I had a call from someone in the media a couple of weeks ago. They had received a complaint from a buyer (nothing to do with me) who had said that her realtor told her to pay a higher deposit than she was comfortable with, and had her sign a document that said she would lose it if she didn’t end up buying the property. The journalist asked if I’d ever heard of this kind of thing, and wanted to know my thoughts as an “expert.”
My first question was to ask if they had actually seen the document. I suspected it was a standard form we sometimes use when buyers want to make an offer without any conditions indicating the buyers are aware they should get legal advice and that they understand what they’re doing. I explained to the journalist that yes, if they make an unconditional offer and then fail to close, they would most likely lose their deposit.
The reporter said, “But I thought if I backed out of the deal for any reason, I got the deposit back? Isn’t that true?”
The answer to that is no, not in unconditional offers. Those deals — the ones that either didn’t have any conditions, or where the conditions have been met — are firm and binding contracts. If the buyer can’t close, caselaw says the seller is entitled to keep the deposit as damages. The buyer may also be on the hook for other damages if the seller then resells for less than their accepted offer, which can happen if a hot market quickly cools.
It sounded to me like the agent wanted to make sure the buyer understood what could happen and was actually behaving in a prudent manner. Where they may have fallen short is in communications, by not explaining fully to the buyer what they meant by that. But then again, I was talking to a savvy journalist who wrongly thought deposits were automatically refunded no matter what happened, too.
According to the journalist, the buyer had also complained that the realtor pressured her to make a higher deposit than she was comfortable with, and said that if she didn’t, she wouldn’t get the house. The journalist didn’t know how much the deposit amount was, or what the buyer wanted to pay, so I couldn’t really offer an opinion. But I’ve had buyers who thought they could get a house with a $ 1,000 deposit, and that’s not going to happen – it has to be a serious amount.
If two offers are almost identical and one has a higher deposit, the seller will go with the one with the higher deposit. And this is again because if the deal goes firm and then falls apart, their losses will be cushioned. As noted, if the deposit has been made to the sellers’ lawyer, the cheque can be cut by the lawyer to the seller as soon as the buyer’s lawyer confirms they can’t close.
If the deposit has been made to one of the real estate brokerages, things get a little more complicated. The parties have to agree to a Mutual Termination and Release and specify how the deposit will be dealt with before the brokerage can release it. If they don’t work it out (either through the realtors or the lawyers), then the deposit is kept in trust by the brokerage until they receive a Mutual Termination and Release, a letter from the lawyers indicating what is to be done to it, or a court order.
Just remember that once your unconditional offer is accepted, and you decide not to proceed because you get cold feet, or can’t get your financing, you will not automatically get your deposit back — while sometimes your realtor can negotiate a compromise with the other lawyer, the seller is entitled to the whole thing. So make sure you understand what you’re getting into, and ask lots of questions before you sign anything!