Real estate deposits in Ontario are an integral part of any real estate transaction. There are some misconceptions as to when they are due and what happens to the deposit in the case of a broken deal. Below you’ll find everything you need to know about real estate deposits in Ontario.
When is the deposit due?
As a buyer you have three options as to when you can pay a deposit.:
- Within 24 hours of acceptance of the offer.
- Submitted along with an offer.
- A separate arrangement set out in the Agreement of Purchase and Sale.
When submitting an offer on a residential property in the GTA, there are two common options. The most common one is to submit a deposit within 24 hours of acceptance of an offer. In the case of a seller’s market, you may want to submit a deposit along with your offer. This could give you a possible edge in negotiations. If you are in the early stages of the hunt, it’d be a good idea to ensure that your deposit funds are readily available. Speak to your bank in advance to make sure you can obtain a certified cheque or bank draft on demand. If some of your funds are invested or locked in (ie. RRSP account) you may need to transfer these funds in advance to have access to them.
What format should the deposit be in?
Bank drafts, certified cheques and money orders are the most common accepted formats that you can make the deposit in. Recently, wire transfers or direct deposits into the listing brokerage’s trust account have also gained popularity. Cash or personal cheques are generally not accepted.
How much should the deposit be?
While there is no set rule on this, in the GTA the typical deposit is 5% of the purchase price. If you are competing with other buyers a higher deposit could improve your chances of getting the property. The amount and timing of the deposit is one of the four major factors seller’s usually consider when reviewing your offer; the other three being purchase price, closing date and conditions.
If you are buying in a buyer’s market, then the items listed above are negotiable. In 2017, when low-rise properties in pockets of the GTA took a big hit, deposits were typically smaller.
What happens to the deposit if I don’t waive one of the conditions?
If your offer to purchase a property is conditional, the deposit is to be returned to the buyer without deduction.
However, if the seller believes that you didn’t act in good faith in trying to satisfy your condition (financing, inspection or status certificate review), they could refuse to release the deposit. In such case the deposit would be stuck in the listing brokerage’s trust account until a judge rules on it. This can be a long process, so you should act in good faith when trying to satisfy the conditions in your contract.
What happens if the deposit is late?
If the deposit is late then the buyer is in breach of contract. The seller has the possibility to sue for the deposit and resell the property. This is a nightmare scenario for a buyer and you should avoid it at all costs. If you do find yourself in this situation, an immediate call to a good lawyer is a must.
Who holds the deposit?
The deposit is usually held by the listing brokerage in a trust account. Real estate brokerage trust accounts are regularly audited and heavily regulated.
What happens to the deposit if there is a dispute?
The large majority of transactions in the GTA close without any hiccups. However, on the rare occasion where a dispute occurs, a deposit can only be released from the listing brokerage’s trust account in 3 circumstances:
- The deal closes
- A court order
- Buyer and seller mutually agree to release each other from the contract
What happens to my deposit on closing?
The deposit is applied to the final purchase price on the closing of the transaction. As part of the closing transactions the deposit funds are transferred from the listing brokerage to the seller minus commissions.
What happens if I can’t close?
This scenario usually plays out when the buyer doesn’t have the funds to close the transaction or if the market turned since the purchase was made. If this happens, the deposit is forfeited and you stand to be liable to the seller for any loses that they incured. Contact a good lawyer immediately but this is a terrible scenario to be in.
When you are waiving conditions from a contract or if your are making a firm offer (no conditions) be certain that you are able to close. Otherwise you can be in for an unpleasant surprise. CBC News Article link
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