You’ve just cut one of the largest cheques of your life!

And now you’re handing it over to…..who?

If you’ve never bought or sold real estate before, allow me to explain the deposit.

The deposit, in legalese, is “consideration for the agreement.”  A contract is worthless without some sort of consideration; some sort of guarantee.

The deposit is submitted by the buyer in the transaction, and this money is held in trust (or “escrow” if you’re watching American reality TV) until the closing date, at which time it forms part of the total sum of money paid for the property.

The deposit is usually around 5% of the purchase price, so if you’re purchasing a $1,000,000 house, with a 20% downpayment, you’d provide $50,000 as a deposit, and then a further $150,000 in cash upon closing.  The mortgage company would provide $800,000, and that money – $50K, $150K, $800K – is wrapped up in a neat little package and transferred to the seller.

So where does that deposit money go once it has left your bank account and is put into certified cheque or bank draft form?

It’s held in trust, ie. a trust account.

Every real estate brokerage has a trust account, which can only be accessed by authorized persons (usually the broker of record and/or the CFO).

Brokerage trust accounts could contain millions of dollars at any time, as they are made up of deposits on properties listed by the brokerage, as well as commissions/salaries owed to the sales representatives employed by the brokerage.

Every industry on the planet has its bad apples, and real estate is no different.

I’m not going to sit here and pretend like no broker in Canada has ever dipped into his company’s trust account, let alone run off to the Cayman Islands with the whole whack of cash.

You may have seen the story on the weekend about a brokerage in Toronto that was shut down.

I’m not sure what I’m allowed to write about this story (Imagine that – RECO rules might prohibit me from talking about something that the newspapers have already done full coverage on!  BTW – I’m planning a blog post about “rules I hate” in the near future; dealing with RECO rules that make no sense for Realtors.  I digress), so I’m going to post the link to the article in the newspaper, and you can all read and draw your own conclusions.

HERE is the original story from Saturday.

HERE is the updated story from Monday.

Sooooo…..technically, since this firm hasn’t been shut down yet, I can’t talk about them in a negative manner, or it might be considered “disparaging a competitor” and a RECO offence.

Instead, let’s talk about brokerages that we don’t trust, hypothetically.  And no, I’m not being a smart-ass; I’m not talking about the one in the article…

From time to time, we as Realtors come across brokerages that we just don’t trust.  They don’t pass the smell test, whether it’s the agent, the brokerage, the brokerage’s website, or even just the name of the brokerage itself.

AAA REALTY INC. does not sound like a reputable brokerage with fifty years of experience.  It sounds like somebody who named their company so that it would appear first in the Yellow Pages.

So who is AAA REALTY INC?  Who works there?  Who owns the company?  Who is the broker of record?  Who oversees the trust account?

Ah yes – the trust account!  When dealing with a fishy brokerage, this is something worth looking into!

Do you want this brokerage holding your deposit?

If you just purchased a property listed by AAA REALTY INC, do you trust (no pun intended) that your hard-earned money is going to be looked after in this brokerage’s trust account?

At what point do you worry?

Contrary to popular belief, the listing brokerage does NOT have to hold the deposit.

Sure, probably 98% of the time, the listing brokerage does hold the deposit, but that’s not carved in stone.  It’s a negotiable part of the offer, just like the price, closing date, inclusions/exclusions, etc.

Last week, a colleague and blog-reader sent me an email that read, “Would you feel safe having your client make out a deposit cheque to:”

Then he listed the name of the brokerage, the address, agent, etc.

Again, I can’t list the name of the brokerage, but I can change the street and essentially give you the idea:

BAY REALTY INC., BROKERAGE
1200 Bay Street, #3001
Toronto, ON M5A2M5

So what we have here is a one-man operation, being run out of somebody’s home!

This person is running a “brokerage” out of his or her condo (the address is a condominium and the suite number listed is a condo unit), and is the sole proprietor.

That’s right, this person is the owner of the firm, broker of record, sole Realtor, CFO, CEO, President, secretary, marketing coordinator, and janitor.

So I ask again, would you cut a cheque to this broker?  Would you feel comfortable having your money sitting in this person’s trust account?

I wouldn’t.  Not a chance.

It’s not to say that they’re 99% likely to take a trip to Mexico on your dime, but rather they haven’t earned the right to expect people’s trust.

There are some brokerages in Toronto that date back a century.  Bosley Real Estate, the company I work for, is almost 90-years-old, and has been passed through four generations.  Our management and ownership have held every position there is at the Toronto, Ontario, and Canadian levels.  That is a company you can trust.

But “BOB SMITH REAL ESTATE” is not.

I you have any reservations whatsoever about the brokerage you are transacting with, then don’t let them hold the deposit.

As a buyer, you have two other options:

1) Buyer Brokerage.  Your buyer agent’s brokerage can hold the deposit, no problems.  They’re registered under RECO, and there’s no reason they can’t hold the deposit in their own trust account, and transfer the funds upon closing.
2) Lawyer.  What’s safer than a lawyer’s trust account?  Okay, okay, so the same issues apply with anybody’s trust account, but if you have a reputable, trustworthy lawyer, they can hold the deposit in their own trust account, just as the buyer brokerage or listing brokerage could do as well.

I come across this all the time.

I’m sorry, but some company based out of Concord, Ontario that has one listing in Toronto, whose website goes to “PAGE CANNOT BE DISPLAYED,” and who employs the broker of record….and his wife, are not as trustworthy as Chestnut Park, Royal Lepage, Re/Max Condos Plus, et al.

I’m glad to see that RECO took action in the case noted in the Toronto Star article, but for every instance of something being done right, I’m sure there are many that fall through the cracks.

As a buyer, you need to protect yourself, because I just don’t see a lot of consumer protection out there right now.

Condo Act, I’m looking at YOU!