The Dog Ate my Home DepositWhen a home buyer and seller enter into an agreement to purchase real estate in Berks County, it is a common practice that the buyer is required to provide a deposit. The deposit is recognized as a sign of good faith and a commitment from the purchaser to honor their obligation to purchase the real estate.
35 Years ago there were few Berks County Real Estate Companies that would accept anything less than 10% of the cost of the property as a deposit. In many cases the Broker would not even present an offer to the home seller, they represented, unless the 10% was delivered with the agreement of sale. This was agreed to when the broker entered into the listing contract with the home seller.
A buyer planning to purchase a home for $200,000 and was financing 90% would be putting $20,000 down. This is the amount that would be held, on account of the buyer, until the time of settlement. All that would be needed to complete the home purchase would be the closing costs and mortgage.
That was then. Today it is not uncommon to see deposits in the amount of $500 to $1,000 on homes in every price range. What changed?
The main culprit in the decline of the deposit was mortgage lending rule changes. Years ago there were very few people buying homes with 5% down and 95% mortgages. Today, you can still purchase a home in Berks County for ZERO down and NO closing costs. FHA loans require 3.5% of the funds to purchase to come directly from the home buyer. The remainder of the necessary funds can come from the seller or other sources that comply with lending regulations. This trend has lowered the need for actual money to purchase a home. If there is little or no money needed, there is little in the way of a deposit.
The second reason is the housing market. If a Berks County home seller or real estate broker require a buyer to put down a large deposit it is likely to reduce the chances of a sale. A lower deposit is less risky for the buyer and enhances their desire and ability to make a deal with the seller. In a poor housing market sellers may take risks with terms and conditions to obtain a higher selling price.
And lastly, changes to the Agreement documents we use in the real estate industry entice lower deposits. There is a clause on the agreement documents I call the “Limited Liability” clause. It reads…”SELLER IS LIMITED TO RETAINING SUMS PAID BY BUYER, INCLUDING DEPOSIT MONIES, AS LIQUIDATED DAMAGES”. This means that the deposit is the only remedy for a default. This is in contrast to a time when if a home buyer defaulted they could be sued for the full price of the home plus damages as the court deemed suitable. Mediation is also directly written into the agreements. The mediation is nonbinding and adds an additional step and cost to a real estate dispute in Berks County. These things lead to the seller not desiring to waste the time or resources fighting for the deposit.
The court system does not like to sit in judgment of real estate transactions. They like it better when people agree to settle and that such settlements take place in their origin, the real estate industry. This is true in most industries that involve commerce and trade.
3 Years ago the rules on escrow deposits changed. Now the buyer’s broker can negotiate a predetermined time period that the deposit can be held by the broker for the seller. In many cases it is 365 days. If there is no court order or claim to the deposit is returned to the buyer. Prior to this change an escrow deposit in dispute between a buyer and seller could be held in perpetuity (That is a long time) or according to the terms of a final order of court. I normally reduce this deposit holding period to 120 days.
The issue with smaller deposits is a simple one. Consider the following example…You are selling your beautiful Berks County, PA home. It is settlement day. You are moving to another state with your family and most of your belongings are on a highway in a truck. The buyer shows up for settlement and has some issues to address. The buyer wants money off the home purchase to solve their issues. You decline. The buyer gets up from the settlement table. It is now when you realize the buyers deposit on your $300,000 home was only $2,500. That is all you get. Is it worth it? You decide.
A reasonable escrow deposit is a good thing. In my opinion, it keeps honest people honest!
Comments(12)