Knowing the role the deposit cheque plays in home buying includes where that money goes, where it comes from, what is applied towards, and rules surrounding it. The most frequent question I get from new home buyers regarding the deposit is "Is it an extra cost on top of the purchase price?". The quick answer to this is no. So how exactly does the deposit cheque in real estate work?
The deposit cheque forms part of the offer and is placed immediately in seller's brokerages' trust account once final acceptance occurs. It shows the home seller that the home buyer is serious about buying the home and fulfilling the terms of the agreement. Many real estate brokerages will require that the deposit cheque be certified if there is less than a 30 day period between their receipt of the deposit and the possession day in the agreement. The deposit cheque must accompany any offer written, unless the buyer and the seller agree to something different, and the deposit must be deposited within 3 banking days of being received by the seller's brokerage.
The deposit is in the form of a cheque or money order, and most real estate brokerages do not want it to be in the form of cash. This used to not always be the case. In my first year of real estate I had an interested buyer call me out of the blue to view a home that had an assumable mortgage. After viewing it, he said he wanted to write an offer, and asked to meet me at a west end Tim Hortons to write up the contract. As we wrote it up, he pulled out an overstuffed envelope with over $10000 cash and told me that was his deposit and down payment in full. I was more than a little nervous handling that much cash in public!
The deposit is used as a part of the down payment on the property. If a condition of the sale cannot be satisfied and the agreement is terminated, then the buyer receives the deposit back - anywhere from a few days to a few weeks afterwards. However, if the seller believes that the buyer did not act in good faith to honor the terms of the contract, then the deposit can be forfeited to the seller. Who decides if a deposit cheque should be forfeited? There is a procedure in place for that. The selling brokerage will review all of the relevant facts of the situation, and then decide of the buyer should receive the deposit back, the seller should receive the deposit due to a material breach in the contract, or, if no decision is clear, he will advise both parties of this and the dispute will begin its way through the court system.
Make sure that as a home buyer you know the role the deposit cheque plays in home buying so you aren't caught having to rush to the bank last minute to make sure these funds are in place on time!