The real estate deposit – that first little bit of money that leads the way to a whole lot of spent on a home.
What is it? It’s security for performance that the Buyer will purchase pursuant to the terms of the agreement of purchase and sale. It contributes to the binding nature of the agreement on buyers and sellers.
How much a deposit should be is up to negotiations between the parties. Typically, we see deposits of $500 to $1,000 for most homes. Sellers may want larger deposits to encourage buyers not to walk away from the deal.
Buyers typically provide the deposit with their offer or upon acceptance of their offer. Deposits should be paid to and held by the seller’s real estate agent or, for private sales, the seller’s lawyer so that it is properly protected until the deal closes or the agreement is otherwise terminated. Avoid deposits directly to sellers because this risks the deposit being released inappropriately.
The deposit is credited against the purchase price on closing. Note that a deposit is part of but not the same as a down payment. A down payment is the amount that is the difference between the purchase price and funds being provided through a mortgage.
What happens to a deposit when an agreement is terminated or when a transaction doesn’t close depends on the specific agreement and the circumstances leading up to the termination or failure to close.
Where there is a contractual right of termination, many real estate agreements will tend to provide that the deposit is returned, in full, without interest: e.g., a valid title objection that the Seller is unable or unwilling to address; or, as is more frequently the case, when conditions in favour of one party, such as obtaining satisfactory financing or home inspection, are not satisfied.
When a Buyer is unable or unwilling to close and there is no basis for the failure to close under the agreement, the deposit may be forfeit. Moreover, sellers may claim against such buyers for damages greater than the deposit as result of the failure to close (e.g., carrying costs of the home after the closing date, additional legal and other fees and the difference in the purchase price under the agreement and the ultimate sale price obtained). The seller has a duty to mitigate (e.g., seller cannot relist a property for an unreasonably low price and expect the buyer to be liable for the full difference) but the potential exposure for defaulting buyers may exceed a small deposit amount so deposits cannot be viewed as ceilings or useful guides for damages.
When a deal doesn’t close or there is concern that it may not, buyers and sellers should review their rights and obligations in respect of the deposit and the larger agreement with their respective lawyers.