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What Is A Real Estate Deposit?
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What Is A Bully Offer In Toronto?
The Buyer pays a real estate deposit upon a successful Purchase and Sale Agreement for a home or condominium. The deposit is to provide security to the Seller in the act of good faith that the Buyer has a financial stake in the agreement. The deposit forms part of the agreement and is applied against the Buyer’s down payment at closing. A deal is not firm and binding without a deposit cheque, so this is an integral part of the negotiation process.
In Toronto, the real-estate deposit is paid ASAP!
However, the answer to this question can vary by local practice. There are subtle differences in the management of deposit cheques, depending on how competitive your marketplace is. In downtown Toronto, typically, the expectation is to provide the deposit cheque with the offer itself. This means working with your financial institution for the funds in advance of submitting your offer paperwork. Your realtor will present your bid on the property with the deposit “herewith,” as stated on the first page of your Agreement of Purchase and Sale. Your offer should also include a photograph of your certified deposit cheque confirming you have the physical funds available and ready to go!
Example of the Deposit Section of Ontario’s Agreement of Purchase & Sale:
Knowing that the deposit is an essential component to a successful offer, it’s vital to have access to cash-on-hand when searching for a home or condominium.
You will want the ability to withdraw funds for the deposit cheque at a moment’s notice. Many times, buyers are scrambling at the last minute to access funds from RRSPs or stocks and bonds, which isn’t always easy. Suppose you happen to bank with institutions like President’s Choice or Tangerine that do not have brick and mortar locations. In that case, you will have to work with their sister companies to pull together a deposit, which is often a more measured and slow process.
If you are not in a competitive offer scenario, it may not be necessary to submit your deposit cheque with your offer (“herewith”). If this is the case, the deposit cheque is typically due within 24-hours after accepting an offer. Generally, the Buyer and buyer agent’s responsibility is to collect the funds and deliver them to the listing brokerage within 24 hours. However, in today’s competitive marketplace, we always encourage Buyers to submit their deposit cheques with their offers. This good-faith gesture goes along with the Seller even when you’re not in a bidding war scenario.
In some cases, you can make alternate arrangements for the deposit. An international buyer is a good example. In this instance, the Buyer’s agent will write a surrogate clause into the Purchase and Sale Agreement to manage the transfer of funds. The deposit is likely wired to the Listing Brokerage, which is a slower and more cumbersome process.
What is considered a good deposit amount in Toronto? There isn’t a fixed rule as to what constitutes a sufficient amount to include in a deposit. However, the amount is a solid testimony to the intention of the purchaser. In Toronto, deposits are generally 5% of the offer price at a minimum. In a multiple offer scenario (a bidding war), we at Fox Marin encourage purchasers to bring a deposit cheque closer to 10%. If the Seller counters your initial offer price, it’s not typical to also counter your deposit amount. Don’t forget that your deposit cheque applies against your total downpayment due on closing. These funds are not “over and above” costs.
No, you cannot write a personal cheque or submit a backpack of cash with your offer. Trust me, we’ve seen it!
The funds need to be in the form of a bank draft or certified cheque. Some banks may charge you a small processing fee to arrange the cheque.
Sample of a Bank Draft:
The deposit holder is identified on the first page of the Agreement of Purchase and Sale. All deposit funds need to be made out to the holder’s name. Remember, it’s critical to ensure there are no spelling mistakes in the “payable to” section of your deposit cheque. Deposits are traditionally held by the statutory Real Estate Trust Account of the Seller’s brokerage. Then, the cheque remains in trust until closing and is applied against the purchaser’s downpayment. If interest is payable, it must be stated in the agreement. A real estate agent does not personally hold onto the deposit.
As per the Real Estate Council of Ontario, if the deposit funds are held in the listing brokerage Real Estate Trust Account (which they generally are), the funds are insured under the RECO Deposit Insurance Program. The insurance covers up to $100,000 per claim, subject to the policy’s terms and conditions. Consumer deposit insurance offers protection in the event of fraud, insolvency or misappropriation of funds by a real estate agent or their brokerage.
