Every home purchase transaction should be initiated with an earnest deposit to the seller. In fact, it’s rare for sellers to accept offers without a deposit. This monetary offering essentially tells the sellers that buyers are serious about purchasing the home, and shows their willingness to meet all of the clauses detailed in the contract.
If the offer is accepted by the seller, the deposit will be put towards the down payment and any closing costs. The money is kept in escrow, and is given back to the buyer if any one of the clauses cannot be met within the allotted time specified in the contract.
How Much Should Be Put Towards a Deposit?
Many industry experts agree that putting anywhere between 2% to 5% towards the purchase price of a home is acceptable. However, the actual amount depends on how hot the market happens to be in the area. If, for instance, the market is somewhat sluggish, buyers can realistically put down as little as 1%. On the other hand, sizzling markets where homes are flying off the shelf will demand much higher deposit amounts. Many bids have been won as a result of the highest deposit amount.
If buyers plan on putting in a large deposit, the lender may want to verify where these monies are coming from. The deposit can essentially be any dollar figure that the buyer is comfortable offering, and what the seller is willing to accept. In general, the deposit amount should reflect both the purchase price of the home, the state of the current market, and the length of time that has been requested for closing. The more time asked for, the bigger the deposit will usually be.
How Are Deposits Made?
Once the buyer and seller have both signed the purchase agreement, the buyer will provide the deposit either in the form of a money order or certified check, which is then placed in an escrow account held by the real estate brokerage of choice. The check is therefore made out to the brokerage, not the seller.
The money is kept safe in these escrow accounts, as state laws have stringent regulations about how these monies are handled and managed. Under no circumstances are these funds ever to be deposited into the business bank account of a broker.
During the time that these funds are sitting in the escrow account, they generate interest. If the interest amount is over $5,000, the buyer will need to fill out IRS Form W-9 in order to receive the interest. Once the deal is finalized, the deposit is released from the escrow account and applied towards the down payment.
Can the Seller Keep the Deposit if the Deal Falls Through?
If a liquidated damage clause is included in the purchase agreement (which it should), the seller can keep a certain portion of the deposit if certain conditions are met. This clause basically states that if the buyer falls through on the contact, the seller can keep the lesser of the earnest deposit or 3% of the purchase price.
An “earnest deposit” is often confused with “liquidated damages” in a real estate contract. While the earnest deposit can be any dollar amount, the seller’s liquidated damages clause only allows the seller to keep a certain amount up to a maximum of 3% of the sales price in the state of California.
How Can Buyers Get Their Deposit Back if the Deal Falls Through?
If the deal is not completed for whatever reason, a cancellation fee is typically garnished from the deposit, and the rest stays in escrow. The deposit holder will determine whether or not the buyer will be getting that money back as per the terms of the contract. Ideally, the purchase agreement will detail how a refund should be dealt with.
Typically, if conditions in the contract cannot be met within the allotted time frame, the buyer should be able to get the deposit money back. If however, the clause expiry date comes and goes and the buyer has not fulfilled the promises made, the seller may be able to keep the deposit.
The Bottom Line
Deposits aren’t just some arbitrary dollar figure thrown out there. These offerings keep buyers on track to fulfill their obligations and promises according to the purchase agreement. Not only do deposits help start the real estate transaction, they also protect the seller should the buyer ever default on the real estate contract. Let us know if you need additional information. We are here to help.
The Team at Dave Financial