So, what do you know about real estate deposits?
If you’ve purchased property before, you know firsthand what a deposit is and how it works. But, if you’re new to home ownership, the concept of a real estate deposit is more than likely a touch mysterious.
That being said, understanding how a real estate deposit works before you begin house shopping is incredibly useful. Not only can you begin to arrange your deposit now, but this will also significantly reduce your financial stress when you submit your first offer.
We’re covering what a deposit is, how much you can expect to pay and what happens if you fail to abide by the rules.
What Is a Deposit?
Generally speaking, a deposit is paid by the buyer in the form of a certified cheque or a money order.
When an offer is accepted by the seller, the buyer must provide a deposit either with the offer or directly following the acceptance. This deposit is a percentage of the purchase price and will be held in a trust account until closing. Come closing, the deposit will be applied to the overall purchase price of the home.
How Much Is the Deposit?
The amount for a real estate deposit is generally between 3 and 5 percent of the purchase price. However, some sellers (typically on higher end listings) will dictate the minimum percentage for the deposit. For example, a home with a listing price of $3.5M might request a minimum 5 or even 10 percent deposit.
However, if you’re looking to make your offer more attractive, increasing your deposit percentage is always helpful. In doing so, you’re showing the sellers that you’re serious about your offer and unlikely to opt out down the road.
How Do I Arrange My Deposit?
Before you officially begin house shopping, you’re going to want to ensure that your deposit is readily available in your bank account. Remember, it often takes multiple business days to gather your funds and transfer them to your general bank account.
If you see a house that you want to offer on, you don’t want to be stuck without the money for a deposit. While you might have this money in investments, alternate accounts or your RRSP, it can take multiple business days for this money to find itself in your bank account. So, do yourself a favor and ensure that this money is liquid before you begin searching for a home.
When Will I Need the Deposit?
A deposit is going to be required when an offer is successfully accepted. However, there are two different means of presenting a deposit cheque. The different means are typically dictated by the sellers or the selling agent.
First, a deposit cheque can be presented “herewith”. This means that the deposit cheque is offered alongside your offer to the seller. Although you’re unsure as to whether or not your offer will be accepted at this point, presenting the deposit with your offer helps to make your offer more appealing to the sellers. When it comes to a multiple offer scenario, you’re nearly always going to want to present your deposit herewith. This will allow you to appear a serious buyer and maximize your chances of beating the competition.
Second, a deposit cheque can also be presented “upon acceptance”. This means that the deposit cheque will be dropped off to the listing agent or the listing brokerage following an official acceptance. In general, the buyer will have 24-hours following an acceptance to deliver the deposit cheque to the specified location.
What if I Fail to Provide the Deposit?
Long story short: goodbye house! Well, maybe…
If you refuse to provide a deposit after having your offer accepted, it could result in bidding farewell to your new home. Even if the deposit is received a minute past the agreed upon time, the sellers can technically opt to back out of the deal. It’s safe to say that timing is taken very seriously when it comes to delivering the deposit cheque.
Remember, in a multiple offer scenario, there are plenty of other buyers that will be willing to complete the sale assuming your deposit is late.
If you’re set to begin house shopping, it’s absolutely crucial to ensure that you have a general deposit amount available in your bank account. While you may not know the purchase price of your future home yet, do your best to estimate the general size of the deposit. In this case, it’s always best to overshoot and have too large a deposit than too small.