How Do Deposits in Real Estate Work
How Do Deposits in Real Estate Work
What’s a Deposit in Real Estate?
A deposit is paid by the buyer on the successful agreement of the sale of a home and forms part of the final purchase price. Now, the question is how do deposits in real estate work? In real estate, a deposit serves two purposes:
- Provides security to the Seller – A deposit ensures that the Buyer has a stake in the agreement and something to lose if they walk away and refuse to close on a purchase.
- Pre-estimated damages – In the event of a breach of the contract by the Buyer, the deposit serves as a signal to the Court of a pre-estimated amount of damages
How Much Should the Deposit Be?
Truth: The higher the deposit, the more attractive the offer.
In real estate, there is no fixed amount of deposit required by law. While deposits are technically negotiated between the buyer and the seller, local customs usually indicate what is ‘acceptable.’ In Toronto, 5% of the purchase price is usually seen as ‘normal’. When we bought our house in Prince Edward County, a flat $1000 was “normal” at the time.
The risk of offering a deposit that is lower than expected is that it will be rejected by the seller. It may also make you seem like an unserious buyer, or worse, a financial risk.
If you’re in a bidding war, the size of your deposit will most certainly be one of the factors taken into consideration. Some sellers accept a lower price for a higher deposit.
Also, Read FHA Insurance
When is a deposit due?
The standard wording of the APS states “24 hours” – not “one business day”. If you agree 11 am on Saturday, the deposit is due by 10:59 am Sunday. Note that your agent can outline alternate deposit arrangements in the agreement (e.g. ‘by 6 pm on Monday, November 5’). In multiple offer situations (i.e., bidding wars), it’s good practice to provide a certified deposit at the same time as the offer. It lessens the Seller’s risk of having to deal with buyer’s remorse the next day. It strengthens your position against other bidders.
Pro tip: Even if you’ve just started the house-hunting process, make sure that your deposit (around 5% of the purchase price in Toronto) is liquid and isn’t locked away in a virtual bank or investment. Many buyers get a line of credit in advance of a purchase. They use that to fund the deposit if their money is in investments or RRSP’s.
What happens if a deposit is late?
You will be in breach of agreement if your deposit doesn’t arrive on time. The Seller could potentially walk away from the deal as well. We see this happens when another potential Buyer has materialized. The seller sees an opportunity to sell the house for more money. Don’t be late with your deposit.
Where is a deposit held?
The deposit is normally held by the listing brokerage, in a trust account. Trust accounts are highly regulated and routinely audited. Deposit money held in trust cannot be used to pay the brokerage’s expenses (salaries, rent, etc.)
Your deposit is insured.
There’s an insurance policy that covers your deposit up to a maximum of $100,000 per claim. If your deposit exceeds $100,000, you may be asked to provide two deposits. One to the seller’s brokerage and one to the buyer’s brokerage or the seller’s lawyer. That also reduces risk. If the brokerage holding your deposit goes bankrupt (this is extremely rare), all claims cannot exceed $3,000,000.
As a Buyer, can I refuse to provide a deposit?
Sometimes, in a bidding war, a buyer pays more than they anticipated waking up the next day with regret. If the offer was firm, they must proceed with the purchase and must provide a deposit. Agreements in Ontario are signed under seal and are binding, and not providing a deposit as per the agreement could get you sued.
What happens to your deposit at closing?
A deposit is applied to the Buyer’s closing costs and forms part of the purchase price at closing. So if a buyer paid $800,000 for a home and provided a $40,000 deposit, that amount + any additional downpayment + the mortgage money from the lender will be provided to the Seller (less the expenses and adjustments).
I’m a Buyer. What happens to the deposit if I don’t get financing?
Your deposit will normally be returned to you in full without deduction if your offer was contingent on obtaining financing and you’re able to obtain financing during the conditional period.
Read everything before signing for you to understand more how deposits in real estate work.
If a seller does not believe that a buyer acted in good faith in fulfilling a condition, they can refuse to release the deposit.
Call your agent or your lawyer if your purchase was not conditional on financing or you previously waived the condition and unable to obtain financing. You will likely lose the deposit you provided and may get sued for any damages the Seller has.
What happens to my deposit if I don’t waive the home inspection clause?
Depending on the wording of the home inspection clause you signed if you don’t waive or fulfill the home inspection condition in the specified time period (e.g. 3 days), you will likely get your deposit back.
Remember: a Seller doesn’t have to fix deficiencies identified in the home inspection unless they agree to, which is incredibly rare in Toronto. If you decide not to waive the home inspection clause, the Seller is free to sell to someone else.
Also: remember that there is an expectation of good faith – meaning a Buyer can’t just use the home inspection clause to get out of a purchase if they’ve changed their minds. It legitimately has to be because of the home inspection.
I’m a Seller. What happens to the deposit if the buyer doesn’t close on the transaction?
In most cases, if a Buyer does not close on a firm sale (in other words, all conditions have been met), the Buyer forfeits the deposit and may be sued for additional damages. This is serious and messy, and your lawyer will guide you through the process.
