The Sale is Dead - What Happens to the Deposit?

 Buyers and Sellers entering into a real estate Agreement of Purchase and Sale are usually at opposite ends of the spectrum on a number of issues the most important of which is money.  Obviously the purchase price is the biggest hurtle to agree on, secondary to that, deposits can sometimes be a thorny issue as well.

  Contrary to what you may believe, an Agreement of Purchase and Sale is a binding contract even if there is “zero” monies paid as a deposit.  A contract is made based on considerations being made.  In real estate, the considerations made in an Agreement of Purchase and Sale includes the Seller transferring the title to the property to the Buyer.  It may also require the Seller to include specific items ie: the appliances and other things that are specified in the Agreement.  Similarly the Buyer agrees to pay the Seller the agreed to purchase price on a specific date etc.  All of these items are essentially promises that are being made by both parties in the terms of the contract.  What makes the contract binding is not the deposit but the fact that the Agreement is signed “under seal.”  As you will note on most real estate forms, signatures are make next to a small black seal and the Agreement is noted as being SIGNED, SEALED and DELIVERED…..

  Virtually all Agreements of Purchase and Sale do however include a deposit the mount of which can vary.  There is no specified or accepted deposit amount ie: 10% of the purchase price etc.  The deposit is a further show of good faith by the Buyer.  The amount of the deposit is not only based on price but also the length of the closing date is an important factor as well.  If a Buyer purchases a property with a long closing date ie: 6 months with say a $2,000 deposit, there is not much of a deterrent for them to not complete the Agreement if all they have at risk monetarily is $2,000.

  Most real estate transactions today have “conditions” that for the most part need to be satisfied by the Buyer.  These can include the sale of the Buyer’s current home, securing a mortgage to complete their purchase, obtaining a satisfactory home inspection report and so on.  Conditions are typically worded such that if they have not been either satisfied or waived by the Buyer by a set date and time, “…the offer shall become null and void and the deposit shall be returned to the Buyer in full without deduction.”  Seldom are deposits “non-refundable” unless specified as such which is rare.  Sellers are as a rule not eligible to keep the Buyer’s deposit even when the Seller feels the Buyer has reneged on the terms of the Agreement. 

  Deposits are for the most part held in the trust account of the real estate Brokerage representing the Seller(s).  So what happens with the deposit when an Agreement of Purchase and Sale becomes null and void or should a conflict arise between a Seller(s) and Buyer(s) and the Agreement is not completed?

  Real estate Brokerages can release a Buyer’s deposit one of two ways.  When an Agreement is aborted, the Seller and Buyer sign a “Mutual Release.”  This releases both parties from the contract, the Brokerage holding the deposit refunds it to the Buyer(s) and life come goes.  If either the Seller or Buyer refuses to sign a Mutual Release it may be an indication that one of the two parties is going to litigate in an attempt to make the Agreement enforceable.  Should that be the case, the only way in which a Brokerage can release a deposit to the Buyer is via a Court Order.  

  If you are a Seller, you want a sufficient enough of a deposit so as to feel comfortable that the Buyer is committed.  A relatively large deposit potentially signifies that the Buyer(s) have the financial ability to complete the transaction.  As a Buyer, you naturally may want to cough up as small a deposit as possible as most deposits are held on non-interest bearing trust accounts.  This means that if your money is sitting in a real estate Brokerage’s trust account for several months, it is not earning you any interest.  As a Buyer, providing a larger deposit shows you are serious and depending on the Seller it may give you more leverage with respect to negotiating the price, closing date and other terms that you want.

  I hope you find this information helpful and I encourage your comments.

Luxury Home Sales Start 2014 With a Whimper

As was reported in my regular blog, area real estate sales in the first quarter of 2014 have gotten off to a somewhat slow start.  This winter's excessive snowfall and abnormally cold temperatures have had a profound impact on our ability to show properties and in many cases weekend road closures prevented would-be buyers from making it up here even when showing appointments had been booked.

As with the mainstream segment of our market, the upper-end price ranges or luxury home market has felt a softening of sales in the first quarter of 2014 versus 2013 with one notable exception.  Sales in the $700,000 to $800,000 range from January 1st to March 31st are five times higher than the same period last year with 10 MLS® sales having been reported in this segment compared to just 2 one year ago.  At the present time, there are 46 properties listed for sale between $700,000 and $800,000 or roughly 13 months worth of inventory.  Conversely, there are 89 active listings for homes and condominiums price above $1 million which represents 4.4 years of inventory based on the current rate of sales.

  Typically, first quarter sales in the upper price segments of our market are very strong.  I have always attributed this to the timing of year-end bonuses paid to senior executives or business owners having had a good year and thus affording them to make a large discretionary purchase as a reward.  There is seemingly no sound economic reasons to explain the weaker luxury home sales during the first quarter or 2014.  Interest rates remain low although many of these purchases are cash anyway. Consumer confidence is up and real estate remains an attractive investment for most.  

  I suspect the arrival of warmer weather will trigger an upturn in market activity overall and this will spill over into the upper end market segments as well.