Difference Between Deposit and Downpayment
Real Estate is local. Definitions of terms vary province to province, state to state. If you search these terms on the Net, the definitions you find will not necessarily apply to how your business is conducted, where you live or where you buy and sell property. Keep an open mind. Govern your actions accordingly and if you have any questions, seek the advice of your own attorney or local REALTOR®. Real Estate agents in some jurisdictions are required to study real estate law, in others, not. Some REALTORS® make a genuine effort to get up to date and stay up to date regarding legal information that may impact them or the clients and customers. Others do not. Either way, this does not make your real estate agent a lawyer, although lawyers, some retired or otherwise no longer practicing law, do become licenced real estate agents.
DEPOSIT: Typically, but not always, when you make an offer to purchase a property, the owner and the listing agent will expect you to provide a deposit in the form of a bank draft, a certified or certifiable cheque, or money order. Typically, but certainly not in every instance, the deposit money will be held in trust by the listing brokerage on behalf of their Seller, and will form part of the closing statement. The current rules and regulations provide for the variable of supplying the deposit with your offer to purchase, or otherwise upon the actual acceptance of the offer.
The semantics of the English language being what they are, combined with the use of the English language in contract law, sometimes creates confusion. This confusion is in the minds of the public as well as in the minds of the real estate agents, especially in regard to deposits, what to do with them, when, and how. Typically there would be a corporate guideline or rule in place so as to eliminate any confusion on this part of the topic regarding when deposits are due to be deposited into trust accounts and the management of such. In the Province of Ontario these guidelines are stipulated in the Real Estate and Business Brokers Act (REBBA).
Part of the confusion is tied to “what is the definition of acceptance?” Does acceptance mean, in some cases, at the time of closing? does it mean the date at which the conditions/contingencies, if any, are fulfilled, making the offer firm and binding on all parties? Does it mean the time when the paperwork has been verbally accepted, but the confirmation of this acceptance has not yet been communicated to the other side? Does acceptance mean the date at which all parties to the contract have signed off on the actual offer to purchase, having dated their acknowledgement and having received their copies of the agreement?
These are all questions that come to the foreground regularly during a typical day conducting real estate business. Ideally, a buyer should be informed that if he or she is seriously looking to buy a property, on the off chance that he/she may come upon the perfect property when least expecting to do so, to “bring your chequebook.” A REALTOR® is likely to think a caller is not serious if he declines to do so. All agents should inform buyers to bring a cheque or at least be prepared to write one, or have on hand some other such method of securing a deposit at the time of writing an offer. A buyer can instruct the agent that the cheque is not to be cashed until such time as he has given permission to finalize the purchase agreement documents, or perhaps while arrangements are being made to transfer funds from one account to another so that the cheque is cashable, and that the agent must not physically hand over the cheque. However, at least the agent acting for the buyer can “show” the other side that the buyer is serious about doing business “today,” and that the agent is doing his/her job properly.
So, as a Buyer, the choice of when, is really yours, although you may engage better “buying power” by providing your agent with a cheque at the onset of the negotiation process, even if you direct him not to release your cheque until the transaction is finalized; at least he can show it to the Seller or the Seller’s agent, as an act of good faith. You will be provided with an official receipt for your deposit. But presume you will be required to provide some sort of deposit in the form of legal tender. In an ideal world your deposit would be in the form of a certified cheque or bank draft. With the onslaught of bank fraud, one bank often is reluctant to accept funds drawn on another bank or other financial institution, without putting holds on the funds for several days, even with regard to trust account cheques. Even lawyers trust account cheques are sometimes being held for fear of fraudulent activity. Banks are daily receiving volumes of fraudulent cheques, even ones written on attorney’s trust accounts. Trust account cheques and certified cheques used to be treated like cash. In many instances, this does not happen any more.
Having given over a deposit cheque to a real estate company to be held in trust until completion of your transaction, at which time those funds will be accounted for as part of the closing transaction accounting, should the conditions/contingencies not be fulfilled and you wish to terminate the would-be purchase at that stage, you will have to wait, sometimes for as long as twenty-one days, or longer, for the return of your deposit funds.
