How much of a deposit should I provide the seller when buying a home?
When you submit an offer to buy a home, the deposit demonstrates your commitment to the seller to complete the purchase. The deposit is reassurance that you are acting in good faith and have the means to purchase the home. It also shows that you are comfortable taking on some level of risk by putting down a deposit until the deal closes.
The agreement between you and the seller will determine when the deposit is due, and is something that can be discussed during negotiations. It may be due at the time the offer is made, once the offer is accepted by the seller or as otherwise agreed.
Keep in mind, there is no minimum or standard amount for a deposit. It’s something that can be negotiated between you and the seller. In hot housing markets, some sellers may find offers with a larger deposit more desirable, and make that a factor when deciding which offer to select. Some sellers may see a larger deposit as an indicator of a stronger level of commitment from the buyer.
In such situations, the deposit amount may be guided by local practises, market conditions and the value of the home you’re buying. Your real estate professional can suggest a suitable deposit amount, but it’s important to remember that the deposit amount should be a number you are comfortable providing in a potentially short time frame (e.g., 24 hours).
It’s also important to remember that once the deal does close, the deposit will be applied towards the purchase price or down payment.
While the deposit is a show of good faith to the seller, in most cases the money doesn’t go to them right away. Your Agreement of Purchase and Sale will outline where your deposit will be held, usually until the closing date.
Often, the deposit will be made out to the seller’s brokerage in trust and held in the brokerage’s real estate trust account until it becomes payable according to the agreement. The brokerage must disclose under what conditions and in what amount, if any, interest will be paid on the deposit. When the deposit is held in a registered brokerage’s trust account, the funds are insured under RECO’s Deposit Insurance Program against fraud, insolvency or misappropriation by the brokerage. That protection is only available if you work with a registered real estate professional.
Regardless of how big your deposit is, the process will be the same should the deal not become firm (for example, if all conditions are not fulfilled or waived).
While the language of your Agreement of Purchase and Sale may be clear as to what will happen to the deposit if a condition is not waived or fulfilled, there are certain steps that need to be taken for the deposit holder to disburse any money that is being held “in trust.”
RECO requires the brokerage holding the deposit to obtain written direction from the buyer and seller with instructions on how the deposit money is to be disbursed. If you and the seller can’t come to an agreement, it becomes a legal matter. The courts would then have to decide how the money will be distributed.
Similarly, a transaction may fail to close and the fault may lie with either the buyer or the seller. No matter who is at fault, a written direction from both the buyer and seller will be needed for the brokerage to release the deposit funds. Otherwise it becomes a legal matter for the courts.
Buying a home is an exciting time, but remember, each decision along the way is important. That’s why you should make a well-informed choice when you determine the amount for your deposit.Joseph Richer is Registrar of the Real Estate Council of Ontario (RECO). He is in charge of the administration and enforcement of all rules that govern real estate professionals in Ontario. You can find more tips at reco.on.ca, follow on Twitter @RECOhelps or on YouTube at http://www.youtube.com/RECOhelps.