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Deposits: Too little, too late

by Goldsmith, James on

To state that the typical deposit is too low an amount and that it is paid later than should be is not an overstatement.

The purchase deposit, which is referred to as “initial deposit” in the Agreement of Sale, is paid within five days of execution. Why a deposit? It is not a legal requirement of a binding contract. Don’t confuse a deposit with “consideration,” which is essential in the formation of a binding contract. No, a deposit is not legally required, but it is a good idea, assuming that it is of a sufficient amount. A sufficient deposit is a better telltale of the buyer’s interest than of the buyer’s stated expressions of love for the home. Money talks.

A deposit also serves to protect against financial damage suffered by seller in the event of buyer’s breach. If left alone, the seller may, upon buyer default, retain the full amount of the deposit and apply it to the actual damages suffered by seller or to the full purchase price or to retain it as a liquidated damage in lieu of actual losses incurred. Even if the agreement did not include any provision regarding seller’s remedies, the seller would enjoy the benefit of Pennsylvania law and could seek actual damages incurred or sue for the purchase price.

By checking the paragraph in the default clause, the seller is left with a remedy that the law would not provide: a liquidated damage (under the agreement, the liquidated damage is the amount of sums paid on account of the purchase price). A liquidated damage is a damage based on contract that is generally used when actual damages are difficult to quantify. Consider a road contractor’s agreement with the commonwealth providing for delivery of a finished road by a date certain. What is the harm to the commonwealth arising from untimely completion by the contractor? These contracts provide a liquidated damage in the form of a per diem amount.

The standard agreement allows the buyer and seller to agree that in the event of buyer default, seller is limited to retaining sums paid. Sums paid on account of the purchase price are rarely anything beyond the deposit(s). If a greater deposit paid at the execution of the agreement increases the likelihood of settlement, why isn’t it the norm?  The argument I hear is that buyer agents want to guard against their client’s money being tied up when the deal goes bad, which frequently precludes their buyers from paying a deposit on the next transaction. It is true that a seller can tie-up a buyer’s deposit pending the outcome of mediation or litigation. That is a weak explanation for the $1,000 and $2,000 deposits I see as the norm across the state.

It’s one thing to advocate for your client, it’s another to make it easy for a buyer to default on a purchase agreement. We’re not talking about a buyer who justifiably terminates on the basis of an inspection or other contingency. These buyers should get their money back immediately and maybe there should be a penalty to pay when refusal to release the deposit is unreasonable. It’s equally disturbing when a buyer walks from a transaction without justification, perhaps only because they found something better.

A substantial percentage of hotline calls involve deposits and their entitlement. My first question is how much deposit is in escrow. Most frequently the amount is $2,000 or less! In these cases, the answer may be irrelevant because litigation costs will exceed that amount. If buyers are willing to pay amounts over list price to purchase a house, they are willing to walk away from a $1,000 or $2,000 deposit, if it means they can buy another property they like better than the one under contract.

There is nothing stated above that is new to you, so let me get to the point. The standard Agreement of Sale does not dictate a norm. The norm is not to have an agreement funded by a deposit paid five days after execution. It is one option among a near infinitive number of options.  If the parties agree, a deposit could be paid 30 days post execution or on the day of execution. Terms are negotiable and not set by default or norms.

Why would any seller agree to the buyer paying a nominal deposit five days after execution when that deposit is a liquidated damage barring seller’s recovery of actual damages? The buyer could tie up a dozen houses this way and take those five days, or more, and decide which one he seeks to acquire. What recourse do the sellers have? Their remedy is to retain sums paid (past tense) when in fact none of these sellers has received anything

Why would any reasonable seller allow the buyer’s deposit to be the seller’s sole remedy before a deposit is even posted? A simpler question is why would anyone agree to limit a seller’s recovery to an amount below actual losses when a buyer defaults?

It would be nice if buyer agents could tell their buyers that unless a reasonable amount is posted as a deposit, they will remain on the hook for seller’s actual losses in the event a breach. It would be nice for buyer agents to advise their buyers that a low deposit coupled with the check mark for liquidated damages will likely not be accepted.  It would be nice that once buyers make a decision that they remain committed to the purchase unless an inspection reveals problems not previously identified or unless the buyer, following a good-faith mortgage application, is denied financing.

Do not assume that the standard agreement suggests the check mark or the payment of the deposit in five days. The standard agreement includes default time limits only to assure that an agent does not fail to specify a date. It is intended as a fail-safe, not a suggestion of what the norm is or what should be. The checkbox is not included because those who create standard forms suggested it as a default. It is an election to be negotiated like any other term of the agreement.

I look forward to the day when I ask a hotline caller the amount of the deposit and whether a check mark is found in the liquidated damage clause and hear something other than $2,000 and “yes” there is a check mark!

