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 other words, should home sellers ask for a hard money deposit!
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, the purchase 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 if you are a home seller, 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.
A home purchase agreement is full of contingencies. The two most common contingencies revolve around the home inspection 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. Contingencies are often called performance or value monuments. When these points of the agreement are reached something usually happens.
Let’s focus on the home inspection contingency and how it ties into the value monuments of the agreement.
The buyer completes the home inspection and notes some items in need of repair or replacement. 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 do the things asked, the buyer has the option of terminating the deal. The seller may not agree with some of the requests but does not want the deal to terminate, so they agree.
The seller proceeds to hire contractors and pay to have the work the buyer requested completed. Two weeks later, the seller is notified that the buyer’s mortgage was not approved, and the buyer is terminating the deal. Yes, the buyer can do this, and the deposit is refunded. A non-refundable or “Hard Money Deposit” can play 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 is 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 value monuments 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 up front. This practice protected the builder from doing selective work and not getting paid for it.
My suggestion is to discuss the hard money deposit up front. The practice of taking a hard money deposit may not be necessary, but clarity and understanding are great things in a real estate transaction.
Knowledge is Power!
Jeffrey C. Hogue
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