Consider A Hard Money Deposit When Negotiating Your Real Estate Deal
Submitting an agreement of sale on a home often includes an initial deposit. The monetary deposit is a show of good faith on the buyer's part. If the buyer does not complete the transaction, the deposit is refunded. Are there times when the deposit should not be refundable?
In the not so distant past, if a person wanted to purchase a home, they had to have a monetary deposit of 10 to 20 percent of the home's value. In today's real estate dealings, good faith deposits are nowhere near that percentage. In many cases, the deposit is not even one percent.
While it seems prudent to obtain a healthy deposit, the act may be in vain. In almost every case, the deposit is refundable to the buyer if the home sale does not go through. The exception occurs if determined that the buyer exited the agreement unjustly. The issue is it may cost more in litigation expenses to keep the deposit then is available to keep.
A home purchase agreement is full of contingencies. The two most common relate to home inspections and mortgage. The home inspection contingency is often the first thing addressed. In many cases, the mortgage contingency is not satisfied until it is almost time for settlement. Whenever a condition is satisfied, the parties are one step closer to settlement.
Let's focus on the home inspection contingency and how it relates as a condition of an agreement.
The buyer completes the home inspection and requests some items be repaired or replaced. Their real estate agent drafts an inspection reply and forwards it to the seller's agent. The seller is being asked to do some things that will cost them money. If the seller does not comply with the buyer's wishes, the buyer has the option of terminating the deal. The seller may not agree with some of the requests but does not want the agreement to end, so they agree.
The seller proceeds to hire contractors and pay to have the work the buyer requested completed. Two weeks later, the seller finds out the buyer's mortgage was not approved, and the buyer is terminating the deal. Yes, the buyer can do this, and they want the deposit is refunded. The seller is now stuck with the bill created by the buyer's request and has no deal! A non-refundable or "Hard Money Deposit" could have played a vital role at this juncture.
A hard money deposit can be in the form of the initial deposit or additional deposit. In either case, it is my practice to advise the deposit to be retained by the seller. Even though it is deemed a non-refundable deposit, it can still be fully credited to the buyer at settlement. In this case, the seller is covered for the expenses created by the buyer's desired requests in case other conditions are not met later in the deal.
This practice was commonplace when selling a new home. If a buyer wanted extras and options, they often paid the builder a percentage or the full cost of the items upfront. The hard deposit protected the builder from doing custom work and not getting paid for it.
You can likely expect pushback from the buyer's agent because they would rather have the seller bear the risk. The practice of taking a hard money deposit is not common but can be a valuable tool. Just make sure you know your options.
Knowledge is Power!
Jeffrey C. Hogue