Where Has the Deposit Money Gone?
It is common practice for a home buyer to provide an earnest money deposit when purchasing a home. An earnest deposit is a sign of good faith and commitment from the purchaser to honor their obligation to purchase the real estate. Over the years, that good faith practice has dwindled. Let us explore why.
Back in the 1970s and 80s, there were few Berks County Real Estate Companies that would accept anything less than 10% of the cost of the property as a deposit. If the buyer's agent did not deliver the 10% deposit along with the agreement, the Broker for the seller would not even present the offer.
If a buyer planned on purchasing a home priced at $200,000 and were financing 90%, they would be putting $20,000 down and getting a mortgage for $180,000. The $20,000 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, which could be paid for by the buyer or seller or a combination of both, simple.
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. FHA loans require 3.5% of the funds to purchase to come directly from the home buyer, and conventional loans have come down to 3%. The remainder of the necessary funds needed for the purchase 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 and therefore lessened the perceived need for more deposit money.
The second reason has to do with the general state of the housing market. If a Berks County home seller or real estate broker requires 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. Sellers may take risks with terms and conditions to obtain a higher selling price. One of those risks is accepting a smaller deposit.
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 clause means that the deposit is the only remedy for a default. The wording 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 intervention is nonbinding and adds additional steps and costs to a real estate dispute. These things lead to the seller not desiring to waste time or resources fighting for the deposit.
The court system does not like to sit in judgment of real estate transactions. They believe it is better when people agree to settle and that such settlements take place in their origin, the real estate industry. Disputes are unlikely to end up in a court if there is little or no reward.
3 Years ago, the rules on escrow deposits changed. Now the buyer's Broker can negotiate a predetermined period that the Broker can hold the deposit for the seller. In many cases, it is 180 days or less. If there is no court order or claim, ora agreement by the parties, the deposit is automatically returned to the buyer. In the past, an escrow deposit in dispute could be held in perpetuity (That is a long time) until the parties agreed to its release or court order was issued.
Consider the following example: You are selling your beautiful Berks County, PA home. It is the settlement day. You are moving to another state with your family. 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 problems. You decline. The buyer gets up from the settlement table. It is now when you realize the buyer's 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!
Knowledge is Power!
Jeffrey C. Hogue