When a buyer and seller enter into an agreement of sale to purchase real estate in Berks County, it is a common practice for the buyer to provide deposit money. The deposit money is often recognized as a sign of good faith and commitment from the purchaser to honor their obligation to purchase the real estate.
35 Years ago 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 did not produce the 10% deposit the seller’s broker would not present the offer. The 10% deposit was agreed to when the broker entered into the listing contract with the home seller.
A buyer purchasing a home for $200,000 and financing 90% of the value would be putting $20,000 down. The deposit will be held in escrow 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 and mortgage.
That was then. Today it is not uncommon to see deposit money of $500 to $1,000 on homes in every price range. What changed?
The main culprit in the decline of the deposit money 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 and NO closing costs. FHA loans require 3.5% of the funds to purchase to come directly from the home buyer. The remainder of the necessary funds 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. If there is little or no money needed, there is little in the way of a deposit.
The second reason is the housing market. If a Berks County home seller or real estate broker require 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. In a weak housing market, sellers and their agents often take risks with terms and conditions to obtain a higher selling price.
And lastly, changes to the Agreement documents we use in the real estate industry entice lower deposit money. There is a paragraph in the agreement documents I call the “Limited Liability” provision. It reads…”SELLER IS LIMITED TO RETAINING SUMS PAID BY BUYER, INCLUDING DEPOSIT MONIES, AS LIQUIDATED DAMAGES”. Meaning the deposit money is the only remedy for default. Quite a contrast to a time when if a home buyer defaulted they could be sued for the full price of the house plus damages as the court deemed suitable. Mediation is also directly written into the agreements. Mediation is non-binding and adds a step and cost to a real estate dispute in Berks County. These things often lead to the seller not desiring to waste the time or resources fighting for the deposit.
The court system prefers not to sit in judgment of real estate transactions. It is better when people agree to settle and that such settlements take place in their origin, the real estate industry. This is true in most industries that involve commerce and trade.
3 Years ago the rules on escrow deposit money changed. Now the buyer’s broker can negotiate a predetermined period that the broker can hold the deposit money for the seller. By law, the maximum limit is 365 days. If there is no court order or claim to the deposit money is returned to the buyer. Prior to this change an escrow deposit in dispute between a buyer and seller could be held in perpetuity (That is a long time) or according to the terms of a final order of the court. I typically reduce this deposit holding period to 90 days.
The issue with smaller deposits is a simple one. Consider the following example…You are selling your beautiful Berks County, PA home. It is 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 quell their concern. You decline. The buyer gets up from the settlement table. It is now when you realize the buyers deposit money 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 necessary. In my opinion, it keeps honest people honest!
Knowledge is Power!