With P & S deposits, Dotgirl3 and I explain
DotGirl3 answered Div’s question about his deposit at signing of the Purchase and Sales Agreement (P & S):
A common misunderstanding is that the P&S deposit (step 2) is the same as the "down payment" (for lack of an easier description). The P&S deposit does not have to equal your "down payment". It has to be an amount that the seller will accept to take the property off the market and bind the buyer to the sale and an amount the buyer feels comfortable risking in the P&S. 5% is customary because it covers most brokers' commission should they be able to claim payment from the seller because the deal didn't close due to a default of the P&S contract.Often I have buyers putting 10-20% down on a loan but no way in heck would I let them bind a P&S with 20% (I will probably eat my words here, but it has to be a pretty special circumstance when I'd recommend 20%)…
DotGirl3,
Good explanation.
I have a story to tell you, and all the other readers! First a little more on these deposits:
The deposit that goes with the Purchase and Sales Agreement is credited toward the down payment at closing. That deposit will be returned if the buyer can’t buy the property because he/she fails to obtain a mortgage commitment by a specific date (stated in the contract.) If the buyer does not buy for any other reason, the deposit goes to the seller as damages for losing the ability to sell during the agreement. Generally, that’s how it works.
Back in the go-go years, seller’s agents were pressuring buyers to increase that deposit. Why? Because the more money that the buyer would lose for quitting the deal without reason, the less likely the buyer would do it. Personally, I don’t know anyone who can afford to walk away from 5 percent of a house purchase. But, seller’s agents got it in their heads that more is better. During the run-up, I routinely advised my buyers to increase that deposit to 8-10 percent, since it didn’t cost them anything (except interest on the funds) and put them in a better position in competition with other buyers. Since I watched the loan commitment dates carefully, there was little risk of a loss of those funds.
Now a first-hand story I heard at a MABA (Massachusetts Association of Buyer’s Agents) meeting. It gave me a bigger-picture view of the risks:
A young couple were buying their first home and having their first baby. Everything was going well with the pregnancy and the purchase. They found their house and they had their loan commitment; they were waiting for both closing and delivery of their child. She went into labor four days before closing. Tragedy struck this family; both mother and child died.
By contract, the seller was entitled to keep the deposit. And the seller exercised his rights.
The loss of his deposit was the least of the widower’s problems; I know that the amount at stake didn’t matter at that moment. But the immensity of this loss, compounded by the financial loss, struck me hard as a buyer’s agent. This was a tragedy compounded by a legal hassle.
I remain surprised when people behave like this seller did. It took months of legal discussion before the deposit was released back to the widower.
So Dotgirl, since then, I take nothing for granted. Since then, I have been loath to advise buyers to put more deposit down than absolutely necessary at P & S. I can’t think of any house worth putting a 20 percent P & S deposit on, in light of how fragile life is in the real world. I advise my clients accordingly, then they make their own decisions.
Am I over-reacting? Do you think the risk is tiny and the benefit worth it?
Do you think the seller was within his rights? Am I being judgmental?
