What is the real estate deposit, and why do I have to pay it?
What is the real estate deposit, and why do I have to pay it?
Some buyers find themselves surprised come subject removal time when their realtor starts asking for the deposit cheque. In particular, this can come as a shock where you’re selling one property and buying another, and the down payment is tied up in home equity.
The real estate deposit however, is an inevitability, and its purpose is to show the seller that you’re serious and committed to the transaction. Once your subjects are removed this deposit (which is a portion of the sale price) will be due within 24 hours, payable to your realtor ‘in trust’ (meaning that it doesn’t belong to your realtor, but rather they are holding on to it for you until the purchase closes).
One common misconception is that this is in addition to the down payment, when in fact, it forms part of the down payment. For example, if your down payment is $100,000 and your deposit is $20,000, then you pay your deposit first, and when it comes time to visit the lawyer, you bring in the balance of your down payment of $80,000.
It also helps to understand the deposit if you consider 2 of the key dates on your real estate contract: the subject removal date (comes first, if applicable), and the completion date (comes after).
Subject removal date = you’ve had the appraisal/inspection, reviewed strata documents, secured your financing and you’re ready to make the deal firm and binding = deposit due
Completion date = you’ve packed your boxes, scheduled the moving truck, it’s a matter of weeks or even days out from completion, and you’re off to see your lawyer/notary = the rest of down payment and closing costs due
But what is this closing costs business, you say? In addition to the down payment, it might be fees due to your lawyer, partial property taxes/strata fees due, lender-required title insurance, or the BC Property Transfer Tax https://www2.gov.bc.ca/gov/content/taxes/property-taxes/property-transfer-tax
In advance of your appointment with the lawyer/notary, they will send you a Statement of Adjustments, that shows the exact amount that you need to bring in by cheque/bank draft (in some cases you can also transfer directly to the lawyer’s trust account, and they will provide instructions on how to do that).
Even if your selling and purchasing, it’s essential to request and review this document before your appointment, so there are no surprises.
The big question that is most often asked is: what if I don’t have money for the deposit?
Maybe you’re getting a down payment gift that’s not coming in for a few weeks, or you’re waiting to sell some investments, or your funds are tied up in the property that you are selling. There are a few options available to you – often, clients will simply use an available credit line or even a credit card if the time between subject removal and closing is short. Alternatively, you can visit your bank or speak to your broker about a deposit loan. A deposit loan is basically a short term personal loan that the notary/lawyer will pay out on completion. It is generally at regular loan rates (in the 8-10% range) and generally has no monthly payments, but rather the interest is due when it’s paid out. It doesn’t affect your mortgage qualification as the intention is to pay this out with your down payment funds when they become available.
So to reiterate, why is a deposit required? For the same reason, we put down deposits on vehicles, vacation packages, and hotel rooms – so the vendor knows that you’re serious and has some recourse if you decide to back out. In real estate, if you have a firm and binding sale that you don’t follow through on, then you can wave goodbye to that $20,000 (or more) as the seller (in most cases) gets to keep it. Welcome to the wild and wonderful world of contract law.