Understanding the Deposit

A part of every real estate transaction is the deposit money.  Let’s take a look at the details inside the deposit money in more detail.

Purpose
The deposit money is offered by the buyer to the seller as a show of good faith or sincerity, hence the deposit is sometimes called the “earnest money”.  There is no reason why a real estate offer could not proceed without any deposit at all, but it would be demonstrating that the buyer has very little financial commitment to the purchase.  A seller will look poorly on an offer in which the buyer is not committing themselves to.

The deposit is simply a part of the total purchase price paid by the buyer.  In addition to the deposit, the buyer agrees to pay the balance of the purchase price, subject to adjustments, on closing.  The balance can be made up of both the buyer’s own money and from mortgage financing.  The deposit will be a portion of the buyer’s down payment, but does not need to be the entire down payment.

How Much Money?
Sellers always like the deposit to be as big as possible!  While there is no set amount that the deposit has to be, in Toronto, sellers expect a significant deposit to be made with an offer.  It will likely come in at between 5% to 10% of the purchase price.  A more sizable deposit is an easy way to make an offer look better, without impacting the actual purchase price.  Beyond that level, it doesn’t really matter.  The seller isn’t going to end up with this money, should the conditions in the offer not be completed.

Who Holds the Deposit
The agreement of purchase and sale will specify when the deposit money needs to be paid and who is going to hold on to it.  It is unwise to give the money directly to the seller.  The seller doesn’t get to receive the money until the whole transaction really closes.  The seller may not be entirely trustworthy, or may not be good at handling large sums of money.  We sure wouldn’t want the seller to disappear with the deposit money, or be in a position where they are unable to return the deposit money should the transaction not proceed.  So, usually the deposit money is held in a trust account belonging to the real estate brokerage representing the seller.  There are specific rules that govern this trust account and the way the funds are handled, to ensure this money is held separately from all other affairs of the brokerage and always available to be paid out.  Occasionally the deposit will be held by another third party, such as a law firm representing the seller.

In a bidding war, buyers often include a certified cheque for the deposit along with their offer as a technique to make their offer stronger than a competing offer that will bring the money later.  In general, the deposit money needs to be received by the seller’s real estate brokerage within 24-hours of the time of acceptance.  So potential buyers need to be sure this money is available to them, from a bank account they can access quickly.  Sellers have been known to cancel transactions when the deposit money arrives late!  If the buyer needs additional time to deliver the deposit, such as over a weekend or they need an additional day, that needs to be specified in the agreement.

Is the Money Really at Risk
The money is held in a trust account and can only be paid towards the closing of the real estate transaction.  Should the sale not complete, the money will continue to be held by the listing brokerage.  The money will be returned to the buyer once all the parties sign a “Mutual Release” absolving each other of any further liability.  Any conditions in the offer will be accompanied by a promise to “return the deposit to the buyer in full, without interest or deduction” should the condition not be completed successfully.  If the transaction does not close for some other reason, the seller can only receive the deposit by suing the buyer for damages.

If you have more questions about the deposit in a real estate transaction, please let me know.

Ralph Evans is a Modern Professional Sales Representative with RE/MAX Professionals Inc., Brokerage. 

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