The real estate companies and agents are not trying to be difficult, and are not trying to take your money. The deposit cheque must have passed through the appropriate real estate office(s) bank accounts (sometimes more than one company is involved in the transaction), and the cheque must be verified through the various financial institutions that it has, in fact, passed through all their channels of operation, even if you provided a certified cheque. And you may, in fact, be asked to provide proof by attending at your bank on which the cheque was drawn to request a copy of your statement or passbook, showing the funds actually had been withdrawn from that account, showing the date of that transmittal; very time-consuming and can be very annoying, in particular if the Buyer has found a secondary property he wants to make an offer on, and now his funds are tied up, elsewhere. There is no way to short-circuit this part of the buying process; so, be aware of the procedures ahead of time.
If the purchase agreement for the second property happens to be listed at the same real estate company as the initial property being offered on, the real estate company must seek to have signed special permission documentation to use those allocated trust funds for the secondary offer to purchase. Again, it can get complicated and is undoubtedly time-consuming for all concerned, as special permissions must be sought and attained prior to opening a file at the real estate company accounting department. Money cannot unofficially be moved from one transaction to another. Real estate companies must take very good care of the public trust monies and there are very strict guidelines that determine the release and/or paying back of funds when a transaction fails to materialize. Often this procedure must be determined by the courts.
Likewise, if you have given over deposit funds to a real estate company, based on making a purchase of a property, or at the start of the negotiations, and for whatever reason the agreement never gets put together in an accepted set of documentation, you cannot, for any reason get your money back until releases are signed by all parties to the (would-be) agreement. The real estate company is forbidden to take instruction from you, your lawyer, or any other source of permission except agreed to releases, failing which only the court can make this determination.
This decision is not permitted to be made by the real estate agent and is totally outside his/her control. The manager or the Broker/Owner cannot intercede. This is the law regarding the management of trust account funds. Neither the agent, the manager nor the owner or anyone standing in on their behalf can sign off and release trust funds without “all” parties having signed documents called releases, saying the funds can be given back to the writer of the cheque, and given back “only” to the writer of the deposit cheque. Likewise, instruction cannot be given, or accepted, to return the deposit funds cheque monies to anyone other than the person(s) who wrote it. The funds cannot be re-directed in any fashion, other than by court order.
Example: you make an offer. The offer never gets to a final negotiation state, so the offer dies. The real estate company historically only had two days from receipt of the funds, during which to deposit your receipted trust funds into their trust account at their bank. To do otherwise would put them in a position of possibly being fined, audited and found wanting. Other more severe penalties could be involved as well. If, in case, the agent never submitted office documentation for the would-be transaction that never came together, even so he had been supplied receipt for the trust funds, the trust funds just sit in the trust account of the listing office until the would-be buyer’s agent makes a formal request to have them released on behalf of his buyer. Failing which the funds eventually are paid into court. There are millions of dollars of unclaimed deposit funds sitting in court bank accounts.
The listing office has no right to return the funds to the originating cheque writer, and by law, must not. Since the public often does not understand the management of trust funds, bad feelings can prevail. Although it should be up to your real estate agent to follow-up and follow through, if and when this does not happen, as a member of the public you need to put the wheels in motion yourself. After all, it is your money, and eventually when all the proper documentation is in place, those funds need to be returned to you. The real estate company does not “own” your money. You do. They don’t want your money. They want to return it to you, and so they must. But they must go through all the procedures, and sometimes the whole situation is out of the control of the listing company holding the trust funds. The listing company, who typically holds the deposit, will be more than happy to return your money to you. But they must follow the rules and regulations of so doing. If you are have funds sitting idly in a real estate trust account some place, notify your real estate agent who acted on your behalf and insist that they prepare the proper documentation for the return of your money. It’s part of their job. They must attend to it.
DOWN PAYMENT: The term down payment is often confused with the term “deposit.” The down payment is a combination of your deposit along with the remaining dollar value of funds that make up the difference between your purchase price and the amount of mortgage on the property you are buying, payable to the Seller on closing. The total of your mortgage(s), your down payment and your deposit(s) should equal the total selling price. If you do not require a mortgage then the down payment just becomes a nebulous term: the differential between your deposit and the balance due on closing.
