Reviewed by the Sky Escrow team, a California DFPI-licensed escrow company serving Los Angeles County.
Last updated: August 25, 2026
Earnest money is a good-faith cash deposit a buyer submits early in a California real estate transaction to show the offer is serious. Once escrow is opened, the deposit is held in a neutral trust account and later applied toward the buyer’s down payment or closing costs at close of escrow.
What Does Earnest Money Mean in a Real Estate Purchase?
An earnest money deposit is the buyer’s signal to a seller that an accepted offer is backed by real funds, not just a signature. It is separate from the down payment and separate from escrow, closing, or title fees, though it eventually counts toward the total the buyer owes at closing.
In practice, the deposit is one of the first items an escrow officer requests after an offer is accepted, since most purchase contracts set a short window — often 3 business days in California’s standard residential purchase agreement — for the buyer to deliver it.
How Much Earnest Money Is Typical in California?
There is no state-mandated earnest money percentage. The amount is negotiated between buyer and seller and written into the purchase contract.
Market convention in Southern California, including Los Angeles, commonly cites earnest money deposits of roughly 1–3% of the purchase price — this is a general observation, not a fixed legal or industry rule, and 3% has become a common baseline in competitive LA submarkets specifically. Factors that can push the deposit higher or lower include:
- How competitive the local market is at the time of the offer
- Whether the buyer is waiving contingencies to strengthen the offer
- The purchase price and property type (luxury and off-market deals sometimes see larger deposits)
- What the seller’s agent requests as a show of buyer commitment
A buyer and seller can agree to any dollar figure or percentage that both sides accept in writing — there is no ceiling or floor set by law.
How Does an Earnest Money Deposit Move Through Escrow?
Once escrow is opened, the buyer wires or delivers the deposit to the escrow holder, not to the seller or either agent directly. The funds sit in the escrow company’s trust account until closing, cancellation, or another instruction all parties have signed off on.
- Buyer and seller agree on the deposit amount in the purchase contract.
- Escrow is opened, and the escrow officer sends deposit instructions and wiring details.
- The buyer delivers the funds, typically by wire, within the timeframe set in the contract.
- The escrow holder confirms receipt and holds the funds in trust for the duration of escrow.
- At closing, the deposit is credited toward the buyer’s down payment and closing costs.
Because these are trust funds, the escrow holder cannot release or apply them without instructions signed by both buyer and seller, or a legal resolution if the parties disagree.What Is an Escrow Account
Earnest Money and Escrow Rules in Los Angeles and California
California escrow companies, including those handling deposits for Los Angeles County transactions, are licensed and regulated by the California Department of Financial Protection and Innovation (DFPI) under the California Escrow Law. That oversight is part of why the deposit goes to a neutral escrow holder rather than directly to the seller: it keeps the funds in a regulated trust account until the transaction is resolved.California Escrow Law overview
Most Los Angeles-area purchase contracts are written on the California Association of Realtors (C.A.R.) Residential Purchase Agreement, which sets the standard deposit timeline and default contingency periods.Standard purchase contract contingency timelinesContingencies written into that contract — inspection, appraisal, loan — are what usually determine whether a buyer keeps the right to a refund.Escrow Contingencies Explained
What Happens to Earnest Money If the Deal Falls Through?
Whether the deposit is refunded depends on why the deal fell apart and whether the buyer canceled within an active contingency period. A buyer who cancels for a reason protected by an open contingency — such as a low appraisal, a failed inspection, or a denied loan — is typically entitled to a refund. A buyer who backs out after contingencies have been removed, without a contractual basis, risks the seller making a claim to the deposit.
This is a common point of confusion and dispute, so it deserves its own detailed treatment.Earnest Money If Deal Falls Apart
Frequently Asked Questions
Is earnest money the same as a down payment?
No. Earnest money is an upfront good-faith deposit made shortly after an offer is accepted. The down payment is a separate, typically larger amount paid at closing. The earnest money deposit is credited toward the down payment and closing costs when escrow closes.
How much earnest money do I need in California?
There is no fixed legal amount. Southern California market convention commonly cites roughly 1–3% of the purchase price, with 3% common in competitive Los Angeles-area markets, but this is negotiable and not a legal requirement. The exact amount is agreed to by buyer and seller in the purchase contract.
Is earnest money refundable?
It can be, depending on the contract’s contingencies and the timing of the buyer’s cancellation. A buyer who cancels within an active, applicable contingency period is generally entitled to a refund; a buyer who cancels without contractual grounds may not be.
Who holds the earnest money deposit during escrow?
A neutral, licensed escrow holder — not the buyer, seller, or either party’s agent — holds the deposit in a trust account until closing or an agreed resolution.
Can I pay earnest money in cash?
Escrow holders generally require earnest money by wire transfer or cashier’s check rather than physical cash, largely to maintain a clear paper trail and comply with trust-accounting and anti-fraud practices. Buyers should always confirm wiring details directly with their escrow officer by phone before sending funds, to guard against wire fraud.
Sky Escrow Contact & Disclaimer
Sky Escrow, Inc.
15760 Ventura Blvd, Suite 1050, Encino, CA 91436
Phone: (818) 712-0000 / (888) 891-0002
Email: info@skyescrow.com
Licensed by the California Department of Financial Protection and Innovation (DFPI). License No. 96DBO-214073. License status: Active.
This article is for general informational purposes and is not legal, financial, or tax advice.
If you’re preparing to open escrow on a Los Angeles-area purchase and want to confirm your earnest money deposit amount, wiring instructions, or timeline, Sky Escrow’s team can walk through the specifics of your contract before you send funds.