First time home-buyers are some of my favourite people. They are excited to go to every viewing and cannot wait to find the home of their dreams. However, being the property virgins they are, they might not know much about deposits and how it relates to their house hunting process. I want to make sure that you are financially educated going into the home buying process, so here is my quick and easy break down of deposits – let’s see how much you already knew and what is new!
What is a Deposit?
A deposit serves two purposes. The first is that a deposit provides security to a seller, contractually speaking. By putting money into an agreement, the seller feels secure that if the buyer walks away they have something to lose. The second reason is that if there are any breaches in the contract on behalf of the buyer, the deposit essentially works as a pre-estimated amount of damages that can be awarded to the seller.
How Are Deposits Paid?
In the Province of Ontario, deposits are usually paid by money order or certified cheque.
How Much Should a Deposit Be?
You can read a hundred articles online and each one will tell you a different percentage that you should pay for your home’s deposit. Why, you may ask? Because there is no fixed amount of deposit required by law! The amount is usually negotiated between the buyer and the seller, and it is usually done so using local customs. In Toronto, the lowest generally accepted amount for a deposit is 5% of the asking price of the property. But here is one of my pro-tips: the higher the deposit, the more attractive the offer will be to the seller. There have been many instances where sellers will accept a lower price for a higher deposit.
When is a Deposit Due?
In a standard wording of an Agreement of Purchase and Sale (APS) (double check that yours is standard with a real estate lawyer – it might not be!) you have 24 hours to pay the deposit. Note that this does not mean one business day! So if you make an offer on a Saturday, the deposit is due on a Sunday. A deposit must be liquid for this very reason. To be the most attractive buyer, provide the certified deposit at the same time as an offer.
If a deposit is late, you will be in breach of the agreement and the seller has no obligation to keep the deal. Don’t take the risk!
Where is a Deposit Held?
Deposits are normally held by the listing brokerage in something called a trust account. Trust accounts are highly regulated and routinely audited temporary accounts that hold money until a transfer is complete. It does not go into the direct hands of the brokerage or the seller until it leaves the trust account.
Is My Deposit Insured?
Yes, deposits are insured up to $100 000. If you wish to put more than $100 000 deposit than you may be asked to provide two deposits to reduce risk.
What Happens to My Deposit at Closing?
Upon closing, the deposit is applied to the buyer’s closing costs and forms part of the purchase price at closing. That is to say, if a house is sold for $500 000 and you put down a $40 000 deposit, any additional down payment and the mortgage money from the lender (less the expenses and adjustments) would be given to the seller.
Deposits can get tricky, and by no means is the above an exhaustive definition of deposits! This information should not be taken as solid legal advice, so if you have any specific questions further to this introduction on deposits, please send me a message here and I can answer what I can or help you find the right real estate lawyer who can answer your question.