How Do Real Estate Deposits Work?

There is some misunderstanding in the real estate world about the role of deposits. A deposit is a crucial part of the Agreement Of Purchase And Sale (APS for short). Buyers provide a deposit to show they are serious buyers, and it provides the sellers security in the transaction. However, some buyers and agents think an accepted offer without a deposit is null and void.

In Ontario, the APS is signed under seal. That means it is a legally binding document once it’s signed, not once the deposit is received. Simply put: if you don’t bring the deposit, the sellers can sue you for breach of contract.

The Short Version:

The average deposit is around 5% of the purchase price.
The real estate deposits is due the next business day after acceptance of the offer, unless otherwise specified in the APS.
Real estate deposits should be kept in the listing brokerage’s trust account or either the buyer’s or seller’s lawyer’s trust account (never the agent’s or seller’s personal account).
Keep your deposit funds in an easily accessible account at a major Canadian bank (not with an online bank).
Real estate deposits are usually returned if you back out of a conditional sale, provided you do so within the conditions outlined in the APS.
Your deposit funds are credited towards your down payment on the closing date.

When is the deposit due when buying a house?

A strong deposit is an essential part of a successful offer. While most buyers offer around 5% of the purchase price, the deposit can be much more or less.

In heated markets, where there are 10-20 other bidders, serious bidders will offer more than 5%. And very serious bidders might include the deposit cheque with the offer. This cheque stays with the buyer’s agent and is returned if the sellers accept another offer.

However, in balanced market conditions, the buyers usually provide the deposit the day after offer acceptance.

The APS has a standard clause that outlines that deposits are due within 24 hours’ notice. But in real-life practice, sometimes homes are sold after banking hours, in those cases, the deposit is due the next day during normal banking hours.

For real estate deposits, only a bank draft, certified cheque, wire transfer or direct deposit is acceptable. Cash and cheques are usually unacceptable.

Once you’re ready to purchase a home, preparation is key. The first step is to move your deposit money with one of the major Canadian banks. Online banks often promise “next-day” bank draft deliveries for customers, but in our extensive experience, the bank draft NEVER arrives on time. Do not risk your purchase by relying on a courier… move your deposit money to a brick-and-mortar bank, and keep it in a chequing account.

Where do real estate deposits go?

Where a deposit is held is up to negotiation between the buyer and seller. In most transactions, the deposit is held in the selling brokerage’s real estate trust account. An account which, by law, is only used for keeping deposits safe. However, there are some circumstances when the deposit is kept in the lawyer’s trust account instead. This happens when buying pre-construction, off-market, for-sale-by-owner and sometimes commercial deals.

One of the benefits of working with a registered real estate agent is that all agents are legally required to carry consumer deposit insurance. The insurance covers theft, fraud, insolvency, or misappropriation of funds. There is no deductible to make a claim, and coverage is up to $200,000 per claim and $4 million total for a single event. However, there are limitations to this insurance. (Visit the Real Estate Council of Ontario for further details on deposit insurance: RECO)

Most real estate trust accounts bear interest. Which means if you have a significant deposit sitting in the trust account for many months, you could earn a return on your deposit. The information of the trust account is usually found on the schedule B of the APS.

What happens to the deposit money on closing day?

Your deposit is held in trust and credited to the purchase price. In Ontario, a 5% deposit is common. That 5% is held in trust until final closing day and is credited towards your total downpayment on the home.

For instance, if you buy a $1 million home, the expected deposit is $50,000. That $50,000 is credited towards your downpayment. So if you plan to put a 20% downpayment, you owe a further $150,000 on closing day. Plus closing fees of course!

What happens to the deposit money when you back out during the conditional period?

It depends on the clauses used. The most common clauses used in Ontario real estate stipulate that the deposit is returned to the buyer if they back out on one of their conditions – as long as the buyers were acting in good faith.

However, some buyers use conditions that include an irrevocable deposit. That would mean the buyers can back out during the conditional period, but they forfeit their deposit. Obviously, this is not common, but it is useful in some negotiations. If you’re 99.99% certain you can get financing, including an irrevocable deposit condition is almost as good as a firm offer in the seller’s eyes, and it gives the buyer the chance to confirm their financing before committing to the sale.

Regardless of the condition and terms used, you always need the sellers to agree to release the deposit back. The sellers and buyers both need to act in good faith during the conditional period.

We mention acting in good faith often, because if the seller can prove you did not act in good faith to complete your conditions, you could jeopardize your deposit funds. A good example would be purchasing a home, and during the 5-business days condition, you go and purchase a second home. You then try to use your home inspection clause to back out of the deal. If the sellers hear about your second purchase, they might not release your funds. And while you might be entitled to a return of your funds, you would need a lawyer to try retrieve them.

What happens to your deposit if you back out of a firm real estate deal?

If the offer is firm, all conditions have been removed, the deposit money is in jeopardy. Backing out of a deal at this point is considered a breach of contract. That is something you don’t want to do if you can avoid it– it means you’re likely going to lose the deposit, and in some cases, get sued for additional damages.

When a buyer breaches the contract, nothing happens with the deposit money until both parties can agree on the next step. The agency holding the deposit money cannot release the funds until both parties agree, or until one party has a court order. If the buyer and seller both agree to release the funds to the sellers, a mutual release is signed. This releases the buyers from the contract, and in the mutual release the buyer and seller will outline how the deposit is handled. In most cases, the sellers keep the whole deposit. Occasionally the sellers will pursue further damages beyond just the deposit.

In Summary:

Deposits are usually around 5% of the purchase price. However, specialty properties sometimes demand a larger deposit.
Deposits are due the next day after offer acceptance unless otherwise negotiated with the sellers.
Deposits should be kept in a separate trust account, not the seller’s, agent’s, or lawyer’s personal account.
Deposits are credited towards your downpayment on closing.
For more real estate advice, reach out to us!