What’s The Point Of The Deposit?

As a seller, do you really care if the deposit is a bit higher?

Well I’m seeing more and more sellers ask for higher deposit amounts these days, which might be a sign of a changing market climate…

DepositCheque

“Consideration.”

That’s the legal term for the deposit funds.

There must be consideration for the deal, as I was shocked to learn back in a University law class.  Upon further investigation, it makes perfect sense.  But I remember being somewhat surprised to learn that in common law, there MUST be consideration for a contract to be binding.  This means that, theoretically, you can shake hands with a friend and say, “I’ll give you my couch, for free, no worries buddy,” and then take it back later because there is no consideration present.

Perhaps that’s why so many deals are consummated for the sum of $1.00, or in the case of real estate that’s transferred from a family member – $2.00, as it appears on Land Registry.

I know, I know – the legal minds are already poking holes with my couch example.

“Verbal agreements are non-binding,” you might say.  You can’t tell a friend, “I’ll give you ten dollars for your bike,” because that could be construed as a suggestion, not an offer, and acceptance wouldn’t be binding if there was no written contract.

Yes, I know you’re dying to yell “Statute of Frauds,” etc.

Let’s just keep this simple…

The purpose of the deposit in a real estate transaction is twofold: 1) to act as consideration for the deal, 2) to bind the buyer to the contract.

Without a deposit, the buyer could walk away at any time.  Sure, the contract that the buyer signed is enforceable, and that buyer could be sued successfully, but with no deposit being held, many sellers wouldn’t bother with a long, drawn-out legal process.

Some say that the deposit is “a sign of good faith.”  That’s a pretty cheerful, optimistic way of looking at it, but I suppose it’s a correct view.

It’s a sign of good faith that the buyer, who has contracted to purchase the property, will come through in 60 or 90 days (whenever the contract specifies the deal closes), and provide the rest of the funds to close the deal.

To nervous sellers, the deposit acts as a “gotcha” measure, which is to say that if something goes wrong, at least you’ve got the seller by the you-know-whats.

But when the real estate market is moving along, full-steam-ahead, nobody really gives any thought to the amount of the deposit.

Sure, it has to be around 5%, as that is the standard, but it’s of relatively less importance than most other terms of the offer.

Put it this way, which of the following two offers would a seller choose:

1) $450,000 offer price, with a $20,000 deposit

2) $448,000 offer price, with a $100,000 deposit

If any of you choose #2, I’d love to hear your justification, and I’d love to see you actually follow through on offer night.

The amount of the deposit is barely a topic of conversation during many offer processes.

“$25,000……is that okay?” the seller might ask.  And as soon as you say, “Yeah, that’s slightly less than the 5% standard, but it’s fine,” the seller won’t give it a second thought.

What good would it be to accept deal #2?

You get $2,000 less for your house, just to have a larger deposit?  Where’s the logic in that?

The buyer gets the interest on the deposit, not the seller, and the seller can’t touch the money until closing, as the funds are held in the listing brokerage’s trust account.  So why would a seller be enamoured with a larger deposit?

How about $150,000?  Would that change your mind?

No?  What about $200,000?  Would you take $448,000 for your home instead of $450,000 because the seller gave a $200,000 deposit?

I wouldn’t.  And I wouldn’t advise my clients to either.

Now, if the deposit on the $450,000 offer was $1,000, then we’d have a problem.

We always hear, “Deposits are generally five to ten per cent of the offer price,” but in reality, they’re almost always closer to 5%.  And over the past few years, buyers have begun to round down instead of up.  Offering on a $650,000 property?  Just round down to $30,000, no problem.

Well personally, I see a change happening in today’s market, and I’m wondering if there’s a deeper meaning.

A client of mine offered on a property last week, priced at $570,000, and the seller demanded a $60,000 deposit.  That’s 10%, rounded up.

We had offered a $30,000 deposit, which was 5%, rounded up.  Usually, that’s more than enough.

But the seller insisted.  The listing agent told me, “Back home, the sale of real estate always comes with a 10-20% deposit, and she’s not comfortable taking your 5%  Her family back home are adamant that she get minimum 10%, or walk away.”

Back home?  From the name on the listing, I believe it was somewhere in the Middle East.  But regardless, perhaps sellers who have transacted in real estate in other countries might want to continue doing business the way they’ve done before, and if that means a 10% deposit, or more, then so be it.

