Show Me The Money! All About Deposits!

More & more these days we're hearing about deals being jeopardized or even falling apart due to the deposit. Or rather the lack of a deposit...or shenanigans of some sort or another surrounding the deposit. There are also lots of misconceptions around what happens to the deposit if a deal falls through. So here's a little primer on a few different aspects of the deposit.

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In real estate, the deposit is like a downpayment on your downpayment. A show of good faith. Typically an Agreement of Purchase & Sale is signed both under seal & offers a deposit. Depending on what area in Ontario you're purchasing in, it can be anywhere from $500 and up. Typically here in the Durham region we see deposits start at $5000 and go up from there, often the amount is dependent on the purchase price of the home. The expectation is, the higher the purchase price, the higher the deposit. In Toronto, it seems to be the norm that deposits are a minimum of 5% of the purchase price. Fun fact: we bought our house 18yrs ago with a $500 deposit! Times sure have changed, lol!

In the Agreement of Purchase & Sale you have 2 options: to include the deposit "herewith", meaning it accompanies the offer, or "upon acceptance" which means it has to be submitted within 23hrs59mins after the acceptance of the offer. At 24hrs the buyer is in breach of contract.

The deposit then gets deposited in a trust account, usually that of the listing brokerage, & on closing day the money is released to the lawyer to be applied to the purchase price along with the downpayment. The listing brokerage must deposit the funds in their trust account within 5 business days of receiving them, in order to stay compliant with the provincial law that governs our industry (Real Estate and Business Brokers Act - REBBA 2002).

According to contract law, a deposit is not necessary to make a contract enforceable, however anything that is written INTO the contract, forms part of the contract & therefore IS enforceable. In most Agreements of Purchase & Sale, which is a legally binding contract, a buyer is agreeing to provide the deposit either with the offer or once the offer is accepted. If the buyer does not submit the deposit, within the timeframe agreed to in the Agreement, the buyer is in breach of the contract.

So what happens if the buyer does not submit the deposit in time? For example: a scenario we've seen play out quite a few times this spring, a buyer throws a whole wack of money at a property in order to "win" in multiples & then in the light of day, buyer's remorse sets in & they refuse to submit the deposit & walk away. The seller can either ignore the breach & proceed with the contract (forcing the buyer to proceed to closing), or they can terminate the contract. Another fun fact: the seller can terminate the contract & also sue for the deposit! They can sue for damages as well...

There is a clause in the Agreement of Purchase & Sale which talks about "time shall be of the essence" which means that deadlines MUST be adhered to. Buyers & sellers must respond to an offer within the timeframe indicated in the offer in order to keep it valid, & conditions must be met within the timeframe indicated in order to keep it valid. There was a well-known legal case from a few years ago which is an interesting read on the importance of timing, & on which judges often refer to when looking at a breach like can read a short synopsis of it HERE

What happens if a buyer has submitted their deposit & then wants out of the deal? What happens to the deposit then? Sometimes there are circumstances beyond your control...deaths, medical diagnoses, job losses etc. & you need to get out of a deal. Sometimes there are financing or appraisal issues which mean you will not be able to close. It's definitely lawyer time in cases like these & there's a good chance you're going to lose some or all of your deposit if the seller incurs losses as a result of your default or anticipated default!

In a recent transaction that I was involved in, the deposit on a (failed) firm deal is going to cover the difference in selling price (the property originally sold in multiple offers for a higher price but re-sold for less in a single offer situation) as well as  additional expenses that the seller will incur due to a later closing date on the new deal. Part of the conversation during negotiations was what the original deposit would cover & the original buyer's lawyer was involved as well, his job being, to mitigate his client's loss as much as possible.

As a seller you want to see as large a deposit as possible, because as in the example above, you may need to cover losses & it makes it more difficult for a buyer to walk away without a damn good reason! It's also very important to seek advice before signing away your rights with a Mutual Release...a release is good for the buyer, absolving them of responsibility & returning their deposit to them. Not so much for the signing it, you lose your claim to the deposit & any further action against the buyer.

Another example where deposits can trip you up as a seller, is a transaction that I was involved in last year. We received a conditional offer with quite a low initial deposit, with a further deposit to come once the conditions were met. There were a couple of red flags in this particular deal, one of them being the deposit. I explained all of my concerns to my clients, but they liked the offer price & decided to take their chances & move forward. Sure enough, the buyers decided not to firm up the deal & my client's hot property was tied up for a week. The buyers in effect put a "hold" on the property, didn't perform any of the conditions in the offer & wasted everybody's time. It was a maddening situation!

In today's competitive market, whether you're on the buying side or the selling side, paying attention to, or highlighting a buyer's financial strength is a must. How an offer is structured, which includes the deposit, can make or break a deal. Demonstrating a buyer's ability to actually close on a property is a key part of an offer presentation as well. And finally, Act in Good Faith! This should go without saying, but many buyers are not! The consequences can be very costly, to everyone involved, including & especially to YOU, if you don't!

Looking for more helpful information about buying or selling a home? Request your free Buyer's Guide HERE or Seller's Guide HERE & have it sent straight to your inbox!

 Have a fabulous day!

Additional Reading:

Electronic Deposits...Coming Soon?

For Deposits up to $10k (East Coast Only?)

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