Thursday, August 17, 2006
The Importance Of Taking Deposits
The trend in the industry of taking no deposits at all is dangerous and counterproductive.
There is a trend in the industry in this day and age of not taking deposits from Buyers, when it comes to servicing accepted offers prior to the conditions precedent being removed. The rationale behind this is to make the offer ‘less onerous’ on Buyers. Additionally, there is the widespread belief that since once a deposit is received the brokerage firm must open immediately a trust account, all this may become wasted effort in the eventuality that the conditions precedent are not removed by the Buyer.
A deposit is the amount of money normally paid by a Buyer at the time the offer is signed, or alternatively a short time after the offer has been accepted by the Seller. Many people wrongly believe, that unless a deposit is paid when the offer is made, there is no binding contract. This is untrue.
The three main requirements for a contract are offer, acceptance and consideration. The offer and acceptance are pretty clear, but some confusion exists as to what consideration really is. Consideration is something to be done, or promised to be done, by one party in return for something to be done, or promised to be done, by the other party. A Contract of Purchase and Sale is in essence an exchange of promises. The Seller promises to convey title to the land to the Buyer on completion date, and the Buyer promises to pay the purchase price to the Seller on the same date. Thus, paying a deposit is not a requirement at law for a contract to be binding on the parties to it.
A deposit is part of the down-payment of the Buyer, that is the portion of his own money the Buyer uses, that does not involve financing. It can be any amount or, sometimes, no amount at all as in the case of a one-hundred percent financing transaction.
If the Seller refuses the offer, the deposit must be returned to the Buyer forthwith. This is done by the broker drawing a trust cheque on his trust account. A problem arises when the original deposit cheque is uncertified. The broker would be unwise to issue a cheque on his trust account, until he knows that the deposit cheque from the Buyer has been honored. In the meanwhile the Buyer will likely be annoyed, because he probably cannot make another offer on a different property until the deposit is returned from the broker.
There are two ways to avoid this inconvenience to the Buyer. The prospective purchaser can be advised to pay the deposit in cash, or by money order or certified cheque. Or a very small deposit, or no deposit at all is obtained at the time the offer is signed. However, the agreement provides that if the offer is accepted, the deposit will be paid, or will be increased of a certain sum with 24 hours of acceptance, or some other reasonable time within the context of the offer. Sometimes a further increase is required either at the time all conditions precedent are removed, or shortly thereafter.
The general idea behind a deposit is to allow the Seller to have a remedy at law, should the Buyer default on his promises. If the Buyer has no assets, the Seller is left with no remedy against him, should the Buyer later on decide not to complete. But even before that, a deposit assures the Seller that the Buyer will carry out his ‘due diligence’ under the contract, prior to the subjects being removed.
If, for example, an accepted offer contains a subject to financing, a subject to title search approval and a subject to inspection clauses, all to be removed within five days after acceptance of the offer, a paid deposit will have the dual beneficial effect of ensuring the Seller that the Buyer will carry out the terms of the accepted offer and, at the same time, to induce the Buyer to do just that. In this respect, therefore, a deposit is an indication to the Seller that the Buyer is serious and committed to finalize the contract.
Seen from this perspective, the inconvenience that the broker will go through, should the subjects not be removed, of opening and then closing a trust account is small matter compared with the proof given to the Seller of the serious intentions of the Buyer. It is also a great tool at the Realtor’s disposal, to distinguish between serious Buyers and those who merely want to ‘test’ the Seller, as in the case of those Buyers – unfortunately more and more frequent these days - who have paid no deposit whatsoever and try to renegotiate the contract price prior to removing the subjects.
Real Estate Chronicle