If the Seller does not accept your offer, you can simply return to your bank and redeposit the funds back to your account.
Bank tellers in Toronto are accustomed to purchasers coming in for bank drafts and returning the following day after an unsuccessful offer attempt.
Often, a real estate deposit is returned to a buyer if there are conditions in the offer that are not satisfied.
For example, if you have made an offer that includes a Condition of Mortgage Financing, but the bank refuses your application during the conditional period.
If you’re unable to proceed with your purchase because the condition cannot be met, both the Buyer and Seller need to sign a Mutual Release Form before your certified deposit cheque is returned to you, the Buyer.
Below is a typical condition you may see in an Agreement of Purchase and Sale that addresses the deposit:
The Agreement is conditional until 5:00 p.m. on the 15th day of June 2021, upon the Buyer being able to arrange financing satisfactory to the Buyer. If within the conditional period the Buyer does not waive this condition by notice delivered to the Seller or the Seller’s agent, this Agreement shall become null and void and the deposit money shall be returned to the Buyer in full with interest if any, and without deduction or delay. This condition is included for the benefit of the Buyer and may be waived by written notice, prior to the expiry of this condition.
Should the Seller suspect you have not acted in good faith, they may refuse to sign the Mutual Release Form and hold back your deposit. If this is the case, the funds will remain in the named trust account, and the dispute between the Buyer and Seller would become a legal issue. A judge would eventually release the funds (to the Buyer or Seller) through a court order if not settled in advance.
Many people assume that the Seller automatically gets to keep the deposit if the buyer defaults (cannot close). However, this is not always true. In fact, cases that involve deposits of $25,000 or less are decided in small claims court and significant deposits (typical to Toronto’s market) in the Superior Court of Justice. In most scenarios, if the Buyer defaults, the Buyer does not get their real estate deposit back. In addition, the Seller may sue the Buyer for damages, legal fees, and carrying costs. In short? If you’re serious about purchasing a home or condo, do your due diligence upfront and don’t assume anything! You want to ensure you’re in a good financial position to purchase a property before leaping in with both feet, only to realize that you cannot move forward with your purchase down the road. A home purchase is not as easy as a refund at Home Depot.
Seeing that Toronto is a competitive marketplace, your deposit can significantly impact the success of your offer. This is especially true when you’re competing against other buyers for a property. Should it come down to you and one other offer (and, assuming all other terms and conditions are the same), the Seller will likely select the Buyer with the more significant deposit and a certified cheque at hand (known as ‘herewith’). A substantial deposit cheque “ready to go” is telling the Seller that you’re serious and that you have the means to close!
MORE QUESTIONS ABOUT DEPOSITS? #AskFM
Whether you’re a first-time homebuyer, a seasoned investor, or someone in between, our customized process ensures all your specific needs are met. This includes all the details about the offer process! Everyone handles the buying process differently. And we understand that. We pride ourselves on our flexibility in remaining an objective third-party. Fox Marin uses the tools and experience to provide sound advice before, during, and after your purchase.
If you would like to learn more about Real Estate Deposits and how you can use them as part of your winning strategy, take a peek at our 8 Insider Tips to Win a Bidding War video for more:
If you would looking to understand more Deposits and Bidding War Strategies, we invite you to read How to Win a Bidding War!
Of course, if you have additional questions please reach out. Contact Us (We’re Nice)!
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This article was written by Kori Marin, Managing partner here at Fox Marin Associates. For high-energy real estate aficionado Kori Marin, a well-lived life is achieved by maintaining an “all-in” attitude that realizes every last ounce of one’s full potential. This mindset has driven successful results in every aspect of her life – from her corporate sales and account management experience to her international travels, to her years of fitness training and leadership – and is the hallmark of the exceptional work that she does on behalf of her clients in the residential real estate sector in downtown Toronto.
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