California Real Estate SalespersonContractsHard
A buyer and seller sign a purchase agreement that includes a liquidated damages clause limiting the seller's recovery, upon buyer default, to the buyer's deposit. If the deposit is $15,000 on a $600,000 purchase price, what is the liquidated damages amount as a percentage of the purchase price?
- A5%
- B1.5%
- C3%
- D2.5%
Show answer & explanationAnswer & explanation
Correct answer: D. 2.5%
Divide the deposit by the purchase price: $15,000 ÷ $600,000 = 0.025, or 2.5%. California law caps liquidated damages on a residential purchase at 3% of the purchase price unless additional requirements are met, so this 2.5% clause is valid.
Why the other options are wrong
- A. 5% would equal $30,000, far exceeding the stated deposit.
- B. 1.5% would require a deposit of only $9,000, not $15,000.
- C. 3% would equal $18,000, not the $15,000 deposit given.
Liquidated Damages Cap
California limits liquidated damages in residential purchase contracts to a maximum of 3% of the purchase price unless the buyer separately initials a higher amount meeting specific statutory conditions.
- Cap applies to residential property of one to four units intended for buyer occupancy
- Amount above 3% requires separate proof of actual damages
- Formula: deposit ÷ purchase price = percentage
- Purpose is to prevent sellers from imposing punitive default penalties
Memory trick: '3% Ceiling'—residential deposits capped unless justified otherwise.