As the closing day approaches, the pool permit has not been properly closed. Although the seller disclosed the open permit to the buyer, the seller indicated that they were working on getting the permit closed. At this stage, the buyers are outside their inspection window, the loan approval period has expired, and the buyers do not have any other available contingencies. Unfortunately, the permit was not closed out, so the buyer reached out to his Realtor and asked, “What happens to my deposit if we do not close?” Often, buyers tend to ask this question late in the transaction. This week’s blog focuses on the significance of the deposit and what remains at risk.
What Is The Deposit?
The deposit (or earnest money deposit) is money paid by the buyer at the time of signing the real estate contract. It represents a buyer’s good faith in entering the contract to purchase a home. The higher the deposit, the more attractive an offer would be for a seller because it demonstrates that the buyer is serious about moving forward with the purchase. For the last few years, many contracts were accompanied by very high deposits, making an offer more attractive in a competitive seller’s market. However, you may want to reconsider the deposit amount as we shift into a buyer-friendly market.
The Deposit as Liquidated Damages
Many buyers often conflate the deposit with the down payment for their purchase. In other words, these buyers believe that the deposit should be the money they need to put down if they intend to finance their purchase. While the deposit is applied towards the purchase price, the deposit also serves another purpose. The deposit is the liquidated damages if the buyer defaults under the contract. Section 15(a) of the FR/BAR Residential Contract (“Contract”) provides that if the buyer fails, neglects, or refuses to perform their obligations under the Contract, including timely payment of the deposit, the seller may elect to recover and retain the deposit as agreed upon liquidated damages. If the Contract fails to close due to a buyer default, the buyer risks losing their deposit. Some examples of buyer default include, but are not limited to, the buyer refusing to sign closing documents, failing to wire their cash to close, failing to use good faith and diligent effort in obtaining loan approval, etc.
How Much Should The Buyer Put For The Deposit?
Sections 2(a) and 2(b) of the Contract allow the buyer to define the amount they intend to submit as a good faith deposit. The deposit is usually 1-10% of the purchase price. Most builders will require 10% of the purchase price for new construction contracts. Otherwise, the deposit tends to be much less. Section 2(b) of the Contract further defines the “Deposit” as all deposits paid or agreed to be paid. Therefore, it is important to keep in mind that the entire deposit is at risk after the Contract is signed.
If you have any questions or concerns regarding the deposit or a deposit dispute, please get in touch with your trusted local real estate attorney.
