Deposit on a House Purchase: An Ultimate Guide

by Richard Morrison
March 4, 2020
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Making an offer on a home is an exciting yet stressful time. As a buyer, you want to make your offer as attractive as possible to the seller. One key component is the deposit amount – but what exactly is a deposit, how much should you offer, and what happens if the deal falls through? This comprehensive guide will walk you through everything you need to know about deposits when purchasing a home.

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Key Takeaways

A deposit is a portion of the purchase price paid upfront to show the seller you are serious and committed. It is typically 5% of the offer price.
Deposits are held in trust by the buyer’s real estate brokerage and forms part of the down payment if the deal completes.
Buyers can lose their deposit if they back out of a firm deal without conditions, so be sure you are ready to move forward before making an unconditional offer.

What is a Real Estate Deposit?

A deposit, also known as a good faith deposit, is an amount of money paid by the buyer when they make an offer on a home. It demonstrates to the seller that the buyer is serious about purchasing the property.

The deposit acts as consideration – something of value exchanged between parties to create a legally binding contract. It also provides the seller with a sense of security that the buyer is committed to following through with the purchase.

Deposits are typically paid by bank draft or wire transfer and range from 1-10% of the purchase price, with 5% being standard in most areas. The money is held in trust by the buyer’s real estate brokerage or the seller’s lawyer until the sale completes.

When is the Deposit Due?

The deposit payment timeline is outlined in the real estate purchase contract. Most contracts state that the deposit is due within 24 hours of the offer being accepted.

However, buyers can negotiate the terms to allow more time to deliver the deposit. For example, the offer could specify the deposit is due within 24 hours of subjects being removed rather than acceptance.

In a multiple offer scenario, having a deposit in hand shows sellers you can deliver the funds quickly. This gives you a competitive edge over other buyers.

Deposit Amount – How Much Should you Offer?

While a deposit can range from 1-10%, the standard amount is typically 5% of the purchase price. However, offering a higher deposit percentage can make your offer more appealing to sellers.

In a bidding war, buyers may offer 7-10% or more to incentivize the seller to choose their offer. A higher deposit indicates you are “all in” and reduces the seller’s risk if the deal falls through.

Conversely, an abnormally low deposit below 3% may raise red flags that the buyer can’t secure financing or isn’t completely committed. Sellers could see this as a liability and pass you over for another buyer.

Who Holds the Real Estate Deposit?

Once an offer is accepted, the deposit money will be held in trust by the buyer’s real estate brokerage. The deposit cannot be released without authorization from both parties.

Having the deposit held by the buyer’s representative ensures that the funds will not be prematurely released to the seller if disputes arise during the transaction.

The real estate regulator in each province oversees brokers to ensure proper handling of deposits. For example, in British Columbia it is the BC Financial Services Authority (BCFSA) that enforces rules around deposit trusts.

What if the Buyer Backs Out of the Deal?

If the offer contains subject conditions like financing approval or a home inspection, the buyer may back out and receive their full deposit back.

However, if the buyer removes all subjects and makes the offer unconditional, then backs out, the seller has the right to keep the deposit. The buyer breached the legal contract and forfeits their deposit as compensation to the seller.

Before removing subjects, ensure you are 100% ready to proceed – there is no turning back after subjects are removed! Consult your real estate agent or lawyer for guidance on subject removal.

Deposit Returned if Deal Collapses

Even after subjects are removed, there are some cases where the deal can still fall apart, allowing the buyer to get their deposit back:

Financing condition – If financing approval was a subject that the buyer waived but is later declined for the mortgage, the buyer’s deposit is returned.
Title issues – If problems arise with the legal title that cannot be resolved before closing, the contract becomes null and void. The deposit is returned to the buyer.
Failure to vacate – If the property is tenant-occupied and the tenants refuse to move out by closing, this can terminate the contract. The buyer receives their deposit back.
Damage to property – Major damage that occurs before closing, such as a fire, may allow the buyer to walk away and have their deposit returned.

What Happens at Closing?

If the deal completes, the deposit will form part of the buyer’s down payment to purchase the home. It gets credited to the buyer on the final Statement of Adjustments.

For example, if the purchase price is $500,000 and the deposit paid was $25,000 (5%), at closing the buyer only needs to provide funds for the remainder of the down payment and closing costs. The deposit makes up a portion of the total payment.

