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Deposits Matter

In any real estate transaction, the purchaser is normally expected to pay a deposit towards the purchase price - either upon signing, or once the agreement becomes unconditional.

By convention this is 10% but the amount is absolutely negotiable between the parties. Any agency commission is usually payable at unconditional date, so it’s certainly worthwhile to at least obtain that much as a deposit.

The intention in seeking a deposit is to give ‘consideration’ to the contract, while also demonstrating commitment from the purchaser to fulfil the terms of your agreement. The deposit should be sufficient to compel settlement, but not so high as to deter buyers entirely. After all not everyone has hundreds of thousands available in a bank account at short notice - and what if the Vendor is the one that can’t settle? What then?

Issues can arise when the market is rising or falling and the settlement date is protracted. In a rising market, the purchaser is very pleased indeed. Perhaps they pay 10% deposit and over the 12 month settlement period the market rises say 20%. The buyers just TRIPLED their money - on the property you still own!

The inverse is also true. Let’s say that same 10% deposit was paid and the market drops 20% over the 12 months before settlement. You might say what’s the problem? The buyer is losing money - not me… but that’s only true if they actually settle. Contracts are one thing - enforcement is another - and in the post GFC climate of 2009/2010 we saw many similar deals fall over.

Put yourself in the buyers shoes.. if you had paid a say 50k deposit, and at settlement time the property is worth $100k less than when you signed up… are you really wanting to settle? CAN you settle even if you want to? Will the bank finance you? The vendor can of course sue - but at what cost? Is it futile if you have no resources left?

With the current buyers market and plenty of listings to choose from, vendors may well receive some cheeky offers - not just in terms of price - but with more onerous settlement terms attached. It’s imperative that you understand the risks of these terms - especially around vendor warranties, deposit levels and settlement timeframes - and not just be blinded by the dollar amount on the front page.

Tougher times bring out both the best and worst in people, so think carefully, and take proper advice before signing anything.

Whether impatient for a sale, or else simply unaware, the gravity of these risks won’t always be adequately highlighted by your agent, so make sure to look out for yourself. A few dollars with your solicitor up front can save you a great deal more down the track.

Take care
Scott Morison