The liquidated damages clause in a real estate contract is a reasonable and agreed upon amount that would be awarded to the seller, should the buyer breach the contract under certain circumstances.
The amount of liquidated damages can vary by contract or state law. In California, for example, liquidated damages are usually capped at 3% of the purchase price for most home sales.
Once contingencies are released, many sellers begin to pack their home, schedule the movers, put a deposit down on a new home and maybe even leave their job. There could be real financial and emotional strain for the seller if the buyer decides they don’t want the house and breach the contract.
The liquidated damages clause protects the seller by awarding an agreed-upon amount to cover their losses. It also protects the buyer by limiting the damages to a "reasonable" amount.
If you're selling or buying a house, our partners at Clever Real Estate can help you find a great agent and save you money. Clever matches you with top local agents who can help sell your house for just a 1% fee for homes over $350,000. Plus, buyers in 41 states can get up to 0.5% cash back after closing, just for using a Clever agent!
Reasons to Include a Liquidated Damages Clause in Your Contract
It Simplifies Resolving a Contract Breach
If you and your buyer agree on a liquidated damages clause that defines reasonable damage amounts, should there be a breach, resolving the dispute will be less taxing.
If you neglect to put this clause in your purchase agreement, you will have to prove the amount of your financial loss in order to collect monetary damages for your buyer’s breach.
It Saves You From Needing To Seek Legal Counsel if There’s a Breach
Without a this clause in your purchase agreement, if the buyer chooses to rescind his or her offer, you will need to seek legal assistance to reconcile the matter.
A legal dispute involving attorneys can be costly to you (and to the buyer); however, with a liquidated damages clause, seeking legal representation may not be necessary since the terms of the breach are already outlined and have been agreed to by both parties.
However, if both parties can't agree on the amount owed, then arbitration or court involvement may be necessary.
The buyer’s deposit is usually held in escrow until the sale is complete. If the buyer decides to breach your purchase agreement, your damages clause will make you eligible to recover their deposit money. However, to do so, escrow companies usually require both parties sign an agreement prior to the release of any funds. In the event that the buyer is being uncooperative, this clause will help you collect.
What if There Is No Liquidated Damages Clause?
In the absence of the liquidated damages clause, the seller would have to prove the amount of costs incurred when the buyer breached. This legal dispute would be costly for both buyer and seller. A liquidated damages clause saves both sides the legal burden.
This clause is standard in most real estate offers. It is typically in the best interest of both the buyer and seller to have one.
If you're selling your house, it helps to have an agent in your corner who can guide you through the plethora of contracts and documents you need to sign. Our friends at Clever can find you a great agent who will help you write a solid sales contract. Plus, you can save thousands in commission fees.
Clever can connect you to pre-vetted local agents from Berkshire Hathaway and Coldwell Banker who can help sell your home for just 1%! You'll get the same full service of a traditional agent at a fraction of the price.
Interested in buying or selling?
We've improved the traditional real estate model with modern technology to cut costs, not quality.Get started today
- Selling a House (177)
- Buying a House (70)
- Real Estate Investing (67)
- Preparing to Sell Your Home (43)
- Real Estate Negotiations (27)
- Home Improvement (26)
- Investment Property (24)
- Homeowner How-To's (21)
- Listing Your Home (21)
- Marketing Your Home (20)
- For Sale By Owner (15)
- Homeowner Advice (15)
- Mortgage (15)
- House Flipping (14)
- Home Value (13)
- Homeowner Hacks (13)
- Personal Finance (13)
- Home Showings (13)
- Closing on a House (12)
- Escrow (12)