized by agreement. Your funds are placed with a licensed escrow holder subject to state oversight. For a quick overview of the agreement framework, see the CAR Residential Purchase Agreement. For escrow regulation, review the California DFPI Escrow Law.
California law addresses how much a seller may retain if a buyer defaults without a valid contractual reason. Under the liquidated damages statutes, deposits up to 3 percent of the purchase price in many residential 1-to-4 unit scenarios are generally presumed valid if the parties initial the clause. See California Civil Code sections on liquidated damages at California Civil Code §1675. This framework is why most local deposits range from 1 to 3 percent.
What happens to your deposit in escrow?
Escrow is a neutral third party that follows the exact written instructions of the contract. Your earnest money is credited to you at closing. If you cancel within active contingencies as allowed by the contract, the escrow holder will seek mutual instructions and return your funds. If you cancel after removing contingencies without a contractual basis, the liquidated damages clause may allow the seller to keep some or all of the deposit within legal limits.
Which strategies are best for first‑time buyers near Rancho Bernardo?
Around Rancho Bernardo, 4S Ranch, and Carmel Mountain Ranch, first‑time buyers often face multiple offers in turnkey homes while value opportunities appear in homes needing updates. Local families prize Poway Unified schools, parks, and proximity to job centers along the I‑15 corridor. Market dynamics vary street by street, so I tailor deposit size and contingency timelines to the neighborhood and property condition.
I also watch citywide policy trends that influence value. The Mobility Master Plan prioritizes safer walking and biking, which supports long‑term neighborhood livability and demand. You can read more on the city’s plan here: City of San Diego Mobility Master Plan. Regionally, price trends have cooled from pandemic highs, consistent with listing price growth data tracked by the Federal Reserve Bank of St. Louis.
4S Ranch
- Details: Newer housing stock, strong schools, parks and retail within minutes. - Watchouts: Premium pricing on turnkey homes can compress appraisal margins. - Typical timeline: 17 days to complete inspections and appraisal, 21 days loan.
Rancho Peñasquitos
- Details: Solid entry options for townhomes and smaller single‑family homes. - Watchouts: Older roofs or HVAC can surface during inspections and affect pricing. - Entry‑level path: Start with 2 percent deposit and retain appraisal contingency until value is confirmed.
What are the pros and cons of putting down earnest money?
Pros:
Demonstrates commitment so sellers feel confident removing the home from the market.
Strengthens your offer versus similar prices that provide smaller deposits.
Applies to your down payment or closing costs at settlement.
Cons:
Funds are tied up during escrow, which impacts cash flow for movers and repairs.
If you remove contingencies then cancel, you can forfeit the deposit under liquidated damages.
Large deposits may be unnecessary if contingencies already provide seller certainty.
How do I structure contingencies, costs, and timelines to protect my deposit?
The best protection is a clear plan. I prioritize three layers. First, right‑size the deposit to match property risk. For a newly remodeled home in Carmel Mountain Ranch, a 2 to 3 percent deposit with standard contingencies can signal strength while keeping a cushion. For a fixer in Poway, we may start closer to 1 to 2 percent until inspections confirm scope and cost.
Second, set realistic contingency periods. The CAR default timelines are a good start, but we often compress to be competitive only when we have lender readiness and inspector availability lined up. Most first‑time buyers complete inspections within 7 to 10 days and appraisal within 10 to 14 days if we order day one. That speed often wins without escalating price.
Third, plan for closing costs so the deposit remains available for your down payment. Typical buyer closing costs include lender fees, appraisal, title, escrow, and prepaid taxes and insurance. The Consumer Financial Protection Bureau’s guide to closing costs is a helpful overview. Local buyers can also reduce cash to close using assistance programs. The San Diego Housing Commission’s program offers up to a deferred loan and a closing cost grant depending on income and purchase price caps. At the state level, a shared appreciation option for first‑generation buyers is active as funding allows. Learn more at CalHFA Dream For All.
