Thursday, August 11, 2011

Deposits – how much? – When?

I’m often asked by our REALTORS® “how much should my Buyer offer, or my Seller accept, as a deposit on a Contract of Purchase and Sale?”
Like many topics in real estate, there are numerous points to consider.

As the REALTOR®- Who are you currently working for – the Buyer or the Seller?

As the Buyer: 

  • what amount of funds are immediately available to you?
  • Are you wanting to show this seller you have good intentions and are a serious purchaser.
  • What are you prepared to risk?

As the Seller:  

  • how long away is possession?
  • How serious do these Buyers appear to be?
  • What would be fair compensation should the Buyer fail to complete?

The process for the handling of the deposit funds is important to know – regardless who you are in the transaction.  The Buyer’s real estate Agent will collect a personal cheque (not ideal), a certified cheque (much better) or a bank draft (the best option for all parties concerned) and it will be payable to the name of  their REALTORS® real estate Brokerage.

As soon as the cheque is given to the representing REALTOR®, they MUST immediately turn it into their Brokerage for deposit into the Trust account – along with a copy of the accepted offer the deposit was taken for. They don’t hold it in their file or pocket until subjects are removed, or until the next time they make it into the office.  Holding clients’ money once they are in receipt of it is a serious breach of a REALTORS® duty and obligation.

The Brokerage will deposit the funds into a Trust account.  Trust Law governs what can be done with that money after that.  The only way the Brokerage can remove the money from their trust account is: 

  • receiving written approval from all parties to the contract, 
  • receiving written notice and instruction from the lawyers 
  • or receiving written notice and instruction from  the courts.

Ideally, the subjects are removed by the Buyer and the contract goes Firm.  The Brokerage will receive written instruction from the Lawyers conveying the transaction to release those funds into their trust account and the deposit becomes part of the Buyers’ purchase funds that are paid through to the Seller at completion.

Now – back to the questions above.
If a REALTOR® is working for their Buyer, they would rather not require their Buyer to put up any deposit until they know the Buyer will remove all their subjects and make the firm commitment to purchase the property.  The Buyer may have their deposit funds tied up in RSP’s or GIC’s and can’t access the funds immediately at acceptance.  Some Buyer’s have given a deposit cheque thinking it just sits in the file and is not cashed until completion – they are very surprised when they get a call from their bank saying the cashing of that cheque has overdrawn their account.  It’s important the REALTOR® makes it clear that once we are in receipt of the funds – the cheque will be deposited and cashed.

If a REALTOR® is working for their Seller – they would be considered remiss, by not insisting that a deposit be taken upon acceptance.  The Real Estate Council and Continued Education Training, teaches REALTORS® that their sellers position is not adequately protected if no deposit is taken at acceptance.

The opposing sides to this often comes to light when a Buyer provides an initial deposit amount upon acceptance, doesn’t remove their subjects for one reason or another, and the Seller, upset that the deal is falling apart, refuses to sign the General Release.  This form is the “written permission from all parties to the contract” needed by the real estate brokerage to release the funds back to the Buyer.  Now, the Seller doesn’t necessarily have a legal right to refuse the return of the deposit but sometimes they believe the Buyer didn’t perform their due diligence adequately and feel the need to cause a fuss.  This is not probable…but possible. The fact that it could happen should be explained to the Buyer – rather than the REALTOR® saying, “Oh of course you’ll get your money back”. REALTORS® are usually successful in helping all parties involved to see the reasonable side of things, the form is signed and the funds returned to the Buyer.

The contract is often drafted that once the Buyer removes their subjects, another deposit amount is paid to the Brokerage.  This is added to the first amount received at acceptance – if it was – and the total deposit is sent through to the conveyancing lawyer to form part of the Buyer’s purchase price.  The lawyers will instruct the Brokerage to hold back the commission amount due to their REALTOR® and pay the balance through for the transaction.

If the Buyer, after the deal has gone firm, then defaults and fails to close the purchase, the deposit amount is usually claimed by the seller.  In this case, the Seller has a stronger legal position to lay claim to those funds.  The release of the deposit from the lawyers trust account is then negotiated the easy way or the hard way, most often by the lawyers acting for both sides.  When a Buyer fails to close on firm offer, they rarely get their deposit money back.

With all that in mind – the last question is “HOW MUCH?” Clients coming from different trading areas may have thoughts on what they feel is fair and expected.  The REALTOR® is in the best position to provide guidance.  If the offer is one of two or three others, the amount of the deposit can speak volumes to a deciding Seller – or judge, in the case of a foreclosure transaction.  The past real estate experiences either the Buyer or the Seller can affect their opinion of what to ‘give’ or ‘accept’.  The value of the property has a huge bearing on the amount of a deposit that is deemed ‘adequate’.  10%, give or take, is often a bench mark.

All circumstances vary and like all other terms in the Contract of Purchase and Sale, the Deposit can have an impact on the success of the negotiation.  A good REALTOR® knows that and can provide valuable guidance to their clients.

When the going gets "Tough"... just call me
Susan Tough

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