When it comes to deposits there is many things to think about, whether you are the buyer or seller. Here are some common questions I’m often asked about real estate deposits.
1. When does a deposit have to be paid?
The standard agreement of purchase and sale states that the deposit must be submitted “herewith” or “within 24 hours of the acceptance of this Agreement”. Neither alternative is legislated but an accepted good practice.
The reason that buyers are encouraged to come up with the deposit immediately is to demonstrate to the seller commitment to complete the transaction.
Sometimes a buyer may not be able to submit the deposit within 24 hours for good reason. For example, when a buyer lives out of the area in which the property is being purchased, it’s unlikely that even using courier the required deposit will be received within 24 hours.
This happens quite often to me when selling cottages. Buyers often live two, three or more hours away from where they are interested in buying a cottage. Often times the decision to purchase a cottage is made a couple of days after viewing the cottage when the buyer has returned home from cottage country. The exchange of a deposit cheque cannot be completed in person unless the buyer decides to drive all the way back to provide the cheque.
In such instances, I simply change the pre-printed 24 hour term in the agreement of purchase and sale to an additional 24 or 48 hours to allow the buyer time to courier or express post the deposit to my office.
In today’s technological age the use of e-transfers for submission of deposits are becoming increasingly popular thereby making the standard 24 hour submission of deposit quite simple.
2. Can the buyer get out of a deal by refusing to pay the deposit?
No. Once the agreement of purchase and sale has been accepted by both buyer and seller, a binding contract exists. Failure to deliver the deposit may be determined a breach of contract by the Buyer.
I’ve heard it said that a good lawyer will be able to get a client out of a real estate contract should the buyer change his or her mind. This is not the case in my experience. Your REALTOR® should understand contract law and all of the complexities and legalities to making certain that real estate contracts are airtight once all conditions have been waived or fulfilled.
Should a buyer wake up the morning after with a serious case of buyer’s remorse and refuses to pay the deposit, the seller can sell the property to another buyer. In the event that the seller gets less money than the initial buyer agreed to pay the seller can sue the buyer for the difference (plus legal fees).
3. What happens to the deposit money once paid?
In most circumstances the deposit is held in trust by the seller’s real estate brokerage. When a deposit is held by the real estate brokerage in trust it is protected by insurance so that even if the brokerage goes bankrupt the buyer’s deposit is protected.
4. What happens to the deposit money if the buyer is not able to fulfill conditions?
Most agreements of purchase and sale contain conditions such as allowing the buyer to arrange a mortgage, have a home inspection completed or have the septic system inspected to make sure that it is in proper working condition, for example.
In the event that a buyer is unable to fulfill conditions within the specified time frame indicated in the contract, the deal becomes null and void. For instance, if a buyer is not satisfied with the results of a home inspection the buyer can choose not to proceed with the purchase and request the return of the deposit. However, if the seller suspects that the buyer did not act in good faith in trying to satisfy the condition, the seller may refuse to release the buyer’s deposit. In this circumstance the deposit must remain in the brokerage’s trust account until a court order indicates who is entitled to the deposit.
In the event that the Seller does release the Buyer from the transaction, which is the case more often than not, the Buyer’s deposit shall be returned in full.
5. How large of a deposit is required when making an offer?
This is an initial decision of the buyer which must be agreed to by the seller (just like any other term or condition of an offer).
If a buyer’s offer includes a deposit of $1,000 yet the seller doesn’t think it’s enough to illustrate the buyer’s commitment to complete the transaction, the seller might counter offer requesting an increased deposit. From a seller’s perspective, a deposit is a sign of good faith that the buyer, who has contracted to purchase the property, will complete the transaction on the date specified in the contract. As I noted at the beginning of this blog, a deposit from a buyer indicates to the seller a sign of commitment. Meaning that the buyer is committed to completing the transaction in good faith and on time.
While there is no right answer or minimum amount required, the size of the deposit should be given very serious consideration by both buyer and seller. As a buyer, put yourself in the seller’s shoes for a minute. How much deposit money will give a sense of confidence that the buyer is committed to the transaction?
The purchase and sale of real estate for most people is one of, if not the single largest financial transaction of their life. REALTORS® are able to provide you experienced guidance and counsel when it comes to navigating the complexities and legalities of real estate contracts.
If you have any questions about deposits or any other real estate matters, feel free to “leave a comment” below and we’ll get in touch.