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Paragraph 21.B. of the California Association of Realtors® Residential Purchase Agreement, if initialed by both parties, provides for liquidated damages if the buyer defaults such as by cancelling without an available contingency or exercising a contingency in bad faith. The amount of liquidated damages is limited to the lower of either the amount of deposit actually paid or three percent of the purchase price. The three percent limit only applies, however, if the property is no more than four units and the buyer intends to occupy one of the units. When there are many buyers for a property, some buyers want to impress sellers by offering a large deposit. If they make such an offer but do not intend to occupy the property, a breach of the contract may cost them more than three percent of the purchase price.

Best Practice: Never tell a buyer who does not intend to occupy the property that the three percent liquidated damage limit applies to them.

Published by the Norco College Real Estate Program with the support of the Real Estate Programs of Saddleback College and Mount San Antonio College and the California Community College Real Estate Education Center.

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