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Initial Deposits: The Purposes and Pitfalls

One aspect of the home buying process that sometimes causes confusion is the initial deposit (also known as the “good faith deposit” or “earnest money deposit”). Buyers often wonder what the purpose of this payment is—and how they get it back if the sale doesn’t go through. Their concerns are valid, so we thought we’d explain a bit about how initial deposits work.

The initial deposit is designed to keep a buyer from backing out of the purchase for no good reason—thereby inconveniencing the seller. It’s usually made when the buyer submits their Offer to Purchase, although sometimes it’s submitted upon acceptance of the Offer (depending on how the contract is drafted). Typically the seller’s brokerage holds the deposit “in trust” for both parties.

The deposit (the size of which depends on the purchase price of the property) usually comes in the form of a personal check, though it can be a bank draft or certified check if the closing date is imminent. Usually it becomes part of the buyer’s down payment if the sale goes through.

All of that is fine and good—until the sale doesn’t happen for some reason. In those instances, the buyer almost always assumes, regardless of why the sale didn’t proceed, that they should get their money back immediately. Unfortunately it doesn’t typically work like that. In reality, the process can take days or even weeks.

If a buyer did not provide a certified check or bank draft, it can take up to 21 days to confirm that their check cleared. In some cases brokerages have a 30-day policy beyond that for returning a check. Producing proof that the check has cleared can sometimes speed up the process, but not always.

The most common cause of a purchase not going through is when a condition upon which the sale was contingent is not met. For example, if the sale was conditional on the buyer being able to obtain financing and they subsequently can’t secure a mortgage. Or if the sale depended upon the home passing inspection and it does not. Again, in those cases the buyer expects they will get their money back right away, but that’s usually not the case. In fact in the latter circumstance, the seller may refuse to return the deposit until the buyer provides a full copy of the inspection report. This can add days or even weeks to the process of getting the deposit back.

To be frank, often the reason such delays occur is that once the money is in the hands of the seller, they’re reluctant to relinquish it. That’s because generally the conditions upon which a sale is dependent are for the benefit of the buyer (and as such only the buyer has the ability to fulfill or waive those conditions). So when the deal doesn’t go through, the seller (often resentful of the fact that their home has been off the market for a time) is usually not in a rush to accommodate the former buyer who inconvenienced them.

Sellers need to know though that the brokerage is bound by the terms of trust contained in the Purchase Contract and must return the deposit to the buyer if the buyer is not in breach of the contract. It’s when disputes surrounding these facts emerge that legal counsel may need to be retained.

We’re happy to say that we’ve never seen a case where an initial deposit was not ultimately returned—but sometimes it can take awhile, which is obviously frustrating for the buyer.

If you have questions about initial deposits or anything else about the home buying process, feel free to let us know.

2017-03-30T23:58:44+00:00 April 17th, 2017|Marketing Your Home, Real Estate Tips|Comments Off on Initial Deposits: The Purposes and Pitfalls