Deposits are a key element in the sale of virtually all houses.
A deposit is usually given to the seller when a buyer first makes an offer. The seller may then accept or reject the offer. If rejected, the deposit is returned. If accepted, the seller - or the seller's representative - holds the deposit to assure that the buyer goes through with the deal.
A deposit can have any of several purposes depending on the outcome of the contract. If the deal goes through, financing is arranged, and everything is in order, the deposit becomes a credit to the buyer's account at settlement. If the deal fails because the buyer defaults, the deposit is used to compensate the seller. Beneath the surface in either case, deposits offer security to the seller while encouraging buyer performance.
The size of a deposit is a matter of negotiation between the buyer and seller. It is in the seller's best interest to obtain the largest deposit possible. While there is no standard size for a deposit, sellers should check with local brokers, attorneys, and other sellers to determine what is acceptable in the community.
Sellers should insist on a large deposit for several reasons. By accepting a contract, a seller is removing a home from the market. Other potential buyers may be lost. While a home is off the market the seller must continue to pay for ownership costs such as taxes, utilities, and mortgage expenses.
If the deal falls through because the buyer fails to honor the contract the seller will be forced to market the home again. This can be a critical problem if the second selling period is during an undesirable time of year. As an example, August is not the best time to try to sell a home in Miami.
Although it is good to seek a large deposit, sellers should also recognize that the size of a deposit can be an important negotiating point. Buyers obviously prefer a small deposit and sellers who seek less than the maximum will enhance their bargaining position.
In reviewing the size of a deposit, sellers should consider that most houses are sold through brokers and that brokers commonly hold deposits. Contract forms supplied by brokers usually provide that the broker has a claim against the deposit if the buyer defaults.
Self-sellers should recognize that a brokered deposit of 10 per cent may only net the seller 5 per cent if the buyer defaults. In this case, individuals who seek deposits of 6 to 9 per cent will gain a sales advantage without undue cost or risk.
Peter G. Miller teaches the course, "How to Sell Your Own Home - With or Without a Broker" through the Consumer Information Institute in Washington.