FAQ #4: What are Liquidated Damages?

FAQ: What are Liquidated Damages?

In the purchase contracts typically used in northern California, the buyer and seller need to decide whether or not they agree to the liquidated damages provision.


If they do agree, in the event buyer breaches the contract and fails to complete the purchase, the seller can retain buyer's deposit (not to exceed 3% of the purchase price in a 1-4 unit property) as the seller's only recourse. Both buyer and seller need to agree to the provision by initialing the Liquidated Damages clause, or it's not part of the contract.

This provision provides a bit of security to both parties. A seller is allowed to keep the deposit up to the 3% limit, is released from the obligation to sell to that buyer, and is free to sell the property to another buyer. In our high-priced market, that 3% is often $25,000 or more.

Buyers stand to lose their deposit should they change their mind or otherwise not be able to close on the purchase after removing all their contingencies. However, should some catastrophy have arisen and the market tanked, the seller cannot come after the buyer for more than their 3% deposit, even if the property subsequently sells for much less than the original contract price.

Liquidated damages - another part of a purchase contract which needs to be understood.


--- Come for a visit; Stay for a lifetime!

Lottie Kendall, Realtor®

Today | Sotheby's International Realty

San Carlos, California, 94070

CA BRE#01215160; 650-465-4547

Lottie@LottieKendall.com;

www.LottieKendall.com

www.SFCondosForMe.com

 

 

Comment balloon 6 commentsLottie Kendall • May 28 2012 08:20AM

Comments

Always good information for the buyers to know.  I do make sure every buyers is very aware of this.

Posted by Kathy Stoltman, Ventura County Real Estate Consultant 805-746-1793 (Rockwood Realty) over 5 years ago

Thanks for a reminder on how important this liquidated damages clause can be in a real estate transaction Lottie.  This is a clause that sometimes gets overlooked when people are signing their papers. 

Posted by Doug Bullwinkel, NMLS #281609 (Academy Mortgage Group) over 5 years ago

Hi Kathy, it's an interesting discussion, especially when we're asked for our advice--which I can't give since I'm not an attorney

Posted by Lottie Kendall, Serving San Mateo County and San Francisco (Today | Sotheby's International Realty) over 5 years ago

Hi Doug - I like to give a sample contract to buyers at our first or second meeting so they have time to review the contract long before we are in the throes of making an offer. The liquidated damages clause is one they need to understand.

 

Posted by Lottie Kendall, Serving San Mateo County and San Francisco (Today | Sotheby's International Realty) over 5 years ago

That is good knowledge to have regarding exactly what "liquidated damages" means.  What if the seller decides not to sell at the very end, what would be the buyer recourse?

Posted by Morgan Evans, LICENSED REAL ESTATE SALESPERSON (Douglas Elliman Real Estate) over 5 years ago

Morgan, our liquidated damages clause doesn't come into play should the seller change his/her mind. Buyer's recourse would be to sue for specific performance, sue for damages, or some other recourse as determined by legal counsel.

Posted by Lottie Kendall, Serving San Mateo County and San Francisco (Today | Sotheby's International Realty) over 5 years ago

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