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.