FAQ- Real Estate Offer Deposits

You’ve saved your down payment, you’re preapproved, you’ve found THE house- now it’s time for the offer.

This post is all about the deposit portion of the offer.

As a homebuyer you are expected to provide a deposit when you make an offer to purchase property.

The purpose of the deposit as far as the contract is concerned is to provide legal “consideration” aka, you are giving something to get something in return. Based on this interpretation of the purpose of the deposit, it could hypothetically speaking be $1 and serve it’s purpose.

That being said, many sellers and their real estate agents would also interpret the existence and perhaps the size of a deposit as an indication that the potential buyer is both serious about buying the house, committed to fulfilling any conditions and prepared financially to do so.

So with that in mind, a $1 deposit hardly seems like enough to show you have the intention of following through on a major purchase like a house. (I think I put $500 down on my first used car).

In fact the first question I generally get from my buyers when I mention the requirement of a deposit is “how much”, and lately this is a topic I have seen come up on some real estate forums I check, and came up at some internal training at my firm a couple of weeks ago as well.

The answer- it really depends.

In this area (London, Ontario and area), I would say 1-2% of the purchase price is pretty typical. Full transparency- I haven’t dealt with a lot of HIGH END million dollar listings, I’m talking about the average resale home and my personal experience.

In the GTA I understand that percentage is much higher. Often buyers are being requested to put a 5% deposit WITH their offer.

Sometimes, the strategy with the deposit will vary depending on the existence of other offers. If you are trying to compete- it could serve as one way to make your offer stand out assuming other offers are similar in price and terms.

You have two options for the deposit. You can provide it with the offer (if your agent is presenting in person this could be practical) or upon acceptance (if you accept an offer at 11pm on a Sunday you don’t need to drive across town to drop off a cheque- next business day is fine).

Once the offer is accepted the deposit generally goes to the listing Brokerage (so whoever is representing the SELLER) and they will cash and put into a trust account. If the property isn't listed with a Brokerage it could go to the selling (buyer's) Brokerage or one of the lawyers, you will add this information to your offer.

Again, regional difference may exist in the type of deposit that can be taken, some areas prefer certified cheques, here we deal with personal OR certified cheques, cash or even EMTs at many Brokerages.

Here’s where things can get tricky for some first time home buyers. If you have been diligent about saving your down-payment in an RRSP to take advantage of the home buyers plan- you may not have 2-5% of the purchase price all that liquid nor do you want to tie up your cash when you qualify to use those other resources as your downpayment. It’s a good idea to have a discussion in advance with your REALTOR and find out what type of deposit you will likely need based on the price range and area you are looking at, and find out how long it will take you to have those funds available (if it involves cashing out RRSP’s for example).

You will also want to have a discussion with your financing professional about if they could refund the CASH portion of your deposit in favour of using your RRSPs upon closing. My understanding is that in most cases this IS possible- so even if you put the cash down today to offer- you’ll get it back at closing and your RRSP’s will be used instead. The deposit goes towards the down payment portion of the loan, so a bigger deposit won’t mean you have to save up again for the down payment- it will be taken into account.

The deposit is held until the deal closes OR is released by both parties. If you put conditions on your offer and you decide not to proceed with the deal- in most cases you should NOT lose your deposit (make sure you carefully check wording in any agreement of purchase and sale) unless it clearly states otherwise. Both the buyer and seller will need to sign off on a “MUTUAL RELEASE” and your money is returned

to you. I always make sure that all conditions are for the benefit of the buyer and that it clearly states that the deposit will be returned in full if you are not satisfied with the conditions.

If the deal doesn’t close for another reason AFTER it has become firm- the outcome may vary. If the buyer and seller both agree- the deposit would be returned. If not it would be held in the trust account until a judge decides where it should be dispersed to (likely based on the reason why it didn’t close). Every situation is unique and you should seek professional or legal advice if you have a firm deal with an outstanding deposit.

If you have any questions, I'm here to help! Feel free to contact me today and remember, this is a general guide but in NO WAY legal advice for your specific situation, make you you look at all terms in your offer carefully!