Dreaming of a home in the picturesque City of Capitola, CA? Tucked away on the breathtaking coastline of Santa Cruz County, Capitola offers a delightful mix of charm, community spirit, and scenic views. With the vibrant atmosphere of Capitola Village, California, and the allure of coastal living, this area is especially appealing to buyers exploring Santa Cruz homes for sale. However, before diving into the Capitola and broader Santa Cruz real estate market, it’s crucial to grasp the details of earnest money deposits (EMDs). A well-structured EMD can tip the scales in your favor, especially in a market where properties are quickly snatched up.
Inside this Article:
What is an Earnest Money Deposit (EMD)?
Earnest money, often referred to as a contract deposit, good faith deposit, or escrow deposit, is the sum of money that is deposited into an escrow account following the seller's acceptance of your offer on a property. You typically pay it when you sign the purchase agreement or sales contract.
Purpose of EMD
In the competitive Santa Cruz real estate market, earnest money deposit is a common feature. In a hot market like in or near the City of Capitola, CA, putting down this 3% deposit shows that you are serious and ready to buy, which makes your offer stand out. It tells the seller that you really want their property. When you add a cash earnest deposit to your offer, it helps the seller feel more confident that you will go through with the sale. It is vital because once the property owner has accepted your offer or "purchase contract," they effectively take their home off the market. If the sale doesn’t go through, they will have to endure the tedious process of relisting and finding another buyer.
Essentially, an EMD acts as concrete financial proof of your sincerity, indicating that you're ready, willing, and able to invest in the property of your dreams.
Earned Money Vs. Down Payment
Some first-time homebuyers confuse earnest money with a down payment, but they’re quite different. The earnest money deposit is what you put down with your offer to show the seller you’re serious about buying the house, and it goes toward your down payment later on. The down payment is usually a more significant chunk of money than you pay at closing. A down payment is the cash a buyer puts down upfront when they’re buying a property with a mortgage.
Note that down payments only matter when someone isn’t paying for the home entirely in cash.
While many people finance their home purchases with a mortgage, some buyers still pay cash. In a mortgage scenario, the down payment serves a few key functions:
- it shows the lender that the borrower is financially capable of making future payments
- a larger down payment can also help the borrower secure more favorable loan terms.
- it helps the lender minimize their risk by reducing the loan amount.
Typically, earnest money deposits are a relatively smaller percentage of the total purchase price, whereas down payments generally range from 3.5% to 30%. Think of earnest money as a way to signal to the seller that you’re ready to back up your offer with some cash. Your down payment, on the other hand, is the first payment you make toward the purchase of your home. It sends a message to the lender that you have the funds to pay off the mortgage. Whether you’re looking at an FHA loan with a 3.5% down payment, a conventional loan with 20%, or a VA loan with no down payment, your down payment shows your commitment.
Just keep in mind that if things don’t work out and you back out of the deal, you could lose that earnest money.
Typical Earnest Money Size
In a competitive market like Santa Cruz, many buyers are inclined to make larger earnest money deposits—sometimes up to 5%—to increase the chances of getting their offers accepted on homes for sale in Santa Cruz. However, if you're searching for homes in near the City of Capitola, CA, you can typically find that earnest money deposits hover around 3% of the home's price, give or take.
Still, for higher-end properties, particularly those near beachfront Santa Cruz, Aptos, and other bustling small towns near Santa Cruz, like Capitola Village, California, buyers may opt for deposits as hefty as 5-10%. Your eagerness as a buyer and the prevailing market conditions will influence the final amount.
Factors Affecting the Size of Earnest Money Deposit
Several factors affect the quantity of your earnest money deposit in Capitola. If you're looking at higher-priced properties in Santa Cruz, be ready to shell out a bigger earnest money deposit. This often shows that you’re financially stable and really serious about buying. Different sellers might have their own expectations for these deposits, depending on how confident they are in the sale. And in a competitive market, it’s pretty standard for sellers to want larger deposits to ensure buyers are fully committed
Earnest Money: When Is It Due
In a typical Capitola real estate transaction, a property owner expects you to submit your earnest money deposit within three business days of signing the purchase agreement. However, a seller can request that this deposit be made sooner, ideally within one business day of acceptance.
Common Traps That Could Jeopardize Your Earnest Money
You've located the home you've always wanted and are working with the agent and property owner to finalize a winning offer. A key component is providing a significant Earnest Money Deposit (EMD). While it may appear to be another formality, unforeseen events may occur prior to closing, putting your hard-earned money at risk. Being aware of the hazards is critical for preserving your investment. Here are some scenarios in which the seller is allowed to keep your EMD.
Skipping Due Diligence
If you’re an investor or just hunting for a good deal, it can be tempting to rush into a contract without doing the necessary checks, like a home inspection. Some investors in Santa Cruz brag about closing deals without inspections to speed things up, but this can backfire. If you find serious problems with the property later, you might have to give up your EMD to get out of the contract.
Failing to Meet Deadlines
When a buyer signs a purchase contract, it’s not just about saying they want to buy the property. They also agree to a timeline that covers a myriad of things, including home inspections, contingencies, and closing dates. If you miss any of these critical deadlines, you could risk losing the whole deal, and that’s on you. If you don’t stick to what the contract says, the seller can move on to someone else and keep your earnest money deposit.
