Deposits: Why do we need it, and is it safe?

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One question home buyers often ask is :  Why do we need to put up a deposit?


In some areas, (the U.S., for example) the deposit is referred to as “Earnest-Money”.  It shows that the buyer is serious, and actually locks him/her into the deal.  Here is an example:

Mr. & Mrs. Brown put their house on the market in May, and receive an offer for $190,000 with a $500.00 deposit.  Possession date is 3 month down the road.  They (foolishly) accept this offer, and go on with their lives, perhaps buying a larger home.  3 weeks before possession date, they receive notice that the buyers have changed their minds:  perhaps they lost one of their incomes, or were transferred in their jobs, or found a better home.  No matter what the reason, the buyers want out.

The buyers would immediately lose their deposit of $500.00, and ‘may’ be sued by the Browns for more than that.  With the courts, who can tell what the final outcome will be, however more time and money will likely be lost in their effort to win this suit.

Now we can see why home-owners are well advised to take larger deposits.  I recently had a listing in the $140,000 range and received several offers on it.  One in particular came with a $50,000 deposit cheque……these people understood the meaning of “earnest money”……

Is the deposit safe? Absolutely.  The cheque is made out to the Listing Company and goes into trust, where it is held until it is turned over to the homeowner on possession date.  If the offer is not accepted, the cheque is not cashed at all.  If the deal falls apart on conditions, (Ex: the buyer can’t get financing, or the home inspection fails) then the deposit is returned to the buyer.

More IS Better! In this day of competing offers, homeowners are often impressed by larger deposits.  Naturally, the rest of the offer has to be acceptable as well, but if two offers for similar amounts are presented, the one with a $10,000 deposit may well be accepted over the one with $2,000 ‘earnest money’.

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