Real estate deposits are used as a method to assure house sellers that the buyer is interested in making a purchase. To make the deposits binding, the parties involved are encouraged first to have an agreement made and accepted previously to make the deposit binding. To agree on the deposit, the seller and buyer have to negotiate to come up with an agreement that favors them both. The seller wants to receive the highest amounts to avoid future buyer defaults while the buyer wants to make the smallest real estate deposits to cushion them in case they default.
Typically, the deposit is usually an upfront payment of five percent (5%). However, buyers will often negotiate on these terms and pay in installments or after some conditions have been met.
According to the Ontario Real Estate Association (OREA), there are two standard ways of making the deposits. The first method involves making the deposit together with the offer while the second method involves depositing an offer that has been accepted. The Real Estate Council of Ontario implements regulations which are in the Real Estate and Business Brokers Act. One of the primary regulations is to ensure that agents should place deposits in their brokerage’s trust accounts before two days are over after receipt of the real estate deposit.
It is always important to have the deposits in a certified form to avoid clearance issues. Issues in clearance take up time thus delaying and postponing delivery of the deposit. Delays in delivery of the deposits will often result in reneging or cancellation of payments. Such difficulties can be avoided by paying certified deposits only after the offer has been accepted.
OREA forms have a spot which is filled to show the receiver of the deposit made. If a listing broker sells a property, they will receive the deposit then apply the realty commissions on the deposits if the transaction is completed, according to Zack from Deposit Financing Canada. For properties that are sold without the aid of a broker, the deposit is made in trust to the seller’s solicitor.
Buyers should avoid paying deposits directly to the seller. This is essential in avoiding fraud to the buyer in case the seller of the property is not the actual owner. Real estate sellers who demand to have the deposits made to their account should be a “red flag” that there is a possibility of fraud. Deposits made to such sellers may result in loss of the real estate deposits.
Lastly, it is important to cover the aspect on breaching of the contract by either the buyer or seller. In case this happens, the deposit will be used to cover the damages rather than be used as a penalty. For example, if a buyer, in this case, the defaulter, paid a deposit beyond the damages incurred by the seller, then the seller will not keep the whole amount deposited, and he or she owes the buyer a share of the deposit.
Real estate brokerages will only release the deposit only after signing of the mutual release documents. If the mutual release is not signed, then the parties will have to litigate the matter for the brokerages to release the money.
Brokerages will opt for this to avoid giving out funds that have a potential for litigation or are a subject of dispute. The same method that is signing of the mutual release documents applies if the deposit is made to the lawyer’s trust account. The method, however, has a benefit in that it allows the lawyer to negotiate the release of the monies before the litigation process is enacted by the parties.
Learn more from Deposit Financing here: Real Estate Deposits and Why Are They Needed? : Deposit Financing