Topics

Agreement of sale Deposit Asr
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Comments (19)

Comments

  • Arthur Bowen    January 15, 2019 | 7:19 am

    True: aI had a deposit of $90,000 on a house under contract at $450,000. The buyer frequently wanted to bring relatives and friends to view the house. Finally the Sellers said “no more”. The buyer said if I didn’t have $90,000 down I would walk. He acquiesced to the sellers request. The deal closed.

    Reply to Arthur Bowen
  • TomWoods    January 15, 2019 | 7:48 am

    Two comments :
    (1) You indicated that in a default the seller could keep the “entire” deposit as liquidated damages or applied towards actual damages. I would just add the comment that the listing contract often indicates that the listing company may be entitled to a portion of that deposit (perhaps we have been damaged also) and thus the seller would not be entitled to the entire deposit. Just a point of interest especially for new people (or maybe not just new people).

    (2) To add insult to injury JIm, I have seen many contracts where the Dual Agent has indicated a check mark for the deposit as Liquidated Damages. In this case you have the Seller’s agent (the dual agent is of course also the seller’s agent) limiting his or her own seller’s remedies in the event of a default. What ? !! It is a clear indication of the dual agent acting as a Buyer Agent and not understanding how to act as a dual agent. I think this is very wrong. That is how automatically people check that box without a thought as to what they are doing or the consequences of what they are doing. For those agents who are otherwise good agents, I think your muscle memory is taking over when you check that box if you are a dual agent (oxymoron). ooops, did I write that?

    Reply to TomWoods
  • Rick Penater    January 15, 2019 | 7:49 am

    Great article
    If buyer agents would explain to their buyers that a typical sale will include 5-7% closing costs and the lender 3-20% down at closing anyway, it will make it a strong offer to a seller with st least a 5-10% deposit of the sale price.
    I do agree there should be a penalty for a delay of returned deposits

    Reply to Rick Penater
  • Robert Hoobler    January 15, 2019 | 7:49 am

    If people are walking away from $1000 or $2000 this should be a flag that it was not enough of a deposit. I feel if a buyer is placing down 3.5 to 5% or more Then that should be the deposit. Why not get the down money upfront?

    Reply to Robert Hoobler
    • Jack Fleming    January 31, 2019 | 1:03 pm

      I had a Relo buyer a few years ago that wanted to make their deposit $500. This was on an $800,000 purchase. I asked the why they were make such a low deposit. They said they did not want to tie up their money for the period of time between the offer and closing. They said the state they were moving from (Texas) it was customary to make low deposits. I pointed out to them that the seller was in a position that would tie up the home for the same period. I finally convinced them that a higher deposit would demonstrate to the seller that they indeed wanted the home.

      Reply to Jack Fleming
  • Hamberg, William    January 15, 2019 | 8:06 am

    Question for the attorneys/form writers: several years ago paragraph 26(C) was added/changed to include the verbiage: “…if there is a dispute over the entitlement to deposit monies that is unresolved…distribute the deposit monies to Buyer”. I understand this was a Broker requested change, due to escrow monies being held indefinitely; but why lean it to the Buyer side and not an even split? Just curious about the “logic” behind the revision.

    Reply to Hamberg, William
    • Jim Goldsmith    January 17, 2019 | 2:37 pm

      Mr. Hamberg: In response to the question why ASR paragraph 26(C) directs the disputed funds to buyer if suit or mediation is not initiated within the 180 days or revised time-frame, consider the following. Our objective in seeking a revision to the law that allowed parties to determine how disputed funds would be disbursed, in advance as part of the agreement of sale, was primarily made for the benefit of brokers who loathe holding funds for years. Once the rules permitted this type of provision, Standard Forms worked on a draft. Initially, we thought of having the disputed funds being divided equally between buyer and seller but ultimately we sought a simple solution. We put the burden on one party, the seller, to decide within a reasonable time to either claim the deposit by filing suit or initiating mediation, and failing that the broker could disburse to buyer. Note, the disbursement to buyer does not preclude the seller from suing buyer for those funds. We could have made the choice to disburse to seller and put the burden on buyer to initiate proceedings. I believe we considered that in our collective experience, deposit funds are more often returned to buyer. We made a choice!

      Reply to Jim Goldsmith
      • Cowell, Richard    February 9, 2019 | 3:41 pm

        The Broker could petition the court to resolve the matter and submit the deposit to the court.

