When making an offer on a home or condo, it’s customary to include a deposit as part of the offer. The deposit, sometimes called the Earnest Money Deposit (EMD) or Good Faith Deposit (GFD), let’s the seller of the property know that the buyer is serious about purchasing the property. The deposit is normally a monetary amount; however, almost anything of value can be a deposit if both the buyer and seller agree.
The deposit is usually held by the company who represents the buyer or by a third-party escrow company. Only if the offer is accepted, is the deposit cashed. If the offer is not accepted, the deposit is normally returned to the buyer, unless the buyer instructs otherwise.
There is no set amount for what the deposit should be, but a Real Estate Agent can advise you about what is customary for your area. In the San Diego area, deposits for residential properties are often in the 1% range of the price of the property. For example, if the offer for a home is $300,000, it’s common to offer a deposit of around $3,000. But keep in mind that buyers and sellers can negotiate the amount of the deposit that’s acceptable to both.
So what happens to the deposit after an offer is accepted? The deposit check is normally deposited into the trust fund account of the company who represents the buyer or into a trust account of an escrow company. Once the deposit is entered into a trust account, the offer is said to be in the escrow period.
During the escrow period, a buyer may hire one or more inspectors to evaluate the condition of the property. The buyer also takes steps to get loan approval for the purchase of the property. If the inspection and loan approval goes well and the buyer wants to complete the purchase, then the buyer can designate how the deposit amount should be applied, such as toward the loan down payment, buyer’s closing costs, or toward some other purpose.
If a buyer decides not to go through with the purchase, then the terms of the purchase contract will dictate how the deposit funds should be handled. If the buyer has complied with the terms and timelines of the purchase contract relating to the deposit, then the buyer is normally entitled to a return of the deposit. The buyer and seller have to sign a written release directing the party holding the deposit to release the funds to the buyer. In this situation, the deposit cannot be given to the buyer until a written release is signed by both buyer and seller, or ordered by arbitration or a Court.
If the buyer has not complied with the terms or deadlines in the purchase contract, then the terms in the purchase contract will dictate what happens to the deposit. It may be that buyer is required to forfeit the deposit and that the seller is entitled to the deposit. In this situation, the deposit cannot be given to the seller until a written release is signed by both buyer and seller, or a decision is agreed to in mediation, or ordered via arbitration or a Court order.
If the buyer and seller don’t agree on who is entitled to the deposit, then the deposit will remain with the party holding the deposit. The buyer and seller then must negotiate the disposition of the deposit between themselves or via mediation, or a decision can be made in arbitration or by a Court.
If a buyer or seller cancels a contract under provisions allowed by the purchase contract, there may fees charged to the seller or buyer by the Escrow Company handling the transaction. These fees are charged by the Escrow Company for costs they incurred on behalf of the buyer or seller during the escrow period. The Escrow Company may deduct, from the deposit, costs they incurred on behalf of the buyer prior to returning the deposit check. If any fees are due by the seller, then the Escrow Company may bill the seller directly.
The issue of deposits is complex and varies from situation to situation. Be sure to discuss with your Real Estate Agent about how the deposit will be handled, and under what conditions it will be returned to you, before you sign a purchase contract to buy real estate.
Please contact me if you have questions about real estate deposits.
