When does the deposit have to be paid if you’re buying a house or condo?
How much is the deposit?
Can a Buyer get out of a purchase if they don’t pay the deposit? What if the deposit is paid late?
Who holds the deposit money until closing?
When you make an offer to purchase a house or condo, you have to pay a deposit.
There is often many questions about the “Deposit”.
In fact, there is often confusion between a “Deposit” vs. a “Down-Payment”.
Today I’m going to provide answers to many questions specifically about “deposits” when buying real estate.
If you want to know more important differences between a “Deposit” vs. a “Down-Payment” check my other post called “Down-Payment” vs. “Deposit” What’s The Difference?”.
I also encourage you to check out my video post called “Can a Seller Keep a Deposit If The Buyer Doesn’t Complete The Purchase?”
I’ll put a link to that one below as well.
When must be deposited paid?
In Ontario, our Purchase and Sale Agreements provides 2 options for the Buyer with regards to payment of the deposit.
The deposit can be paid immediately when submitting the offer. In other words a Cheque of Bank Draft can accompany the offer.
This is often done when in multiple offer situations when offers are presented in person on offer night.
Or the deposit can be paid once the offer is accepted by the Seller & Buyer.
Can a Buyer get out of a deal by refusing to pay the deposit?
The answer to this question is no.
Once the offer is accepted by the Seller, you as a Buyer cannot change your mind.
If you do, the Seller may re-list the property for sale on the market and sell it to another Buyer.
If the Seller sells the property to a different Buyer and receives less money than what you originally agreed to pay, then the Seller might sue you for their losses and possibly even legal fees or other related costs.
What happens if the deposit is paid late?
Generally in Ontario our standard Purchase and Sale Agreements require the Deposit to be paid within 24 hours of acceptance of the Agreement.
It does specify 24 hours in banking days. So if you finalize a deal at 11:00pm Saturday night you might have until Monday to pay the Deposit.
This is the standards, although various terms for the payment of deposit can be negotiated as long as it’s agreed to by the Sellers and Buyers prior to acceptance of the offer.
If a Buyer pays a deposit late then the Seller may choose to cancel the deal.
Time limits do in fact matter in a real estate contract as it is a legal document and legally binding contract and agreement.
So a friendly reminder that it’s important to ensure that a Buyer meets all of the deadlines set out in the Agreement of Purchase and Sale including when the deposit must be paid.
How much should be paid as a deposit?
This varies from case to case and will often depend on the market and the advice of your realtor.
Typically, five (5) % of the purchase price is given as a deposit, however, the deposit is subject to negotiation, just like the purchase price.
The Seller will want to secure the largest deposit possible whereas the Buyer will want to pay the smallest deposit possible.
In an overheated market like we have today, Buyers may be forced to provide a larger deposit than they would like to.
The amount of the deposit becomes relevant where the deal does not close.
Who is the deposit paid to?
The deposit is made payable to the Listing Agent’s brokerage and the money is held in the Brokerage’s Trust account for safety & protection.
Why is the deposit made payable to the Listing Agent’s brokerage and not the Seller?
The simple reason is that by having the deposit held by the brokerage, the deposit is better protected.
If the deposit were paid directly to the Seller, the Seller could disappear with the funds or deplete the funds and the Buyer would have little recourse.
By having the deposit with the brokerage, the funds are held in trust and protected by legislation.
What happens to the deposit when the deal closes on closing day?
The amount of your deposit (as a Buyer) is of course deducted from the balance of the purchase price which you owe or still need to pay on closing day.
What happens to the deposit if the deal does not close?
This is a common question and many are surprised by the answer.
If the deal does not close, the deposit is not automatically released to either the Seller or the Buyer.
The brokerage holding the deposit will only release the deposit if the parties sign a mutual release or by court order.
Many Sellers are under the mistaken belief that they automatically receive the deposit if the Buyer breaches the Agreement and does not close. This is not true.
Alternatively, if the Seller is at fault, the Buyer cannot demand the return of their deposit.
In the event of a dispute between the parties resulting in the deal not closing, the parties must obtain legal advice to protect their respective interests.
Again, I urge you to also watch my other video called “Down-Payment” vs. “Deposit” What’s The Difference” and “Can a Seller Keep a Deposit If The Buyer Doesn’t Complete The Purchase” for further clarification on this last point.
If you’d like to learn more about buying or selling a home I’m always happy to answer your questions.