Agreeing to a Non-Refundable EMD
Sometimes, especially when buying bank-owned or investment properties, you might need to put down a non-refundable earnest money deposit (EMD) to show you’re serious about buying. If you’re sure the financing and contract terms are good, this could be a smart move. But it’s vital to understand what this means before you write that check because it means you won’t get your money back if things don’t work out.
Letting Bidding War Obscure Your Judgment
The Santa Cruz real estate market is known for low inventory, which fuels buyer excitement and competitiveness. When new Capitola homes for sale are listed, you can expect them to receive several offers and sometimes intense bidding wars, making the process feel like a race. Buyers in this fast-moving market may feel pressured to make bids on homes that do not meet their wants completely.
It is also common for some purchasers to increase their earnest money deposits, believing that a higher upfront commitment will make their offer more enticing. However, it’s important to tread carefully: if you later find out that the house doesn’t suit your needs—be it the layout, location, or overall feel—you could end up losing a significant amount of money if you decide to back out of the deal.
Dropping Contingencies Prematurely
When making an offer in a competitive market, you might have to cut down on the contingencies in your sales contract. Or, once you’re under contract, you might think some conditions have already been met and drop those contingencies too early. In both cases, not having enough protection can lead to canceled contracts, and you could lose your earnest money deposit.
Misunderstanding "As-Is" Purchases
Some buyers are excited about the savings from buying an “as-is” property, thinking they can fix any issues themselves. However, hidden problems, like structural damage or termite issues, can lead to surprise costs. It’s vital to have a home inspection contingency that says you won’t ask for repairs. Without this, you could lose your earnest money if you decide to back out of the deal.
Voiding a Contract Without a Refund
When both parties agree to cancel a sales contract, it's super important to clearly outline the conditions for getting a full refund of your earnest money. This way, the seller can't hold onto any part of your deposit. Once the contract is canceled, you lose any chance to convince the seller to give back your earnest money.
Realizing the Home Isn’t “The One”
Buying a house in or near the City of Capitola, CA, can be a wild ride, and it's totally normal to have doubts after checking out a few places. If you figure out that the house isn’t the right fit and there’s no clause allowing you to change your mind, you could end up losing your earnest money deposit if you decide to back out without a solid reason.
Difficulty Navigating FOMO for an Alternative Property
Just like falling in love, you can get caught up in the excitement of searching for a home for sale in Santa Cruz rather than the actual purchase. After locking in a contract, it’s easy to start worrying that there might be a better option out there. This emotional urge to cancel can cost you your earnest money, especially since a seller will usually want to avoid taking a big hit when they have to put their home back on the market.
Backing Out for Personal Reasons
Life can throw some curveballs, like health issues, relationship changes, job loss, or other unexpected events that can mess with a home purchase. In these cases, sellers often have a good reason to keep the earnest money deposit since the deal has been impacted by things outside the original agreement.
Contingencies and Increased Deposit Deadlines
You can structure your offer to include both an initial deposit and an increased deposit. For example, the initial deposit might be 1.5%, while the increased deposit could be an additional 1.5%, due after contingencies are released. This structure reassures sellers while allowing you flexibility as a buyer.
Where is the Deposit Held?
When you make an earnest money deposit, made out to or wired to the title company, it’s stored in a neutral third-party escrow account. This guarantees that your payments are protected until the transaction is complete, giving both you and the seller peace of mind. Please note that your earnest money deposit is used for your down payment. This implies that the money you initially provide goes toward your ultimate financial commitment to buy a property.
Is the Earnest Money Deposit Refundable?
Knowing the rules about getting your earnest money back is critical. Typically, if you cancel the contract while you're still in the contingency period—say, because the inspection didn't pass or you can't get a loan—you could get your money back. But if you just change your mind without a solid reason, you could end up losing that deposit.
Justifications for Home Buyers to Retrieve Their Earnest Money Deposit
- Denial of a Loan: If your purchase agreement includes a loan financing contingency and you are denied a loan, you can back out of the transaction and receive a refund of your earnest money deposit.
- Problems with the Title: When you conduct a title review, and the results reveal defects like outstanding liens or unknown heirs, the purchase agreement includes a title contingency so you can back out and recover your deposit.
- Major Issues with the Home: Should a home inspection find major issues, like with the foundation or critical systems, you have the option to ask for repairs or back out of the purchase altogether, and your earnest money deposit is likely to be refunded
- Inability to Sell Current Home: When buyers are selling their current home while searching for a new one, they often include a home sale contingency in their agreement. This protection enables them to withdraw from the transaction and keep their earnest money if they can’t sell their existing property by the agreed-upon deadline.
- Uncompleted Agreed-Upon Repairs: If the seller fails to complete repairs or renovations before closing, you can walk away from the agreement and expect a refund of your deposit.
As you explore Santa Cruz homes for sale, be aware of other factors that may influence your earnest money deposit. Working with a knowledgeable realtor who specializes in homes for sale in Santa Cruz can provide a wealth of insights and guidance, ensuring you make informed decisions that protect your investment.
Paul Burrowes, CRS, CCEC, SFR, NHCP, LHC, REALTOR® Licensed REALTOR® with over 15 years of experience and expertise. Commits to being on time and transparent. Acts as your consultant to ensure you make the best decisions to fit your transaction at every step in the process. Negotiates towards a low-stress, win-win outcome. Handles all the details for you, ensuring the hundreds of steps in your real estate transaction go smoothly. Proudly serving Silicon Valley, Santa Cruz, Monterey, and Santa Clara Counties! | DRE# 01955563 | (831) 295-5130 | paul@burrowes.com
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