A Guide to Buying Real Estate: Part 4, Deposits

The next article in our series on buying and selling real estate is Alberta deals with depositis. The following information is generic in nature, and will not apply in all cases. As we've said before this is a simple guide to buying and selling real estate, not an exhaustive one. If you have any questions regarding deposits, or purchase contracts ask a professional who is qualified to answer your questions.

As we've already learned in this series, the Statute of Frauds requires that when it comes to buying or selling real property, everything must be in writing. What's put in writing? A contract.

One of the basic elements that must exist in a contract is “consideration.” This means that each party to the contract must receive something of value. Consideration is what each party in a contract receives in exchange for its promise to act in a specified way. Typically when selling real property the seller receives money, and the buyer receives the title to the property.

My intention was not to get to "law-ish" here, but to talk about deposits. When a buyer makes an offer to a seller, the offer must be in writing, and should be accompanied by a deposit. The buyer may withhold the deposit until the offer is accepted, but it will typically be required within two business days of acceptance.

What is the deposit for?
The deposit can be as small or as large as the buyer and seller agree to, and there are different reasons either party may want to offer or accept different amounts of money. The deposit is typically viewed as security for the seller; once the offer is accepted and all conditions are removed (ie. the property is sold) the deposit and the contract are what ensures the property will change hands on possession day. If for some reason the buyer is unable to fulfill their part of the bargain, and purchase the property for any reason, they forfeit their deposit to the seller. The seller may then have grounds to pursue further legal action against the buyer (ie. sue them).

When is a deposit refunded, and when is it forfeited?
A deposit is refunded (or returned) to the buyer if the buyer and seller do not come to an agreement. If conditions are included in the purchase contract, and the conditions are not removed the deposit is refunded to the buyer. If the contract is agreed to, and all conditions are removed (the property is sold) and the buyer backs out, the deposit is forfeited, if the seller backs out the deposit is refunded. If a party backs out of the deal, the other party may have other legal recourse (ie speak to your lawyer about this!). Of course, all of this is spelled out in the contract and may vary depending on what the parties agree to.

What is the difference between an initial and an additional deposit?
In many purchase contracts, the buyer and seller will agree to an initial deposit, as well as an additional deposit. Typically the initial deposit accompanies the offer, or is delivered once the offer is accepted. If there is an additional deposit it is most often delivered if and when all the conditions are removed. Again, this is outlined in the contract so if you are uncertain about the timing of deposits, or have specific requirements for them be sure to ask.

How much are deposits?
The deposit can be as small or as large as the buyer and seller agree to. As a buyer, you may choose to offer a large deposit to make your offer more attractive, and potentially encourage the seller to make other concessions such as the purchase price or possession date. The size of the deposit may also be affected by the value of the property - more expensive properties may require a larger deposit.

What is the difference between a deposit and a down payment?
The deposit counts towards your down payment. If you were purchasing a $200,000 home, with 20% down, your total down payment would be $40,000. If you gave a $1000 initial deposit, and a $4000 additional deposit, you would owe the remaining $35,000 of your down payment at closing.

Who holds the deposits?
In most cases the seller's brokerage holds the deposit in a trust account. There are strictly enforced rules regarding trust accounts in Alberta. On some occasions the deposit is held in a lawyer's trust account. If you're purchasing a home from a builder the deposit may be put into their general account and not "held" at all. If you're purchasing a home privately the seller may want to hold the deposit (speak to your lawyer before you let that happen!!!). Some of these situations are safer than others, so if you're making a deposit be sure to ask where the money will end up.