The Real Estate Deposit: The Six Most Common Misconceptions

April 18, 2021

Real Estate Attorneys Providing Representation in Asbury Park, Belmar, Colts Neck, Middletown, Eatontown, Freehold, Hazlet, Holmdel, Howell, Lake Como, and across Monmouth County Area

The Real Estate Deposit: The Six Most Common MisconceptionsYour offer has been accepted, the real estate contract has been signed, and your contract has successfully made it out of attorney review. Now the buyer must provide the seller with a deposit.

In the past, the deposit was typically paid within 14 days after the review, but with technology, that time has shortened, where now most of the real estate contracts are requiring those deposits to be paid within 7 days or even shorter.

We have identified six common misconceptions about the real estate deposit. Let’s debunk any misconceptions surrounding this important part of the home-buying process.

Misconception #1: A deposit is required

While the deposit is common practice in the majority of real estate transactions, whether a deposit is required actually depends on the terms of the contract that the buyer and seller agree upon. The buyer will often offer “earnest money” or a good faith deposit to demonstrate the buyer’s good faith to buy a home. However, the actual requirement to tender a deposit depends on the terms of the agreed-upon contract.

In other words, if a buyer refuses to give a deposit, this may not quash the deal so long as the seller agrees.

Misconception #2: The deposit must be a designated percentage of the down payment or purchase price

How much should I deposit? There is often confusion about the deposit as the amount always fluctuates.  Is it 20% of the down payment, 10% of the purchase price? Despite what many people believe, there is no ironclad rule as to how much the deposit should be.

Our recommendation to the seller is always to require enough of a deposit to ensure that the buyer has some skin in the game and that they are not going to be able to simply walk away.

Our recommendation to the buyer is to offer enough of a deposit to ensure that the seller has a good faith interest in purchasing the seller’s property.

Misconception #3: If the buyer cancels the contract, the seller may retain the entire deposit

Another common misconception is that if the contract is subsequently terminated, for whatever reason, by the buyer, that the seller is entitled to retain that deposit as a form of damages.  That is typically not correct.

Most real estate contracts contain an inspection contingency and a mortgage contingency. If the buyers are not able to satisfy the mortgage contingency, and they have to cancel the contract, as a result, they are entitled to their deposit back. Similarly, if there is an issue during the inspection that is unable to be resolved between the parties, there is a failure to satisfy the inspection contingency, and the buyer would be eligible for the return of all of their deposit money.

Misconception #4: If the buyer breaches the contract, the seller may retain the entire deposit

The only rare instance that a buyer would potentially lose the deposit is in the event of a breach. A breach of contract is a failure, without legal excuse, to perform any promise that forms all or part of the contract.

However, even with a breach, there would likely be litigation before that any money is turned over. There is a term called liquidated damages that are contained in just about every contract that sets a predetermined fair assessment of damages that the seller may incur if the contract is breached. However, almost always, one of the attorneys strikes that language from any contract.

Therefore, without the liquidated damages provision, any damages would have to be proven through litigation instead of just turning over the deposit money.

Misconception #5: The actual seller holds the deposit in a real estate transaction

In the majority of cases, the buyer will owe the seller a deposit. However, the deposit is not placed into the seller’s personal bank account. Rather, the deposit money will be held in the seller’s attorney’s trust account until the time of closing.

This arrangement ensures that the buyer does not have to worry about the seller absconding with the deposit money if the deal falls through for one of the reasons previously noted.

Misconception #6: The seller is entitled to interest accrued on a deposit

Almost all real estate contracts indicate that the deposit money must be held in a “NON-INTEREST BEARING TRUST ACCOUNT.” This language indicates clearly that deposit money cannot be held in an interest accruing account. Therefore, there is no interest accrued on a real estate deposit. The seller does not stand to profit anything by delaying the closing and encouraging the money to sit in an account.

The real estate deposit is just one step in the complex process of buying or selling a home. The identified common misconceptions about the real estate deposit emphasize the importance of having an experienced real estate attorney represent your interests when buying or selling a home.

Ocean County, NJ Real Estate Law Firm

At Chamlin, Uliano & Walsh our experienced real estate attorneys provide legal counsel in all aspects related to the home-buying process. We serve clients in Colts Neck, Middletown, Freehold, Hazlet, Holmdel, Howell, and across Monmouth County Area.

To meet with a team member today regarding closing on your dream home, please call 732-440-3950 or fill out our online form today for a free and confidential consultation to discuss your individual needs and concerns.

Categorised in: Real Estate Law