Question Box: What is an Initial Deposit?

What is an initial deposit?

A deposit usually accompanies the buyer’s Offer to Purchase, or can be submitted upon the acceptance of the Offer depending on how the contract is drafted. The deposit will become part of the buyer’s downpayment if the sale goes through. The amount of the deposit varies depending on the purchase price of the property.   A deposit can be paid in the form of a personal check unless the closing date is imminent, in which case a bank draft or certified check is required. In some parts, it`s also referred to as a “good faith deposit” or “earnest money deposit.”

The Buyer’s Perspective

What happens to the deposit if the sale doesn’t proceed due to an inability to fulfill a condition? If the sale is conditional to financing and the buyer is unable to obtain a mortgage, it may take time to get their deposit back.

If the sale is conditional to a home inspection, depending on the circumstances of the inspection, the seller may resist returning the deposit without the buyer providing a copy of the inspection report. This may add a few days or even weeks to get the deposit back.  (Pro trip: there are different property inspection schedules that can be used to avoid any such issues)

Some buyers may be under the impression that they get their deposit back immediately if the sale fails to close or the conditions are not met. In reality, this process can take days or even weeks.  If a buyer did not provide a certified check or bank draft, this process can take up to 21 days to confirm funds—and in some cases a brokerage may have a 30-day policy for returning a check. Producing proof that the check has cleared can sometimes speed up the process. If a dispute emerges between a buyer and seller, legal counsel may need to be retained.

The Purchase Contract states: 3.5 (c)the deposit will be refunded forthwith to the buyer upon the buyer’s cheque clearing the brokerage’s trust account if a condition is not satisfied or waived (as per clauses 8.5 and 8.6) or the seller fails to perform this contract.

The Seller’s Perspective

Sellers need to realize that the brokerage is bound by the terms of trust contained in the Purchase Contract and must return the deposit to the buyer provided that the buyer is not in breach of the contract.

It is generally considered that financing and home inspections are unilateral conditions for the sole benefit of the buyer and as such, only the buyer has the ability to fulfill or waive those conditions. Deposits on conditional sales that fail as a result of a unilateral condition are almost always returned to the buyer without exception.

If conditions are met and waived, the Purchase Contract states in section 3.5(d) the deposit will be forfeited to the seller if this offer is accepted and all conditions are satisfied, or waived, and the buyer fails to perform this contract.

FSBO or Mere postings

Deposits are negotiable between the buyer and the seller. Usually the seller’s brokerage holds the deposit “in trust” for the buyer and the seller.

But what happens in the case of a FSBO or a mere posting? I advise my buyer clients that the deposit should be held by First Place Realty for their protection and that term be written right into the Purchase Contract. The deposit would be held in accordance with the Real Estate Act of Alberta rather than in the seller’s personal account or that of the seller’s lawyer.

(The comments contained on this site are for information purposes only and do not constitute legal advice.)

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