Just one more thing to pay attention to on your offer, whether you are the buyer or the seller. Make certain that all the numbers add up. Sometimes agents forget to do that; if so, major trouble could be around the bend. If the owner is taking back a mortgage, the Seller needs to be sure that the mortgage becomes due and payable if you sell the house to someone else. This is your lawyer’s job to be sure you are protected, to construct the mortgage appropriately, when private funds are changing hands or held in a mortgage.
Real estate agents do not personally care where you get the money from to buy a house, but agents are required by law to notify the authorities, if they think for one minute that there is any “funny money” involved in the purchase of real estate, through an operation called FinTrac. (FINTRAC - Financial Transactions Reports Analysis Centre of Canada - Money Laundering - Terrorist financing.) Simply put: you “must” be able to prove where your down payment or other real estate related purchase funds are coming from.
Typically you will be asked by your financial institution along with providing to the mortgage company, information as to the current location of the source of funds being used to purchase real estate; explaining “where the money is coming from.” Your down payment funds could be coming from a gift, from a secondary loan, from an inheritance, from a forthcoming marriage breakup settlement, from some other court ordered funds, retirement savings plans, insurance plans, company sponsored mortgage programs – any number of avenues of money provision. Wherever it is located or wherever the money is coming from, you will be required to identify the source. If you require a mortgage, the mortgage company will require you to provide this information. You will have to divulge whether the down payment funds you are accessing must be paid back to the source at any point in time.
The down payment funds are not required to be “issued” by the buyer and given to the Seller, specifically, until shortly before closing day; typically you would meet with your lawyer a week or so prior to closing at which time the attorney would ask you to bring certified funds, in an amount that includes his fees along with any adjustments that form part of the closing procedure. If you cannot, then you may find yourself in what is referred to as anticipatory breach of your contract. If you cannot close your transaction on time, you may incur additional legal fees among a long list of additional fees, and as a Buyer, you may forfeit your deposit; but, not necessarily so. Typically it would be up to a court or a judge to decide if there was any misdeed being carried on with the contract. The Seller cannot automatically expect the Buyer to forfeit his deposit. There are many variables that come into play with a situation where a transaction cannot close. Just as an example – when the Buyer cannot come up with closing funds for his particular transaction, this is most likely not the only transaction that will head into a tailspin. The Seller from whom the Buyer made the purchase may have gone out and bought another property based on the strength of his sale. The owner of the house he bought may have done the same thing. The chain of sales could be very long. If each one relied on the sale before it, to close in order for each buyer to close in succession, the defaulting Buyer could find himself in a long line of court cases, being found liable for the expenses of all the people in the chain. In the meantime, all the properties in the chain could be tied up indefinitely from being sold to someone else until all the details are worked out and settled. You can see how complicated deposits and down payments can get.
This is where part of the confusion lies with the public. No, you do not have to give your “down payment” with your offer to purchase, but you likely will be required to provide some sort of “deposit.” A Seller will be looking for as large a deposit as he can get from a Buyer, not because the Seller can keep the deposit necessarily in a default situation, but the chances of a buyer completing a transaction typically appear to be greater when there is a larger deposit, out of fear that he “might” lose his deposit if he fails to close. But that would most likely not be the “only” thing he loses.
The legwork must have been done well in advance to enable you to make an honest decision when you find the right property to buy. There is no point in your agent working hard in finding the exact property you would call your dream home, and “then” discover there is no way you can buy it, due to the fact that there is no way you can put together your down payment, and/or qualify to carry the difference in a mortgage.
So, think it all through and arrive at your meeting with your REALTOR®, prepared to do business. There’s a good possibility you may find the ideal property the first time out. Avoid suffering needlessly as a result of not being fully prepared. You might run into a situation where someone else also wants to buy the same property, thus multiple offers. The Buyer who is most prepared ahead of time will usually get to buy the subject property. If you have any questions, never be afraid to ask your REALTOR® or your financial expert to guide you through the process. There are no dumb questions, except the ones that don’t get asked.
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