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.
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
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
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
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