Earnest Money in California: What LA Buyers Need to Know Before They Wire the Deposit

How does earnest money work in California and Los Angeles?

In California, earnest money (called the "initial deposit" in the C.A.R. Residential Purchase Agreement) is typically 1% to 3% of the purchase price, wired to a licensed escrow company within 3 business days of offer acceptance. The deposit is fully protected while your contingencies are active. Once you remove them, the seller can keep up to 3% as liquidated damages if you default. Unlike Texas, California has no option period. Your only unconditional exit windows are the contingency periods built into the RPA.

By Paul Blair | August 22, 2026

When a seller in Los Angeles accepts your offer, two things happen fast.

First, congratulations. Second, you have 3 business days to wire your initial deposit into escrow.

That deposit, what most buyers call earnest money, is one of the most misunderstood parts of buying a home in California. It's not handed to the seller. It doesn't go to your agent. And it's not a handshake gesture you can walk back if you get cold feet.

In competitive LA markets, 3% of the purchase price is the floor, not a starting point for negotiation. On a $2 million home in Studio City or West Hollywood, that's $60,000 sitting in escrow before you've had an inspector on the property. On a $5 million home in the Hollywood Hills, it's $150,000.

Understanding exactly when that money is protected, and when it isn't, is one of the most important things you can know before you write an offer.

Where the deposit actually goes

California handles real estate transactions through escrow companies, not attorneys and not title companies managing funds directly. When you wire your initial deposit, it lands in a trust account at a licensed third-party escrow holder.

The seller cannot touch it. Your agent cannot access it. It sits there, neutral, until one of two things happens: the deal closes and your deposit is credited toward your purchase price, or the deal falls apart and the parties have to agree on who gets it back.

That "who gets it" question is exactly why the contingency periods matter so much.

How much should you put down?

The C.A.R. Residential Purchase Agreement doesn't set a minimum deposit amount. But in Los Angeles, 1% is often too low to be taken seriously in any competitive situation.

The market norm is 3%, which is not a coincidence. It matches the liquidated damages cap under California Civil Code Section 1675, which limits what a seller can keep if you walk away after removing contingencies. Sellers know this ceiling, so anything below it signals you're less than fully committed.

In genuinely competitive situations, some buyers offer 3% to 5% to stand out. In ultraluxury transactions above $10 million, fixed deposits of $250,000 to $500,000 are not uncommon. A higher deposit can tip a close call in your favor, but it also raises the stakes if something goes sideways.

A useful rule: put down 3% (or less) to stay inside the liquidated damages cap. Going above it doesn't change your legal protection and can expose more of your money if the deal falls apart.

Your deposit is protected, but only while contingencies are active

California's version of buyer protection isn't a blanket exit window like the option period Texas buyers get. Instead, protection comes through three contingencies built into the standard C.A.R. RPA:

• Inspection contingency: Defaults to 17 days. During this window, you can review inspection reports and cancel for any reason related to property condition.
• Appraisal contingency: Defaults to 17 days. If the home appraises below the purchase price, you can cancel or renegotiate.
• Loan contingency: Defaults to 21 days. If you can't secure financing on the terms in the contract, you can exit and recover your deposit.

Cancel within any of those windows, with proper written notice to the seller, and you're entitled to a full refund. Full stop.

The risk lives at the edges of those windows, and that's where a lot of buyers find themselves in trouble.

For a detailed walkthrough of how the removal deadlines actually work, see Contingency Removal in California: What Los Angeles Buyers and Sellers Need to Know Before the Deadline.

The passive removal trap

California contingency removal happens two ways: active and passive.

Active removal means you or your agent sign and deliver C.A.R. Form CR, explicitly releasing the contingency. Protection ends at the moment you deliver that form.

Passive removal is where buyers get caught. If you haven't canceled AND haven't actively removed the contingency, the seller can serve a Notice to Buyer to Perform once the deadline passes. That gives you 2 days to either remove the contingency or cancel. If you do neither, the seller can cancel the deal and move to keep your deposit.

The practical implication: if you're at day 18 and still on the fence about inspection results, you can't just sit there and assume your protection is still in place. You have to act. Cancel, actively remove, or request a written extension. Silence is not a safe middle path.

This is the single biggest misunderstanding I see with buyers who are new to California. They treat the contingency period as a window that closes softly. It doesn't. Once the seller serves that notice, the clock moves fast.

What happens if you default

If you remove all contingencies and then back out without a contractual right to cancel, the seller is entitled to keep your deposit as liquidated damages. California Civil Code Section 1675 caps this at 3% of the purchase price for qualifying residential transactions.