The listing agent in this case went on to say, “The seller has been reading everything about Toronto’s real estate market, and fears that if a sudden crash took place the buyer might walk away.  So she wants a ten per cent deposit to protect herself.”

Okay, there’s no such thing as a “sudden” real estate crash.  Shares of a bio-tech company can drop from $8 to $2 overnight if clinical trials show that their new wonder-drug doesn’t actually do wonders.  But a $570,000 condo doesn’t drop to $400,000 overnight, or in a week, month, or even a year.  So that last line was pretty silly, if you ask me.

In this case, we gave the seller her 10% deposit, simply because my client was going to purchase the condo in cash, and the difference between 5% and 10% was meaningless to him.  But for others, maybe those who are buying with the minimum 5% downpayment allowed under CMHC, or who don’t have liquid funds to go from 5% to 10%, it could mean the difference of getting the deal, or not.

So what happens to the deposit in the event that the deal doesn’t close?

Many people are under the common misconception that the deposit is automatically released to the seller, but that isn’t true.

Under Section 27 of the Real Estate Business Broker’s Act, a real estate Brokerage is not allowed to release any deposit from their trust account without a) a mutual release, signed by both buyer and seller, b) a court order.

I had a situation where the listing agent inserted clause reading:

Parties agree that should this transaction not be completed, solely due to the Buyer’s default or neglect, the deposit funds held by the Listing Brokerage shall be released to the Seller forthwith, on the date following the date of completion set out in this Agreement.  No Mutual Release shall be required.

Unfortunately for the seller and the listing agent, this clause is illegal.

You cannot contract out of a contract, or contract out of law.

Therefore, if REBBA states under the Act that a deposit cannot be released without a mutual release or court order, then you cannot include a clause to the contrary.

If a deal doesn’t close, the deposit monies remain in trust, and litigation ensues.

The buyer and seller can come to an agreement, ie. pay $50,000 of the $100,000 deposit, in order to get out of the deal, or they can fight until the bitter end.

The courts will almost always release the deposit to the seller in the event of a buyer’s default, but the process still has to go through the courts.  You simply can’t put the cart before the horse.

Now one final spin on things: what happens to the deposit if the property is re-sold for a HIGHER price?

Let’s say a house sells for $1,000,000, with a $50,000 deposit.  And upon the completion date, the buyer decides he isn’t closing.  Even if the seller is able to resell the property for, say, $1,100,000, the seller is still within his or her right to seek the original deposit monies.  There is no legal requirement for the seller to prove damages in the first case.

A similar situation took place in British Columbia, and last month, made its way through the appellate court.  The court found that: “ the question of whether a deposit is forfeited remains a matter of contractual interpretation.”  Although generally speaking, deposits will be forfeited by a purchaser who repudiates a contract.  It’s an interesting case.  Have a look HERE if you’re curious.

At the end of the day, I think buyers should assume that deposit monies are “non-refundable.”  Plan for the worst, they say.

And if you’re a seller, wondering whether or not 5% is still sufficient as a deposit, I have a hard time seeing any reason why it wouldn’t be…

23 Comments

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  1. Jla says:

    Agreed

  2. Maryam says:

    Hello,
    Can i sue my agent who did not put any condition on my house purchase offer?
    Actually i lost my deposit because my mortgage was canceled in last minute .
    Can you give me advise please?

  3. Bob says:

    Hi There I bought a house all conditions were met and left a deposit. I have buyer’s remorse and would like to cancel. What happens next? Do I lose my deposit or more? Am I able to negotiate a fee with the seller (I am thinking half the deposit) and have my deposit released? DO the agents get paid? Agreement was signed a few days ago

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  5. Maggie K. says:

    5% seems like a huge deposit to me. Both my house purchases in Barrie had $1000 deposit 2005 and 2009. This year we put a $3000 deposit down in Ptbo but other houses that we had offered on (and not got) we just put $1-2k down.

    I definitely think the deposit amount depends on region.

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  7. Sharon says:

    I put a $500 deposit on a used car (BC) There were a few scratches but were going to detail it, saying they should be able to get them out. If I am not satisfied and will not take the car, will I lose my $500?

  8. Mark says:

    A deposit is NOT the only form of “consideration” in law, other forms of “consideration” are acceptable and enforceable in law, therefore, a deposit is NOT necessary to have a binding real estate contract in law.

  9. Laura says:

    Do i have to put a deposit down at all if I am buying it from my dad?

