Legal Brief for May, 2013

Deposits in Real Estate Purchases

In last month's Legal Brief we looked at the role that subject to conditions play in a real estate purchase.  This month we will look at another important element of a purchase contract - that of the deposit paid by the purchaser.

The purpose of a deposit is to show that a would be purchaser is serious about the proposed transaction and actually has money that they are willing to commit to the deal.  If a seller is going to accept an offer, it usually means that they are in effect taking their property "off the market" for up to a few weeks.  If they are going to do that, they want as much assurance as possible that they will in fact be able to complete a sale to the person who has put in the offer.  If a purchaser does not pay any amount for a deposit, then they have less reason to remain committed to completing the purchase if they get cold feet or find another property that is more to their liking.  The higher the deposit amount, the greater the incentive for the current purchaser to carry through and complete the purchase.

There is no formal legal requirement as to the amount of a deposit that a purchaser is to pay as part of their offer to purchase.  It is a matter of negotiation between the purchaser and the seller.  There used to be a rule of thumb that the deposit amount should be 10% of the purchase price.  That seems to have fallen by the wayside as there have been more homebuyers in the past few years taking advantage of high ratio mortgages in the range of 90-95% of the value of the property, thus having no capacity to provide a 10% deposit.  A seller wants to get as high a deposit amount as possible, while a purchaser usually wants to minimize the amount of money they have to tie up prior to the closing of the purchase.  A common range of figures for deposit amounts on current transactions is from $5,000.00 to $10,000.00, the final figure depending on the size of the total purchase price.

If the property is being sold through a realtor, the deposit is paid to the seller's realtor and is held in the trust account of the real estate agency until the purchase is completed.  Once the purchase has "closed" on the scheduled closing date, the real estate agency will then release the funds and they will be applied against the balance owing by the seller for the real estate commission.  If the amount of the deposit exceeds the balance owing, the surplus will be sent to the seller’s lawyer, who will in turn pass it on to the seller.

If the property is being sold privately, then the usual practice is for the deposit to be paid to the seller's lawyer, who will then hold it in their trust account until the completion of the transaction, at which time it will be released to the seller.

If the purchaser removes all of the subject to conditions, and then has a change of heart about the property and decides to "walk away" from the deal, then the deposit will be forfeited to the seller, and the seller will have to put the property back on the market to look for a new buyer.  If the general market is declining, the seller may find this to be very disadvantageous as they may be left with having to sell the property at an amount much lower than what they would have been able to if the original purchase transaction had gone ahead.  This concern is why a seller always wants to have the purchaser pay a deposit that is high enough that the purchaser is unlikely to want to risk losing that amount if they don't go complete the purchase.