⚖️ What Is a Liquidated Damages Clause in Real Estate?

A liquidated damages clause in real estate sets a predetermined amount of money the buyer must forfeit if they breach the purchase contract—usually by failing to close without a valid contingency. It protects sellers by limiting disputes and defining the financial penalty upfront.

How a Liquidated Damages Clause Works

Most liquidated damages clauses apply to the buyer’s earnest money deposit (EMD). If the buyer backs out without an allowed contingency, the seller keeps part—or all—of the deposit as compensation.

Key components include:

  • The specific dollar amount or percentage of the deposit at risk.
  • The circumstances that trigger liquidated damages (usually buyer default).
  • Contingency protections that allow buyers to withdraw without penalty.
  • State-specific rules that may cap the amount (e.g., California’s 3% rule).

The purpose is to avoid uncertainty and prevent litigation by agreeing in advance what the seller will receive if the buyer breaches the contract.

Benefits and Risks of a Liquidated Damages Clause

Benefits:

  • Provides clear, upfront consequences for buyer default.
  • Reduces disputes, arbitration, and lawsuits.
  • Offers protection for sellers who take their property off the market.
  • Gives buyers clarity on their maximum financial risk.

Risks:

  • Buyers may lose a significant deposit if they breach the agreement.
  • Sellers may be limited to the liquidated amount even if the breach causes greater losses.
  • Not enforceable if the amount is considered excessive or punitive.

Example of a Liquidated Damages Clause

A buyer offers $500,000 with a $15,000 earnest money deposit.

The contract states:

  • If the buyer fails to close without an active contingency, the seller keeps the $15,000 as liquidated damages.
  • If the buyer cancels under a valid contingency (inspection, appraisal, financing), the deposit is refunded.

If the buyer changes their mind two weeks before closing—and no contingency applies—the seller receives the $15,000.

Why Liquidated Damages Matter for FSBO Sellers

FSBO sellers rely heavily on contract protections because there is no listing agent advising them. A proper liquidated damages clause:

  • Reduces fall-through risk.
  • Encourages serious buyers.
  • Makes clear what happens if the buyer walks away.
  • Prevents disputes over earnest money.

Sellers using Flat Fee MLS through Brokerless often juggle multiple offers; having a clear damages clause keeps negotiations clean and enforceable.

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Frequently Asked Questions About Liquidated Damages

Are liquidated damages legal in all states?
Yes, but they must reflect a reasonable estimate of actual damages. Excessive penalties can be voided.

Can a seller take more than the earnest money?
Usually no—if a liquidated damages clause is selected, it limits the seller’s remedy.

Can the buyer get their deposit back?
Yes, if the cancellation falls under an active contingency (inspection, appraisal, financing, etc.).

Is liquidated damages the same as specific performance?
No. Liquidated damages = a preset payment. Specific performance = forcing the buyer to close.