All About Real Estate Deposits

What's a deposit? How much do I need for a deposit when purchasing a home?

Is a deposit the same as a down payment?  Well, these are all questions I hear a lot! Deposits are certainly one of those areas around home buying where there's a lot of confusion and misunderstanding so I'm going to do my best to clear that up. 

First, let me explain the difference between a deposit and a down payment. The down payment is the total amount of money or cash you will be paying when you purchase a home. Now, this could be 5% or 50%, or even 90%.  If you're paying cash it's 100%. The amount of the down payment is irrelevant to the owner of the home you are buying as long as they know that you can get the financing you require, if you require financing, but whether you are paying them by way of a 5% down payment, a 95% mortgage or 100% cash, the amount they get is the same. 

The total down payment will need to be provided to your lawyer shortly before the actual date of closing, which is the date you take possession of your home. So let's say, for example, you are buying a $400,000 home and you're planning to pay $40,000 in cash and the rest by the mortgage; your down payment will be $40,000 and your lawyer will make arrangements for you to bring this into them by way of a bank draft. The other $360,000, your lawyer will obtain from your bank or lender. The deposit, however, is normally a smaller amount that is due around the time you make your initial offer to purchase the property. 

There was a time many years ago when there was a standard of 5% that was used for a deposit, but you see, at that time, you needed a 10% down payment to buy a home, so half of that was a reasonable deposit amount. However, today you can buy a home with 5% down or even less. In some cases so it's not always reasonable or feasible for a buyer to come up with a 5% deposit. Now, there is no standard as far as a deposit goes. It's an amount you negotiate with the seller of the property at the same time you negotiate your price in other terms. You see, the deposit provides the seller with some assurance that you're going to proceed and not back out of the purchase at the last minute. Theoretically, you could put down a deposit of $1 but that gives the home seller little assurance that you're going to proceed. The larger the deposit you put down, the more confidence the seller has in your seriousness and your ability to follow through on your purchase. Let's face it, you are less likely to walk away from a $5,000 deposit than a $1 deposit so while there is no standard and the amount is negotiable, I will say that a typical deposit on a home in a $200,000 to $300,000 price range might be around $5,000 and then goes up from there based on the value of the property. 

So what happens with the deposit? Well, the contract you've negotiated with the seller will outline not only how much the deposit will be but also when it will be due.  It could be due within a day or two of the offer being written or not until all your conditions are removed. The contract will also stipulate who is holding the deposit. This is normally the brokerage that has the listing on the property, but it does not have to be. It could be the buyer's brokerage or a lawyer. Either way, it goes into a trust account and there are very strict rules around trust accounts. The money cannot be used by the seller or the brokerage. It must stay in the trust account and only be disbursed according to the terms of your contract. So what does that mean? Well, there's normally one of two ways that money gets dispersed. The first is if you decide to proceed with the purchase and remove your conditions the deposit then gets applied against your down payment; so if you had a $10,000 deposit and you are planning to put down a total of $40,000, as in our example, well, the balance you would now be required to take to your lawyer would be $30,000. The deposit effectively gets applied against your down payment. 

If however, you decide you are not proceeding with your purchase; maybe you didn't get your financing, or maybe the inspection went poorly, well you are entitled to receive 100% of your deposit back provided you did not remove any of your conditions; this is very important. On your contract with the sellers, there will be a date or dates when you have to remove your conditions by. If you do not remove your conditions, the offer becomes null and void and you get your deposit back. 

However, if you remove your conditions and you are agreeing to purchase the property and then for some reason you decide to back out after removing your conditions, well the contract states that you will forfeit your deposit, but that's not the end of it. You've breached a contract and in addition to forfeiting your deposit, you may be liable for damage and that can be very very expensive so you don't want to go there. You want to make sure that when you remove your conditions, you are 100% committed to purchasing that home.  If you're not, then don't remove your conditions. 

Well, I hope I've explained everything you wanted to know about deposits. If I haven't or if you have any other questions about buying or selling a home, please feel free to give me a call at 780-462-5002 or send me an email at you can also visit my website where we have lots of valuable resources for home buyers and home sellers.

Alberta Real Estate Purchase Contract Conditions Explained >>
Buy A New Home First? or Sell your Current Home First?  
We regularly post new helpful videos. Click here to SUBSCRIBE:

Post a Comment