Deposit Tips for Buyers

Have deposit funds readily available when making offers in case the seller requests quick delivery.
Seek advice from your agent on competitive deposit amounts for your market.
Only make an unconditional offer if you are fully committed to buying the home – you risk losing the deposit if you back out!
Ask your real estate lawyer to review the purchase contract before submitting an offer so you understand the deposit terms.
Ensure subjects like financing and inspection are incorporated if you need more time to confirm details.
Communicate any concerns that arise promptly to your agent so they can seek a resolution with the seller/seller’s agent.
Understand conditions that could nullify the contract and allow your deposit to be returned if the deal falls through.

Frequently Asked Questions

Q: What is a deposit on a home purchase?

A: A deposit on a home purchase is a sum of money paid by the buyer to the seller to show their commitment to the transaction.

Q: How much is the standard deposit?

A: The standard deposit amount can vary depending on the real estate market and the specific terms of the purchase and sale agreement. It is typically a percentage of the purchase price, often around 5% to 10%.

Q: What happens to the deposit once it is paid?

A: The deposit is usually held in trust by a third party, such as a lawyer or a real estate agent, until the completion of the transaction.

Q: Can I lose my deposit if I change my mind about buying the house?

A: If you have signed a binding agreement of purchase and sale, you may risk losing your deposit if you back out of the deal without a valid reason specified in the contract.

Q: When is the deposit paid?

A: The deposit is typically paid within a certain number of days after the offer is accepted. This timeframe is usually outlined in the agreement of purchase and sale.

Q: What happens if the deposit is late?

A: If the deposit is not paid on time as specified in the agreement of purchase and sale, the seller may have the right to terminate the contract or take legal action to enforce the payment.

Q: Can the seller keep the deposit?

A: The seller can only keep the deposit in certain circumstances as outlined in the agreement of purchase and sale, such as if the buyer fails to fulfill the terms of the contract or breaches any conditions.

Q: Can I get the deposit back if my offer is not accepted?

A: If your offer is not accepted by the seller, you should receive your deposit back in full.

Q: What happens to the deposit if the buyer cannot proceed with the purchase?

A: If the buyer is unable to proceed with the purchase due to valid reasons specified in the agreement of purchase and sale, the deposit may be returned to the buyer.

Q: How can I ensure the safety of my deposit funds?

A: To ensure the safety of your deposit funds, it is recommended to have them held in a trust account by a reputable third party, such as a lawyer or a real estate brokerage.

The Bottom Line

Offering an attractive deposit amount with your offer can give you an edge over the competition when buying a home. Just be sure you fully understand the implications before removing subjects and understand scenarios where your deposit could be at risk or returned. Consult the real estate professionals on your team for guidance!

Did you know that 31% of buyers wish they had offered a higher deposit amount to incentivize the seller according to a survey by Richard Morrison.

Next time try to deposit as much as you can to incentive the Buyer!

Major Point

A deposit is a portion of the purchase price paid upfront to show the seller you are serious and committed. It is typically 5% of the offer price.
Deposits are held in trust by the buyer’s real estate brokerage and forms part of the down payment if the deal completes.
Buyers can lose their deposit if they back out of a firm deal without conditions, so be sure you are ready to move forward before making an unconditional offer.

In conclusion, the deposit on a real estate purchase plays a significant role in the contract of purchase and sale. When home buyers make an accepted offer, they are required by law to pay the deposit as part of the purchase price. This deposit serves as security to the seller and helps regulate the real estate transaction. It provides an opportunity to sell and ensures that the buyer is serious about moving forward with the purchase. The deposit must be paid within 24 hours of subject removal, usually in the form of a subject-free offer.

However, there is a risk of offering a deposit if it does not arrive on time or if the buyer is late with their deposit. In such cases, the seller may be able to consider other offers or even sell the house for more money. The initial deposit is held in a brokerage trust and will become part of the final purchase price, but failure to provide the deposit can result in a breach of contract.

Ready to turn your real estate dreams into reality? Contact Richard Morrison, Vancouver’s top realtor with 20+ years of experience. As a Medallion Club member and RE/MAX Hall of Fame award winning agent, he’s the expert you need on your side. Whether buying, selling, or investing, Richard’s personalized approach and deep market insights ensure a successful transaction. Reach out to Richard today at (778) 900-2235 and make your real estate journey seamless and rewarding.

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