        Reply to Cowell, Richard
  • Carol Murray Cei    January 15, 2019 | 8:36 am

    1. Why would anyone accept a $1,000-$2,000 deposit on a home. Even buyers getting grants can come up witn more than that. They certainly would have to if they were renting an apartment; paying first and last month’s rent and a month of security.
    2. There is no guarantee that the seller keeps the deposit in the event of a default. Read the language carefully. You have to prove the case, maybe even initiate a legal action. I had to go to Small Claims Court with my clients to help them get a $5,000 deposit after a buyer committed a fraud in the transalction and a default. It took us over 6 months and my diligence of monitoring every step of the way or the money would have gone back to the buyer. Most agents don’t understand this.
    3. I am on my way out of the business after 34 years. There is so little training in recent years. People get a license and are flying by the seats of their pants. You can’t imagine how many newer agents don’t understand that the Agreement of Sale is a legal document. They actually scream at me when I tell them we need to execute in writing any changes and have them signed by all. It’s not a good time in Real Estate.

    Reply to Carol Murray Cei
  • Henry Jacquelin    January 15, 2019 | 9:25 am

    I can remember when the standard deposit was 3% to 10% of the sales price. Very rarely did a transaction not go to settlement. Why did we get away from that practice?

    Reply to Henry Jacquelin
  • Aggie Schoenberger    January 15, 2019 | 10:00 am

    Would like you to address the companies who are now saying its “company policy” that all deposit checks must be certified even though the agreement of sale says personal checks are ok as long as closing is more than 30 days away.

    Reply to Aggie Schoenberger
  • Dominic Cardone    January 15, 2019 | 9:22 pm

    I once represented Buyers who were in competition with six other offers. They offered only the asking price of $525,000, while I was told by the listing agent that this offer was nowhere near the others, and surely not the highest offer for the property. Yet my Buyer’s offer was accepted over all the others. Why, you ask. Well, their one and only deposit check delivered with the offer was $250,000. These Buyers were very earnest.
    As Jim Goldsmith says, “Money talks”.

    Reply to Dominic Cardone
  • Aaron L Gray    January 16, 2019 | 7:43 am

    This was a very good read as were the comments. I never fully understood why a buyer’s agent would not explain the benefits of a larger earnest money deposit, especially in light of the closing costs required on the buyer closing cost estimate. The buyer is going to have to fork over the funds at some point in the transaction, so why not do it at the beginning and strengthen their offer as Dominic Cardone’s comment demonstrates.

    Reply to Aaron L Gray
  • Jim Goldsmith    January 17, 2019 | 2:18 pm

    By the way, I’m midway through an afternoon shift on the PAR Hotline. I’ve had two calls regarding disputed deposit money. The first was over $1,000; the second, $2000!!

    Reply to Jim Goldsmith
  • Jim Goldsmith    January 17, 2019 | 2:49 pm

    And the third call regarding a fight over deposit …. $500!!!

    Reply to Jim Goldsmith
  • Megan Flor    January 21, 2019 | 12:09 pm

    This is a good read…We have had two deals recently where two of our listings had competing offers. An offer was accepted and the agreement of sale was executed. Properties were marked Pending and future showings cancelled. Buyer terminated based on “cold feet” and the other “changed their mind”. EMD had not been delivered yet. Both buyer agents refuse to provide EMD and are requesting we sign the termination based on their interpretation that without the EMD we do not have an executed contract. One is $5000 so it is a reasonable EMD but worthless if it cannot be collected. Any recommendations on how to prevent this in the future? With everything being online, very rarely are EMD checks submitted with offers anymore.

    Reply to Megan Flor
    • Edward Novack    January 30, 2019 | 9:56 am

      Dear Megan and all my fellow readers,

      While I read your comments your choice of “EMD” baffled me for a minute or so.
      I am old and slow, Actually writing out, “Ernest Money Deposit” keeps clarity.
      During that span I kept thinking EMS which I had occasion to use last year.
      All this reminds me of the old song from the play “Hair” called “Initials” and yea
      I know what FBI, CIA, and IRS are. and I am a member of GPAR and SWRA but that
      really is far as it should go. It takes only a a few seconds to type out the name and
      the reward is instant comprehension. Don’t you agree?

      Reply to Edward Novack
  • Melanie    July 30, 2020 | 1:06 pm

    If both seller and the buyer sign an AoS, but the buyer doesn’t pay the Earnest Deposit within 5 days of signing the AoS and ask the seller to cancel the contract after 9 days of signing (because he simply changed his mind after re-evaluating his financial ability) can seller pursue the buyer to pay any damages just for the 9 days that property was under contract? No inspection or appraisal done yet.

    Reply to Melanie
    • Kelly Leighton    July 30, 2020 | 1:40 pm

      Hi Melanie,
      If you already have asked your broker about this, and haven’t received an adequate response, you can contact the PAR Legal Hotline if you are a PAR member.

      Reply to Kelly Leighton

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