What are they for?

To many the difference between a deposit and a down payment in a residential real estate purchase seems confusing. They are both monies you pay up front, right? Not exactly. A deposit is security for performance of the buyer's obligations under the agreement of purchase and sale. The seller may get to keep it if the buyer backs out of the deal and refuses to close.

The down payment is the portion of the purchase price of a home that a buyer pays upfront while the rest of the purchase price is paid by the bank in exchange for a mortgage that needs to be repaid later. If a real estate purchase closes successfully, the deposit is credited towards the purchase price and becomes part of the down payment. So essentially, the deposit is part of the down payment, but they are not the same thing.

Amount

Typically, the seller of a property will want the largest deposit possible because it is hoped that the threat of losing the deposit money will discourage the buyer from changing his or her mind. In contrast, a buyer will typically desire the smallest deposit possible in order to limit the buyer's loss if he or she has to refuse to close for some unforeseen reason.

However, the size of deposit is not a cap on the seller's damages. If a buyer refuses to close and the seller is only able to sell the property to someone else for less than the price agreed upon with the buyer, the seller can try to recover the difference in value from the original buyer, even if it is much larger than the deposit paid.

When to Pay

In the current Ontario Real Estate Association standard form agreement of purchase and sale, there are options for when the deposit can be paid. It is usually either paid by the buyer when the offer is presented to the seller, or upon the seller's acceptance of the offer. Both approaches have their advantages and disadvantages. The first approach can be effective in convincing a seller of your seriousness if you have your heart set on a particular property. You are essentially "putting your money where your mouth is." But it may not be wise if you are not certain about the property and have other potential properties that you are equally interested in. Depending on its size, paying a deposit on one property may make it difficult to put a deposit on another property quickly as it make take some time to get your money back.

To whom

Whomever the deposit is paid to is normally supposed to hold the deposit in trust for both the buyer and the seller. Typically, where the property is being sold by a real estate broker, the broker holds the deposit. If the property is sold without a broker, the deposit should be paid to the seller's solicitor in trust.

Paying a deposit directly to the seller when buying a resale home should be avoided. There is always the chance that the "seller" is not the real owner and perpetrating a fraud. As well, the seller may try and retain the deposit without justification where the sale fails to close for a legitimate reason.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.