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Homebuyer, Home Buyer in Los Angeles, CA

should we agree to a liquidated damages clause in making an offer?

Asked by Homebuyer, Los Angeles, CA Wed Aug 13, 2008

is this a good or bad idea? If we agree to specified amount, are we obligated to this if we fail to perform after all the contingencies are met? Is this designed to protect the buyer OR to insure that the seller/sellers agent receives funds if the deal does not go through.?

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The liquidated damages clause is designed to ensure that everyone is protected. From the buyer side, this clause limits your liability to the amount of the deposit and no more than 3% of the purchase price. Without this clause the buyer could be on the line for a maximum of 3% of the purchase price. Remember that you have contingency periods to get all your inspections, disclosures, etc. done. Be sure to use this time and make sure that you do want to buy the home before you remove the contingencies.

Feel free to contact me with any questions.

Good Luck,

Ray
Web Reference: http://www.charityar.com
2 votes Thank Flag Link Wed Aug 13, 2008
It is kind of designed for both. It limits the damages the Seller can claim against the buyer, and it gives the Seller an amount they can go after if there is a breach of contract. One thing to remeber is that the Seller does not automatically get the 3%. They have to prove that they have been damaged, and they have to prove that they have been damaged up to that amount. They may only be able to demonstrate they have been damaged up to $100, so that is all they will get.
Is it good or bad? My buying clients have always signed it, and the one time my clients clearly breached the contract, the seller did not try to get the 3%. Part of that goes to clear communications with both sides, and the fact that the seller was immediately able to get the property into contract.
Good Luck
1 vote Thank Flag Link Wed Aug 13, 2008
As the homebuyer, it limits your liability to no more then the 3% of purchase price, and that's only after ALL contingencies have been removed. You have enough time to get your inspections/disclosures etc done, and if you need more time, have your agent ask for an extension on the contingency period.

Best,
Yona Bello
Web Reference: http://www.YonaBell.com
0 votes Thank Flag Link Wed Aug 13, 2008
Liquidated Damages is a widely misunderstood part of the C.A.R. sales contract.

Let's start with how it works:

1. Buyer cancels contract.
2. Seller claims that buyer has defaulted.
3. Buyer claims that they had a right (contingency) to cancel.

This part of the dispute is settled first. Either the buyer had the right to cancel or they didn't. If they buyer had the right to cancel then the dispute is over & the buyer gets the depost back.

Up to this point it doesn't make any difference whether the liquidated damage provision is part of the contract or not.

The method of resolving the dispute is through mediation, arbitration (if initialed in the contract or subsequently agreed to by the buyer & the seller), or a legal action in the appropriate court.

If the buyer has defaulted the next step is to decide how much the damages are.

If Liquidated Damages was initialed - that is the amount of the damages. It is what the buyer and seller agreed to when they initialed it.

If Liquidated Damages was NOT intialed - the seller must prove how much damage they suffered.

There is no easy answer to which is better.

For the buyer, liquidated damages of 3% of the purchase price (assuming that was the depost) can be a lot of money. On a $700,000 purchase that would be $21,000. On the other hand, if liquidiated damages was not signed and the seller subsequently was only able to get $650,000, they could claim the "lost" $50,000 as part of their damages.

This is why Realtors advise their clients to seek legal advice.

A final note - an experienced Realtor will work VERY hard to avoid disputes like this by writing clear contracts and diligently helping their clients understand them.

Good luck,

John Hickey
Dilbeck Realtors, GMAC
818-541-7311
John@JohnHickey.com
http://www.JohnHickey.com
0 votes Thank Flag Link Wed Aug 13, 2008
What protection does the buyer have, for his investment in inspection and appraisal costs, if the seller defaults?
Flag Wed May 21, 2014
Hey Homebuyer,

That clause merely says if buyer backs out after contingencies are removed, seller can keep the good faith deposit of 3% as liquidated damages. If deposit is more than 3% then seller has to return amount over 3%. If you are the buyers, then they should be aware that if they don't agree, seller may not even respond to their offer. Otherwise, what good would having the active contingency removal be? A buyer who changes their mind after they remove all contingencies would suffer no consequences. What seller wants that to suffer that? I think it's a great idea to sign it. If you have any other questions, let me know.

All the best,

Monique Carrabba
The Reavis Group
Keller Williams Wilshire
mcarrabba@kw.com
0 votes Thank Flag Link Wed Aug 13, 2008
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