  10. Sylvain Pelletier says:

    What if the buyer has a clause ” conditional to financing approval ” Does he still lose his deposit?

  11. george says:

    what would the odds be that in one week I would get two full agreements accepted on my sale but twice the were no show within 24 hours with a deposit?

  12. George says:

    There’s no such thing as a sudden real estate crash?

    I guess you weren’t an agent in the Feb 91 when Mulroney and the BofC raised interest rates from 11% to 16% OVERNIGHT? What do you think happened to the RE market when that happened?

    Your lack of experience is showing.

    1. Kay says:

      Agree. I stopped reading after the ‘there’s no such thing as a sudden real eatate crash’ comment. The author lost all credibility. I’ve been through a sudden crash- in England 2007. I’ve seen people line up outside banks to with draw their money. And I’ve had a house plumett in price OVERNIGHT. The author has no idea what they are talking about.

  13. Paully says:

    David, how many deals don’t close? Does CREA or TREB or some other RE group or office actually keep track?

    1. @ Paully

      No, TREB doesn’t track these, but you’d see the property come back onto the market, and the old “sale” would still appear on MLS.

      Not a lot of firm deals fall through before closing. If I had to guess, I’d say 1/1000 in the GTA.

  14. bugeyedbrit says:

    ‘The courts will almost always release the deposit to the seller in the event of a seller’s default, but the process still has to go through the courts. You simply can’t put the cart before the horse.’

    Shouldn’t that be buyer’s default?

  15. Kyle says:

    I think if i were selling today in a multiple offer situation, i would be inclined to accept a slightly lower price with a much larger deposit. Especially when i see the number of houses that have supposedly sold and then mysteriously re-listed. See The Mash post on 132 Yarmouth for a list of recent failed transactions. I too subscribe to your philosophy that you only get one chance to sell your house for top dollar. So with that in mind, it’s better to make sure it closes, or if it doesn’t close that the deposit is worth litigating over.

    One problem with multiple offers, is that no one vets the winning buyer’s finances. None of the parties know if he is offering way more than he is approved for, whether he is assuming he can get an unrealistic amount for his current property, or whether the house will appraise out at the final selling price. Even if the seller gets handed the full deposit, 5% may not be enough to compensate for the inconvenience and costs of having to re-list your home, nor will it make up for the stigma that gets attached to your home, when you have to re-list after supposedly selling.

  16. JC says:

    I’m going to go out on a limb here and say that 5% deposit isn’t a standard everywhere and seems to be more a GTA animal.
    I know firsthand that deposits in areas outside the GTA (Kitchener-Waterloo-Guelph to be specific) are often between 500-1,000 dollars. More in some cases but not 5%.

    1. Al says:

      That’s crazy. $500-$1000 is a deposit on a car my friend. Nobody in their right mind would accept that kind of a deposit. If I’m a seller or either agent, red flags wouls immidiately be raised if somebody comes in with $500. Give your head shake.

      1. JC says:

        Not all markets are the same. By your logic, I guess there are a lot of crazy sellers in other markets. Give your head (a) shake and ask an agent that works in those areas if you don’t believe me. I myself bought a house in K-W with a 1,000 deposit. My agent there asked if I was crazy when I was going to put 20,000 down. Conversely, I’ve had clients put 3% deposit on a house in Toronto – only because it’s all they had quick access to.

    2. busyshrew says:

      Respectfully, I have to disagree with JC – I also live the KW region and recently sold & bought in the last year. When selling, our agent requested (and got) a 5K deposit on a 275K sale and we paid a substantially higher deposit on the next house we then purchased. While 5,000 isn’t 5%, it’s certainly more than 500 bucks (my goodness, 500 is what you’d spend on an evening into T.O. to see a Jays game, so that’s kinda crazy, no?).

      1. JC says:

        Hey, I don’t have a problem with people disagreeing with me as long as you’re respectful doing it 😉 . Perhaps I should have said “could be as low as 500”. The whole concept of consideration doesn’t put a limit on the amount. The long time local Realtor I dealt with suggested 500 to 1,000 in response to my willing to put forward much more as a deposit. I asked him again just this week about deposits and he said that he doesn’t see the 500.00 thing anymore unless there is a subsequent deposit as well. In my case, I put down 1,000, which was accepted on a 200,000 home.

        My point, which I stand by, is that 5% deposits are not “standard” in all markets anymore than 5% commission rates are “standard”. As the general market slows, we may see more variance.

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