Deposits

When purchasers make an offer to buy real estate, that offer is typically accompanied by some form of "consideration." The idea of consideration is to demonstrate the purchaser's seriousness and to compensate the seller if the purchaser causes the deal to fall through by withdrawing without a legally suitable reason.

Note that a "deposit" (sometimes called "earnest money") is not the same thing as a "down payment." A deposit is consideration given to the seller when an offer is made. A down payment is additional money paid by a purchaser at settlement to reduce mortgage borrowing requirements.

How large is an appropriate deposit? There is no numerical guide or "standard" percentage; instead the answer depends on your status. If you're a seller, you want as much as possible-the full purchase price of the property if you can get it at the time you receive an offer. From the buyer's perspective, an adequate deposit might be $10.

Complicating the issue of deposits is the matter of disposition. In the event a buyer defaults, who gets the money? Surely the purpose of a deposit is to protect the seller, but there is usually another interested party as well: the broker. In case of default, brokers are often entitled to receive one-half of the deposit up to the value of their commission.

Brokers have a logical claim to a portion of the deposit. Their work is typically to find a buyer who is "ready, willing, and able" to purchase the property, and so, when a seller accepts a purchase offer, the work required of the broker in a listing agreement is largely completed. If the deal later falls through because the buyer defaults, the fact remains that the broker did his or her job and is entitled to some compensation.

Brokers hold deposits in an "escrow" or trust account, which means the buyer's money is separate and apart from the broker's funds. The funds are released at closing to the party conducting settlement. However, if the money is in dispute, it will not be released without the authority of both buyer and seller. Instead, the money in the broker's escrow account will be turned over to a court until buyer and seller reach a settlement.

Buyers, particularly, should be aware that forfeiting a deposit may not terminate all claims if a deal falls through. Many standardized form agreements provide that not only can buyers lose their deposits, they can also be sued for damages as well. From the buyer's viewpoint, it's best to limit potential claims from both the seller and the seller's agent to the deposit alone.

Back To Top