Home Buyers FAQ: What’s a Deposit?

19.11.2015

Things to Know Before Buying a Home

What’s a Real Estate Deposit?

For any home buyers looking to buy a condo, townhouse or house in the next little while, one important aspect of the transaction is the Deposit. The Deposit is, in essence, “good faith money” that Home Buyers offer to Home Sellers when the offer to purchase is official (which is, once the Buyer removes subjects, but before the actual Completion Date). These funds give the Seller peace of mind knowing that the Buyer will go through with the purchase, otherwise will risk losing the Deposit amount.

Are you wondering about the Difference between a Down Payment an Deposit?

A standard deposit is 5% of the purchase price, though that’s more of a guideline than a strict requirement. The amount of the deposit is listed on the Contract of Purchase and Sale, and is something that can be negotiated during the offer process.

The deposit is due when the Buyer enters a firm contract to purchase the property. Typically, Buyers submit offers to purchase a home with subjects, which makes the contract conditional. When the conditions are satisfied, the Buyer will “remove subjects” creating a firm contract, which is when the deposit is due. What this means is the Buyer doesn’t have to put dow any money until they are certain that they are purchasing the property. The deposit is part of the contract, so if the Buyer enters into a firm contract to buy the home, but doesn’t have the deposit funds available, the Seller can terminate the contract. If there is another interested Buyer who may pay more for the property, the Seller is likely to do that. However, if the Seller got a great price on the unit and the Buyer doesn’t come up with the deposit (and thus, doesn’t buy the suite) technically the Buyer is in breach of contract. The Seller can try to sell the property again, but if it’s sold at at loss, the Seller can sue the Buyer for the difference, plus legal fees. Keep in mind that once a Buyer gives their deposit, it can be tough to get back if the Buyer decides not to go through with the purchase, as the Seller has to agree to release the funds. If the Seller doesn’t want to release the funds to the Buyer, the issue goes to mediation, and in worst case scenario, court.

The deposit is due by bank draft. A bank draft is similar to a cheque, though the funds are immediately removed from your account when you pull the draft, rather than when the draft is finally deposited. What this means is that the funds have to be liquid and available to be used in your account. If the funds are sitting with a different bank, or in a different country, or in investments – the bank may take a few days to a few weeks to clear the funds.

The deposit can come from anyone – yourself, your parents, a friend – as long as the proper amount is given to your Real Estate Agent when needed. The bank draft is always made out to your Real Estate Agent’s Brokerage (office) since that’s where the funds are held in trust. This also means that the deposit funds never flow through your Real Estate Agent.

A few days before the Completion Date of the purchase, the deposit funds are passed from the Buyer’s Agent’s Brokerage to the Buyer’s Lawyer. The deposit funds, along with the rest of the Buyer’s down payment and their mortgage funds becomes the purchase price.

Summary of Real Estate Deposits

Amount? About 5% of the purchase price, though this can vary

Due? When the Buyer enters a firm contract to purchase the property, which is after their subject clauses have been satisfied

Form? A bank draft, which means the funds have to be liquid since they are removed from your account when you pull the bank draft

For whom? Your Real Estate Agent’s Brokerage (office) holds on to the Deposit until the Completion Date. At that time the funds are passed to the Lawyer and become part of the Buyers down payment.

*Make sure these funds will be available when you need them, as the deposit is an important part of the contract!

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