Ask Our Broker With Peter G. Miller: Big Deposit
Question: Our real estate broker says it’s common to have a 10 percent deposit for a strong offer. An uncle who sells real estate says we should put down less. What’s the best way to go with a deposit?
Answer: The purpose of a deposit is to protect the seller in case a purchase offer falls through for reasons not allowed in the contract. If the sale agreement says the home inspection must be satisfactory to the buyer or that the interest rate cannot be above a certain level, then the buyer may have grounds to get out of the agreement and get back the deposit.
However, there are situations where a purchaser does not follow through on the steps required to complete the purchase or simply has a case of buyer’s remorse. Such actions can cause serious damage to a seller. For example, if a buyer backs out of the deal the owner may have lost weeks or months to market the property, perhaps during the most active selling season. The seller may have lost the opportunity to get an offer of equal value or maybe even a higher price. Or, when putting the property back on the market the seller may find that interest rates have increased and therefore the home no longer commands the same price.
In a typical sale agreement there may be several ways to handle a deposit if a buyer does not honor required contract terms.
First, the buyer may lose the deposit.
Second, the seller may have the right to keep the deposit but by doing so settles all claims against the purchaser.
Third, the seller may have the right to both keep the deposit and to sue the purchaser for additional damages.
In addition, sale agreements often provide that in a situation where a deposit is lost, the money is divided equally between the seller and the broker, but the broker’s share is limited to no more than the amount of the commission. The logic is that the broker found a ready, willing, and able buyer; spent money for advertising; invested professional time in marketing the property; and therefore is also entitled to compensation.
As a purchaser you want to offer the smallest possible deposit so that if something goes wrong you have little exposure to loss. Sellers – of course – want the biggest deposit so they are protected in case the deal falls through for reasons not allowed by the contract.
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Peter G. Miller is author of "The Common-Sense Mortgage," (Kindle 2016). Have a question? Please write to peter@ctwfeatures.com.