Myths surround deposit money

Editor’s note: This article has been updated to remove outdated links and references.

PAR staff sees a constant flow of questions regarding the handling of deposit monies. Let’s look at some of the common myths about deposits and set them straight.

Myth #1:  “A buyer must make a deposit for an Agreement of Sale to be binding.”

Not true. Contract law says there must be “consideration” for a contract to be binding. In essence, each party has to have some skin in the game. But consideration in a real estate contract is generally the mutual promises made by the parties – the seller promises to transfer the property to the buyer and the buyer promises to pay the purchase price to the seller. The deposit is a mechanism that (theoretically, at least) shows a buyer is serious about the deal but it isn’t consideration. One might argue that a listing broker isn’t adequately protecting the interests of his seller by counseling the seller to accept an offer with no deposit but that’s a practice issue rather than a legal requirement.

Myth #2:  “The option to keep deposits as liquidated damages harms sellers because deposits are so low.”

While this may be true in areas where deposits are low, the fault does not lie in the text of the agreement. In some areas of the state it is common to have larger deposits – sometimes as much as 5-10 percent of the sales price  – paid in two to three stages during the transaction. In short, if a listing broker feels that the deposit offered by a buyer is insufficient to protect the seller’s interests in a transaction, the broker can counsel the client to demand a higher deposit as a condition of accepting an offer.

Myth #3:  “Deposit disputes can’t be mediated under the mediation paragraph of the Agreement of Sale.”

I was shocked when I first heard this and continue to be shocked as it is repeated. The mediation paragraph has stated for many years that it applies to “all disputes or claims that arise from this agreement.” Since deposit money disputes certainly “arise from” the agreement there is no reason why they couldn’t be mediated. Just to make that crystal clear, the Agreement was updated in 2010 to more explicitly state that mediation applies to “all disputes or claims that arise from this agreement, including disputes and claims over deposit monies….”

Myth #4: “If the parties don’t agree to a release of the deposits I’ll have to keep them in my escrow account forever.”

This was true until about 2010, when the law was changed to allow distribution of the funds if the buyer and seller agree in advance to a contract term that instructs brokers how to distribute disputed funds if the parties can’t resolve that dispute. The Agreement of Sale contains a provision allowing disputed funds to be returned to a buyer after a certain period of time if neither side has initiated a process (mediation or litigation) to resolve that dispute.