What is 'liquidated damages' in a real estate contract?

A liquidated damages clause in a contract specifies, in advance, the amount of damages the non-breaching party may claim if the other party defaults. In residential real estate, the most common form is that the seller may keep the buyer's earnest money as liquidated damages if the buyer defaults. The advantage is certainty — both parties know up front what is at stake. To be enforceable, the agreed amount must be a reasonable estimate of likely damages (not so large that it is punitive); courts will not enforce liquidated damages clauses that look like penalties. The buyer typically gives up the right to be sued for additional damages by agreeing to the cap. Liquidated damages are different from actual damages, which require proof of loss.