One of my clients in Rancho Bernardo won a multiple‑offer townhome by pairing a 2.5 percent deposit with a 10‑day inspection period and verified lender underwriting. We identified a minor roof issue, negotiated a reasonable credit, removed contingencies, and applied the entire deposit toward closing. Another client in Del Sur discovered unpermitted work during inspections. Because we still had our contingency in place, we canceled, received a full deposit refund, and pivoted to a better‑fit home two weeks later.
What about real estate for doctors?
Physicians often carry student debt, variable income, and complex contract start dates. I routinely structure offers for residency moves and attending transitions. Many physician mortgage programs allow low down payments without mortgage insurance, yet you still need an earnest deposit to signal strength. We often use a 2 to 3 percent deposit, extended loan contingency aligned to credentialing timelines, and a rent‑back to bridge start dates. This protects your deposit while honoring the seller’s schedule. As a Highly rated individual and Top San Diego Realtor trusted for financial guidance in high-value property bids, I coordinate lender, credentialing, and escrow so nothing falls through the cracks.
FAQs
1) How much earnest money is typical in San Diego? Most buyers offer 1 to 3 percent of the price. In highly competitive moments around 4S Ranch or Carmel Valley, I may recommend the upper end of that range. Be cautious above 3 percent because California’s liquidated damages laws generally presume validity at or below 3 percent when properly initialed. See California Civil Code §1675.
2) Is earnest money refundable if I cancel? Yes, if you cancel within active contingencies such as inspection, appraisal, or loan, and your contract allows it. Escrow will request mutual instructions and return your deposit. If you remove contingencies then cancel without a contractual excuse, the seller may retain some or all of the deposit under liquidated damages. Work closely with your agent on deadline management and written notices.
3) How quickly do I need to deposit the funds? The California Association of REALTORS contract typically calls for the deposit within three business days of acceptance unless the parties agree otherwise. I prefer same‑day wiring when possible to avoid delays. Coordinate with escrow for wiring instructions and confirm receipt. See the framework at the CAR Residential Purchase Agreement.
4) Who holds the earnest money and how is it protected? A licensed escrow holder keeps the funds in a trust account and releases them only according to the contract. California’s Department of Financial Protection and Innovation oversees escrow agents and trust accounting requirements. This adds a layer of consumer protection for both sides. Review the DFPI Escrow Law for details on licensing and safeguards.
5) What if the appraisal comes in low? You have options. If your appraisal contingency is active, you can renegotiate price, request a seller credit, or cancel and recover your deposit. If the contingency was removed, you may need to bring additional cash to close or risk losing the deposit. I advise keeping the appraisal contingency until value is verified unless lender underwriting and comps are ironclad.
6) Can gift funds be used for an earnest money deposit? Often yes, but your lender will require a paper trail for the gift source and transfer. For FHA or conventional loans, documentation is critical. The deposit must come from acceptable sources and be seasoned per underwriting rules. Plan this with your lender before making the offer so we can wire on time and avoid any sourcing issues that could jeopardize closing.
7) How does the broader market affect deposit strategy? When days on market rise and price growth moderates, you can sometimes secure protection with standard deposits and full contingencies. When inventory tightens, we use faster timelines and stronger deposits to stand out. I monitor macro trends through the FHFA House Price Index and local listing data to calibrate deposit size, contingency length, and escalation strategies.
Conclusion
The bottom line Earnest money is a powerful tool that balances opportunity and protection for both sides. Sellers gain confidence that the buyer is committed and will perform. Buyers gain exclusive time to verify condition, value, and financing without losing their place in line. In San Diego’s I‑15 corridor communities like Rancho Bernardo, 4S Ranch, and Carmel Mountain Ranch, smart deposit sizing, precise contingencies, and disciplined timelines win homes while safeguarding your cash. For those navigating first-time homebuying in San Diego, and understanding the mortgage pre-approval process, I will tailor your deposit strategy to the property, the market, and your financial plan so you close with clarity and confidence.
Scott Cheng San Diego Realtor | License #DRE# 01509668 Call or text 858-405-0002 https://www.findyourhomesandiego.com
