Is The Good Faith Deposit At Risk?

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Many agents seem to answer this question differently depending upon whether their client is the prospective buyer or seller. When their client is making an offer, "No, your deposit could never possibly be at risk," while when their client is evaluating an offer, "And besides, if they renege or can't bring it off, you get to keep the deposit." Both of these are false, misleading, and practicing law without a license.

The cold hard fact is that the deposit is always at risk, but there is absolutely no guarantee that a jilted seller will get it, either. The answer to "Is the deposit at risk?" from a real estate agent can never honestly be anything other than "Yes."

For buyers, the deposit is "at risk." Otherwise, what would be the point of having it? If it couldn't be lost, why would it need to go into escrow? Just to prove the buyer has a couple thousand dollars to their name? I can do that with a Verification of Deposit. The only reason to make a deposit on a purchase offer is that it is at risk, and no listing agent in their right mind is going to accept any purchase offer where there is no deposit - even if the buyer is doing a "one dollar down" VA loan. That seller is risking a minimum of a full month of all carrying costs (usually much more) upon your representation that you want the property, and they are entitled to keep your deposit if certain conditions are met. For sellers, no you don't automatically get the deposit if the buyer flakes out. There are burdens upon you and your agent, and contingencies, or escape clauses for the buyer, built right into the purchase contract. You don't want to allow those clauses, that's your choice, but you'll severely restrict the number of people willing to make offers as well as the price you will actually get. Even if the seller negotiates the payment of the deposit to them as part of the contract, the buyers can still sue to get it back. This is the real world and an offer is being made with real money and real consequences to that money. If you're unable to come to terms with that fact, stay a renter, because that fact is not going to change. For agents, if the only way you can make a sale is to misrepresent the deposit, it doesn't take a great fortune teller to see a courtroom in your future.

For buyer clients, I can do a lot to keep a deposit from being forfeit - any agent and loan officer can. Get out in front of all the contingency issues and any other reason that my client might decide they don't want to purchase the property, and get them dealt with right away, during the contingency period. Loan, appraisal, inspection, I want them all done before their contingency expires, or at the absolute minimum, a loan commitment with contingencies I'm certain we can meet. As of this writing, I have not yet lost any buyer deposit money. Nonetheless, since no agent can honestly guarantee the deposit will not be lost, I cannot and will not pretend that I'm some kind of exception to the law. The only way I could make such a guarantee is by putting up my own money as a surety, and if my client lost a deposit for a reason that was in any way my fault, I hope I would reimburse them (Until it happens and I'm facing an actual choice, there's no way to be certain). But it's not my investment, and if the investment succeeds, I'm not going to share in the proceeds (I'm given to understand that's illegal, at least in California), and one of the essential, unchangeable facts about investment is that there is no such thing as a risk free investment. If you don't understand this, any money or assets you may have can be considered a temporary thing, and you have no business in a profession with responsibility for other people's money. Anyone willing to say that there is no risk is either a fool or a crook. Nor is it likely your agent or anyone will reimburse you, especially for situations beyond their control, or if you misrepresent your situation or miss deadlines.

For listing clients, the same thing applies: Get what I need to done right away, and keep after that buyer's agent to remove contingencies in a timely fashion. If they won't remove contingencies when they are supposed to be removed, it tells me all I need to know. It's my client's call, but I know what my recommendation is going to be. I want the transaction to work, but I also want my client to get that money if it doesn't. Incidentally, Deposit issues are one reason of many that nobody should ever be willing to accept dual agency.

The bottom line is like something out of quantum physics: Schrodinger's Cat. Ideally, you want the sale to go through and record and for everybody to be happy because it all turned out exactly as agreed. Unfortunately, that's not perfectly predictable or knowable in advance. If it was, no real estate transaction would ever blow up, and the deposit would not be an issue. There are laws and procedures, and things agreed to in the purchase contract, that you have to be a real estate lawyer to offer an informed opinion about, and the judge, arbitrator, or whatever making the decision to make a definitive ruling. Escrow has custody of the money, but they're not going to do anything without mutual agreement of the buyer and seller. Either side can potentially decide to be stubborn and force the matter to arbitration, court, or whatever is appropriate, and all the consequent expenses of the legal system (which additional money is also at risk as the usual agreement is that prevailing party is entitled to legal expenses). And the legal system runs in incomprehensible ways for unpredictable reasons - the one thing that seems to be a constant is that if the judge wants the ruling to go a certain way, they can probably find a precedent to justify it if they try.

The point is this: The deposit is at risk. It is not "safe", and it does not necessarily belong to the seller either. Since this is cash, people understand that it is real money, because they had to scrimp, save, and set every single dollar in it aside from other uses, so they get understandably nervous about it. It represents a great vacation, a down payment on a new car, or something else very desirable that they're giving up, and they're putting at risk of forfeiture. Against this, the seller wants it if the transaction fails. There are ways to protect it, and ways to endanger it, and you've got both agents working to their client's advantage. As with any other competitive or potentially competitive situation, that makes the result indefinite until the game is complete. It isn't common in my experience that the deposit is forfeit, but it does happen. And anybody who tells you otherwise is either lying or hopelessly incompetent. Nonetheless, real estate is such a powerful investment that you are well advised to come to terms with the risk, because it's a necessary risk in order to buy real estate.

Caveat Emptor

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This page contains a single entry by Dan Melson published on May 28, 2008 7:00 AM.

Why Cost Is As Important As Rate For Mortgage Loans was the previous entry in this blog.

Real Loans For Real People May 28, 2008 is the next entry in this blog.

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