You found the perfect property in Los Angeles, negotiated the terms, and signed a purchase agreement.
Maybe you even began imagining your future in that space. But suddenly, things take a turn—your financing falls through, the inspection reveals unexpected damage, or the seller pulls out unexpectedly. Now what?
At Artemis Law Group, we know that a failed real estate transaction can be financially and legally complicated.
Whether you’re the buyer or the seller, it’s essential to understand your rights, what happens to the money involved, and how disputes can be resolved. Here’s what you need to know about your legal protections when a real estate deal falls through in LA.
Common Reasons Real Estate Deals Fall Through in LA:
- Financing issues: A common reason a transaction fails is when the buyer cannot secure financing by the loan contingency deadline. If this contingency expires and the buyer backs out afterward, the seller may have the right to keep the earnest money.
- Property inspection problems: Home inspections often uncover unexpected issues—mold, structural damage, faulty wiring. If these are discovered before the inspection contingency deadline, the buyer can usually withdraw and receive their earnest money back. If the deadline has passed, the seller may be entitled to keep it.
- Title or disclosure concerns: If the title report reveals liens or boundary disputes, or if the seller fails to disclose material facts about the property, the buyer may have grounds to cancel the contract, especially if a contingency allows for it.
- Missed deadlines: Real estate contracts in California are legally binding agreements. If one party fails to perform—by missing deadlines, not providing documents, or refusing to close—the other party may have a legal claim for damages or specific performance.
What Happens to the Earnest Money?
In California real estate transactions, earnest money is almost always placed in an escrow account, which is managed by a neutral third party, such as a title company, escrow company, or real estate attorney. This party is named in the purchase agreement and is responsible for holding the funds until the transaction is completed or canceled.
This arrangement protects both the buyer and the seller. The buyer’s deposit—typically 1% to 3% of the purchase price—serves as a gesture of good faith, showing they are serious about purchasing the property. From the seller’s perspective, it ensures some financial remedy if the buyer backs out improperly, costing the seller time or other opportunities.
Escrow holders are legally bound to release the funds only under certain conditions, such as:
- mutual agreement by both parties (often via a release form),
- fulfillment of contract contingencies,
- or a legal order, such as a court judgment.
Escrow holders cannot unilaterally decide who receives the funds in case of a dispute.
When buyers get it back
Buyers are usually entitled to a refund if they cancel the contract due to unmet contingencies (e.g., financing, inspection, title review) and provide timely written notice per the contract terms.
When sellers can keep it
If the buyer backs out for reasons not covered by a contingency or breaches the contract terms, the seller may be entitled to keep the earnest money. However, this isn’t automatic—it may still require mutual agreement or legal action.
Legal Remedies if the Seller Backs Out
Specific performance
If you’re the buyer and the seller tries to back out without a valid reason, you may have the right to sue for specific performance—a legal remedy that forces the seller to complete the sale. This is useful in a market like LA, where comparable properties may be scarce.
Monetary damages
You may also be entitled to compensation for losses such as inspection fees, appraisal costs, or temporary housing expenses. These claims depend on the terms of the contract and your ability to document your losses.
Legal Remedies if the Buyer Backs Out
Retaining the earnest money
As a seller, your first line of protection is the earnest money. If the buyer breaches the contract, you may be entitled to retain these funds as liquidated damages.
Suing for damages
If the buyer’s breach causes you to incur financial losses beyond the deposit amount, you may pursue a lawsuit for additional damages. These can include price reductions from relisting the property, carrying costs during the delay, and legal fees.
How to Avoid Future Deal Collapses:
- Clear contingency clauses: Make sure your purchase agreement clearly outlines all contingencies, such as loan approval, inspections, and title clearance. These clauses offer crucial protection and should be negotiated with legal insight.
- Meeting deadlines: Timelines matter in California real estate law. Missed deadlines can nullify your protections or expose you to liability. Keep a close eye on all contractual milestones and communicate with your agent or attorney if delays arise.
- Using legal counsel from day one: The best protection is prevention. Having an experienced real estate attorney, like the team at Artemis Law Group, review your contract before signing can prevent costly surprises down the road.
Why Legal Representation Matters in LA Real Estate
Los Angeles real estate transactions are high-stakes and fast-paced. The complexity of contracts, aggressive market dynamics, and volume of money involved mean that even minor missteps can have serious consequences. Whether you’re the buyer or seller, legal representation helps ensure that your rights are protected and that you’re not caught off guard by legal loopholes or ambiguous language.
When a real estate deal falls through, you don’t have to navigate the fallout alone. Whether you’re trying to recover your earnest money, enforce a breached contract, or understand your rights, Artemis Law Group is here to help. With decades of experience in real estate law across Southern California, we help turn a failed deal into a fresh opportunity. Reach out today to schedule a consultation.