That 3% cap is why deposit amounts and the liquidated damages figure are typically identical in California contracts. On a $3 million home in Silver Lake or Brentwood, the seller can keep up to $90,000. On a $5 million home in Bel Air, up to $150,000.

The cap applies only when both parties have initialed the liquidated damages clause in the RPA, which they almost always do in standard residential transactions. And it only applies if your deposit equals 3% or less of the purchase price. If you offered $200,000 on a $3 million home, only $90,000 falls under the cap. The excess could potentially be subject to a larger damages claim.

That scenario is rare in practice, which is another reason why keeping your deposit at 3% or less is standard practice in California.

For a complete breakdown of how this clause works, see The Liquidated Damages Clause in California Real Estate: What Los Angeles Buyers and Sellers Need to Know.

One protection most buyers don't know about

California Civil Code Section 1057.3 gives buyers a legal backstop against sellers who refuse to release a deposit in bad faith. If a seller won't return your deposit within 30 days of a written demand following a proper cancellation, and they're doing so without a legitimate good-faith basis, you can sue for up to three times the deposit amount, plus attorney's fees.

This protection rarely comes up, but it matters. It keeps sellers from holding deposits hostage just to pressure buyers into completing a sale.

Using your deposit strategically in a competitive offer

In a market where two or three offers land on a desirable home the same weekend, your deposit amount is a signal. Here's how it plays out in practice:

A buyer offering the standard 3% reads as a serious, normal buyer. A buyer offering 4% or 5% with an accelerated inspection contingency period reads as someone willing to take a calculated risk to win the home. In Hollywood Hills or Beverly Hills listings with genuine competition, that difference can matter more than a few thousand dollars in list price.

The risk calculation is yours to make. A higher deposit means more at stake if the inspection reveals something serious. But in certain situations, moving the deposit up is less costly than losing the property to another offer.

If you're thinking about going fully non-contingent instead, that's a different and more significant decision. See Non-Contingent Offers in Los Angeles: What You're Agreeing to and What's Actually at Risk before you go that route.

Frequently Asked Questions

How much earnest money is standard in Los Angeles?

In Los Angeles and Ventura Counties, 3% of the purchase price is the market norm. On a $2 million home, that's $60,000. In competitive situations or luxury transactions, some buyers offer 3% to 5% to strengthen their position. Going below 1% is rarely taken seriously in the current market.

Is earnest money refundable in California?

Yes, if you cancel during an active contingency period with proper written notice. The inspection, appraisal, and loan contingencies in the C.A.R. RPA each provide a protected window (17, 17, and 21 days respectively by default) during which you can exit and recover your full deposit. Once all contingencies are removed, backing out without a contractual basis puts your deposit at risk.

Who holds the earnest money deposit in California?

A licensed escrow company holds the deposit in a neutral trust account. Unlike some states where deposits go to the seller or a real estate attorney, California's escrow system keeps the funds neutral until the transaction closes or the parties agree on handling a cancellation.

What is the liquidated damages clause and how does it apply to my deposit?

The liquidated damages clause, initialed by both parties in the C.A.R. RPA, caps the amount a seller can keep at 3% of the purchase price if a buyer defaults after removing contingencies. On a $4 million home, that's $120,000 maximum, regardless of how long the property sat off the market. California Civil Code Section 1675 governs this cap.

Can a seller refuse to return my earnest money after I cancel properly?

Technically yes, and it creates a deposit dispute. The escrow company cannot release funds until both parties agree or a court orders it. But California Civil Code Section 1057.3 penalizes sellers who refuse without a good-faith basis: treble damages up to three times the deposit amount, plus attorney's fees. That exposure keeps most sellers from dragging out legitimate cancellations.

Earnest money in California isn't complicated once you understand the structure. Put your deposit in escrow within 3 business days, track your contingency windows carefully, act before those windows close passively, and know that the 3% cap is both a ceiling and a target number.

If you're working through the right deposit amount for a specific offer, or you're preparing to write on a property where competition is a real factor, that's a conversation worth having before you submit. Reach out at greysq.com/contact and I'll walk through the numbers with you.

About Paul Blair

Paul Blair is the founder and broker of Grey Square, a virtual real estate brokerage representing buyers and sellers across Dallas and Los Angeles. With 22 years in the business and more than $200 million in closed transactions, Paul works the full range of the market, from luxury homes in the Park Cities and Preston Hollow to estates in the Hollywood Hills and across the Westside. Connect with Paul and the Grey Square team at greysq.com. TX TREC #9011505, CA DRE #01792671.