What You Should Know When Making a Real Estate Deposit

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Ever wonder what happens to your deposit when you make an offer on a home?  What about if the offer doesn’t go through or if you have to pull out for some reason?  Read below to find out what happens to your real estate deposit and what happens if the deal doesn’t close.

You’ve found the perfect new home for your family and now it’s time to make an offer. Your realtor will prepare an “Offer to Purchase”, a document that will become the contract between you and the seller if your offer is accepted. Along with this Offer to Purchase, you’ll typically be required to provide a deposit in the form of a certified cheque, money order or bank draft.

In all the excitement of making an offer on your potential home, you might not consider what exactly this deposit is used for, who you are paying it to, and what will happen if the sale doesn’t close. Here are a few important points to keep in mind before making your deposit.

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Why am I making a deposit?

A deposit is a “sign of good faith” to show that you’re serious about purchasing the home. In the absence of a deposit, it would be relatively easy for you to back out at anytime, leaving the seller with no buyer unless they were willing to pursue a potentially lengthy legal process to enforce your contract. There is no fixed amount you’re required to pay as a deposit, although amounts usually range from about $1000-10,000. Your real estate agent can provide guidance if you don’t know how much to offer. Fortunately for you, this deposit is typically applied against your home’s purchase price once the sale closes.

Who gets the deposit?

In Ontario, you have the option to pay your deposit immediately when you make an offer, or you can agree to pay it within 24 hours after the seller accepts this offer. Most buyers opt for the second choice, although if you’re in a bidding war, you’ll typically have more success if you pay the deposit immediately.

Many people mistakenly believe that this deposit is automatically given to the seller. In fact, you give the deposit to your agent, and it is then held in the seller’s brokerages’ trust account until the deal closes. The brokerage cannot release the deposit from their trust account without either a mutual release signed by you and the seller, or a court order.

What if the sale doesn’t close?

For the most part, it’s best to think of your deposit as non-refundable. Your signed offer is a legal contract, which means that once the seller accepts, it’s not easy for you to get your deposit back. Unless you and the seller both sign a mutual release, the deposit will remain in the brokerage’s trust indefinitely.

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If you try to back out of the agreement or the seller believes you did not uphold the conditions of the contract, they can refuse to sign the release. Similarly, if the seller does not meet the conditions of the contract, such as passing a home inspection, you can refuse to sign the release, but that doesn’t mean you get your deposit back. In both cases, your only option is to take the case to court and let a judge decide who gets the money. In order to protect yourself, it can be a good idea to make two deposits: a small one when the offer is accepted and a second larger one when the seller satisfies the conditions of the contract.

This underscores the importance of understanding the rules and being certain of your decision before making a deposit on a potential new home, because trying to get your deposit back can be an expensive and lengthy process.  Have a question about real estate deposits?  Feel free to contact me here, happy to answer any questions!

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