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The Pros and Cons of Using an Increased Deposit

Homes - Deposit MoneyThe deposit for a home in a real estate contract can also be referred to as "Earnest Money." Oftentimes, the Offer to Purchase has an initial deposit and then an additional deposit due at a future, predetermined time. However, there are cases where a deposit isn't even needed to make a real estate contract binding and enforcable. The "promise to pay" the purchase price and signing "under seal" can satisfy the requirement of contracts for consideration. (This may not be the same case in all jurisdictions).
Let's look at the deposit issue from both the Seller's and the Buyer's point of view...
The Seller's Perspective:
    • A larger deposit would tend to indicate a qualified and more serious Buyer.
    • If the Buyer firms up the contract, (i.e. removes all their conditions) then if the Buyer can't close the deal and take possession, then the Seller may get to keep all or a portion of the deposit in damages.
    • The higher the amount of deposit submitted (initial and additional, combined) it provides the Seller some comfort that the Buyer is "more into" the home and less likely to cancel their offer. Eventhough, the Buyer's deposit is safe until they remove their contingencies (waiving their conditions).
    • If the Buyer indicates on the contract that they are proceeding with Conventional financing (20% or more down) and they have only placed a $1,000 total deposit may give the Seller some cause for concern. If the Seller counters with a requirement of a $5,000 deposit and the Buyer says they don't currently have access to the funds, then it may put up a cautionary flag. Are they going to be able to come up with the 20% on closing? There may be a legitimate reason, such as having the money in a registered retirement fund and plan on taking advantage of a government program. Or perhaps the funds are in other securities with penalties for early withdrawal.
    • In our Seller Brokerage contacts (the Listing Contact) you'll see that if there is a full-price, no contingency offer, then the Seller is obligated to pay their Listing Brokerage the remuneration in the Brokerage Contract in FULL - whether or not they accept the Offer to Purchase, or if the Purchase Contact even completes. In these cases, the Seller should be looking for enough deposit to cover their liability to the Listing Brokerage in case the Buyer cannot complete the Purchase Contact. [That's one reason why I think to underprice a home - below market value - in order to attract multiple offers is usually a really, really bad move. Although we do see it occasionally. In fact, this fall I had one of my Buyers take advantage an opportunity like this and got a home for a few hundred thousand dollars below market value.]
The Buyer's Perspective:
    • It may give the Buyer a slight advantage over another prospective buyer in a competing offer situation. In the case of two offers that are identical in price, the one with the higher deposit will have a slight advantage over the one with the lesser deposit. (Although in reality, the amount of the deposit doesn't impact the amount the Seller gets paid for the house.)
    • The full deposit amount is refunded if the Buyer does not waive (or satisfy) their contract conditions.
    • If the Buyer places a high initial deposit (with or without the requirement of an additional deposit due on removal of conditions) then if they don't waive their conditions, their money is tied up in the Seller's Brokerage's Trust Account until the money "clears" the banking process. Depending on the amount of the deposit, this may prevent the Buyer from placing an offer on a more appropriate home until they get their deposit returned. At least one local brokerage felt they should hold onto the money for no less than 30 days! The normal practice is 10 days, but clearly our banking system operates faster than clearing cheques in 10 days.
    • If the Buyer is going to use a government backed program like the First-Time Buyer's Plan, then they may not have access to the money for the deposit without substantial penalties (income tax withholding). As a result, they may have a lower deposit but have the ability to close the deal.
In today's market, it's "Skin in the Game." Buyers want to tie up as little money as possible through the deposit/s, and Sellers want as much as they can get. It doesn't in any way impact the price of the home or the amount the Seller is going to "net out" with the sale of the property in equity.
One option is to have a small initial deposit which is followed up with a more substantial amount (an additional deposit on the contract) which is due upon the removal of the Buyer's contract contingencies (the conditions).


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