Buyers and
Sellers entering into a real estate Agreement of Purchase and Sale are usually
at opposite ends of the spectrum on a number of issues the most important of
which is money. Obviously the purchase
price is the biggest hurtle to agree on, secondary to that, deposits can
sometimes be a thorny issue as well.
Contrary to what you may believe, an
Agreement of Purchase and Sale is a binding contract even if there is “zero”
monies paid as a deposit. A contract is
made based on considerations being made.
In real estate, the considerations made in an Agreement of Purchase and
Sale includes the Seller transferring the title to the property to the
Buyer. It may also require the Seller to
include specific items ie: the appliances and other things that are specified
in the Agreement. Similarly the Buyer
agrees to pay the Seller the agreed to purchase price on a specific date
etc. All of these items are essentially
promises that are being made by both parties in the terms of the contract. What makes the contract binding is not the
deposit but the fact that the Agreement is signed “under seal.” As you will note on most real estate forms, signatures
are make next to a small black seal and the Agreement is noted as being SIGNED,
SEALED and DELIVERED…..
Virtually all Agreements of Purchase and Sale
do however include a deposit the mount of which can vary. There is no specified or accepted deposit
amount ie: 10% of the purchase price etc.
The deposit is a further show of good faith by the Buyer. The amount of the deposit is not only based
on price but also the length of the closing date is an important factor as
well. If a Buyer purchases a property
with a long closing date ie: 6 months with say a $2,000 deposit, there is not
much of a deterrent for them to not complete the Agreement if all they have at
risk monetarily is $2,000.
Most real estate transactions today have “conditions”
that for the most part need to be satisfied by the Buyer. These can include the sale of the Buyer’s
current home, securing a mortgage to complete their purchase, obtaining a
satisfactory home inspection report and so on.
Conditions are typically worded such that if they have not been either
satisfied or waived by the Buyer by a set date and time, “…the offer shall become
null and void and the deposit shall be returned to the Buyer in full without
deduction.” Seldom are deposits “non-refundable”
unless specified as such which is rare.
Sellers are as a rule not eligible to keep the Buyer’s deposit even when
the Seller feels the Buyer has reneged on the terms of the Agreement.
Deposits are for the most part held in the
trust account of the real estate Brokerage representing the Seller(s). So what happens with the deposit when an
Agreement of Purchase and Sale becomes null and void or should a conflict arise
between a Seller(s) and Buyer(s) and the Agreement is not completed?
Real estate Brokerages can release a Buyer’s
deposit one of two ways. When an
Agreement is aborted, the Seller and Buyer sign a “Mutual Release.” This releases both parties from the contract,
the Brokerage holding the deposit refunds it to the Buyer(s) and life come
goes. If either the Seller or Buyer
refuses to sign a Mutual Release it may be an indication that one of the two
parties is going to litigate in an attempt to make the Agreement enforceable. Should that be the case, the only way in
which a Brokerage can release a deposit to the Buyer is via a Court Order.
If you are a Seller, you want a sufficient
enough of a deposit so as to feel comfortable that the Buyer is committed. A relatively large deposit potentially signifies
that the Buyer(s) have the financial ability to complete the transaction. As a Buyer, you naturally may want to cough
up as small a deposit as possible as most deposits are held on non-interest
bearing trust accounts. This means that
if your money is sitting in a real estate Brokerage’s trust account for several
months, it is not earning you any interest.
As a Buyer, providing a larger deposit shows you are serious and
depending on the Seller it may give you more leverage with respect to
negotiating the price, closing date and other terms that you want.
I hope you find this information helpful and
I encourage your comments.
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