What is a Good Faith Deposit, and Why Do I Need One?

I'm always a little surprised when I sit down to write a purchase offer on Chico CA Real Estate for a new buyer, and they don't have their checkbook with them!

It seems that many buyers don't know that they are expected to submit a good faith deposit with their offer to purchase a property. I often hear "Oh.... um... JEEZ! I forgot my checkbook!" Unfortunately, in California, a contract must have consideration (a deposit) to be valid.

A good faith deposit is an amount of money that the buyer submits with the offer to show that he or she is acting in good faith and intends to fulfill the terms of their agreement.

The deposit basically says to the seller, "I want your house badly enough, I'm willing to put my money where my mouth is!"

The amount of an acceptable good faith deposit varies widely by region.

In Chico, CA, a good rule of thumb is to offer about 1% of the purchase price for every 30 days in escrow. In other words, if you are offering on a $300,000 home and you are requesting a 60 day escrow, a $6,000 deposit will probably fit the bill. This is a very loose rule, however, and each transaction should be considered carefully. For instance, in a strong buyer's market, it is likely that a buyer can offer a smaller deposit without too much grumbling from the seller. However, in a competitive situation where the property is bringing in multiple offers, a buyer can help make his offer more appealing by providing a more substantial deposit.

Your good faith deposit is typically held by the broker who is writing the offer for you. If I was acting as your buyer's agent, I would accept the check on the seller's behalf. Chico Homes would then hold it in a separately maintained trust account until your offer was accepted by the seller. Within 3 days of acceptance, the deposit is required to be deposited with the title company that will be handling the escrow. Your check should always be made out to the title company, not the agent you are working with, or the company where they are employed!

The seller is only entitled to keep your good faith deposit in the event that you, the buyer default on the contract.

It is important that you are very clear as to the terms you are agreeing to. If the contract says you have 17 days to complete your investigations, and you decide on day 25 that you no longer want the property because the house next door has barking dogs, you may sacrifice your deposit! Be sure to work with your trusted Realtor to adhere to the terms and timelines specified in the contract.

If the transaction proceeds without issues, the deposit is typically applied to the closing costs the buyer will incur during the escrow. In the event that both buyer and seller agree to terminate the contract, the buyer can receive his deposit back minus any inspection costs that he may have agreed to.

Have more questions? I'm happy to answer them! Sandi 530-864-5407

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Looking to buy or sell Chico CA Real Estate? Need a Top Producing Chico CA Realtor? Call Sandi Bauman 530-864-5407 or email sandibauman@sbcglobal.net. Specializing in REO, residential, relocation, investment & ag property.