You’ve found the ideal property in San Diego, successfully negotiated terms, and signed the purchase agreement.
Maybe you’ve even started planning your move or envisioning your investment returns. But then—unexpected issues arise. The financing doesn’t go through, the inspection uncovers major flaws, or the seller suddenly decides to walk away. What now?
At Artemis Law Group, we understand the legal and financial impact of a failed real estate transaction.
Whether you’re buying or selling, it’s critical to understand your rights, what happens to your money, and what legal steps may be available. Here’s what to know if a real estate deal falls apart in San Diego.
Why Real Estate Transactions Fail in San Diego
Real estate contracts in California are legally binding, but several common issues can derail a deal before closing:
- Financing problems: Buyers sometimes fail to secure a loan before the financing contingency deadline. If they back out after that point, they could lose their deposit.
- Inspection surprises: A home inspection might reveal costly repairs, like structural issues or mold. If this occurs before the inspection contingency expires, the buyer can typically exit the deal and recover their earnest money.
- Title or disclosure issues: Disputes over property boundaries, hidden liens, or failure to disclose material defects may give the buyer grounds to cancel—especially if the contract includes a title or disclosure contingency.
- Contract breaches or delays: If either party misses key deadlines, fails to provide documentation, or refuses to close, the other side may have legal grounds to seek damages or compel performance.
What Happens to the Earnest Money Deposit?
In most California real estate transactions, the buyer places earnest money—typically 1% to 3% of the purchase price—into an escrow account. This neutral third party (often a title or escrow company) holds the funds until the transaction closes or is terminated under specific terms.
Earnest money shows the buyer’s commitment to the purchase. From the seller’s standpoint, it serves as a safeguard against wasted time or lost opportunities if the buyer backs out improperly.
Escrow holders may only release the funds when:
- Both parties agree in writing (usually through a release form),
- Contract contingencies are met or not met,
- Or there’s a court order directing the funds.
They cannot release the funds at their own discretion in the event of a dispute.
When Does the Buyer Get the Earnest Money Back?
Buyers are typically entitled to a full refund when they cancel the contract within valid contingency periods, such as for loan approval, inspection, or title issues. Proper and timely notice in writing is essential to preserve this right.
When Can the Seller Keep the Earnest Money?
If the buyer withdraws from the deal without cause or after contingencies have expired, the seller may be entitled to keep the earnest deposit as liquidated damages. However, escrow won’t release the funds without mutual consent or legal resolution.
Legal Options If the Seller Backs Out
- Specific Performance: In some cases, the buyer may file a legal action to force the seller to complete the sale. This remedy is particularly useful in tight real estate markets like San Diego, where comparable properties are limited.
- Monetary Compensation: Buyers may also seek damages for out-of-pocket expenses such as inspections, appraisals, or alternative housing costs. The ability to recover these costs depends on contract terms and documentation.
Legal Options If the Buyer Backs Out
- Retaining the Deposit: If a buyer unjustifiably backs out, the seller’s first remedy is usually to claim the earnest money.
- Additional Damages: Sellers may pursue a lawsuit for losses exceeding the deposit, such as extended holding costs, price drops due to relisting, or legal fees incurred.
How to Prevent Future Real Estate Disputes
- Clearly Defined Contingencies: Ensure your purchase agreement includes well-defined contingency clauses for financing, inspections, and disclosures.
- Stay on Schedule: Meeting deadlines is critical. Delays can jeopardize protections or expose you to liability.
- Involve Legal Counsel Early: Having an experienced San Diego real estate attorney review contracts before signing can help avoid misunderstandings, disputes, and costly delays.
Why Legal Counsel Matters in San Diego Real Estate
San Diego’s real estate market is competitive, fast-moving, and complex. A single oversight can lead to significant financial loss. Legal representation ensures your contract is solid, your interests are protected, and your next move—whether defending your position or recovering damages—is legally sound.
If your real estate deal has hit a roadblock, you don’t have to navigate the legal aftermath alone. Whether you’re trying to recover a deposit, enforce a breached contract, or clarify your legal rights, Artemis Law Group is here to help. With deep experience in California real estate law, we are committed to protecting your investment and guiding you toward resolution. Contact us today to schedule a consultation and explore your legal options.