How Big a Deposit Should I Give

Once you've settled on the price, the next consideration for most buyers is the deposit. The deposit is money that you put up at the time you make an offer on a piece of property to show that you are in earnest about buying it. (You're putting your money where your mouth is, so to speak.) Hence the deposit is actually "earnest money." It is supposed to demonstrate to the seller that your offer isn't capricious.

An offer can be made without a deposit. However, a seller is less likely to accept it. After all, without a deposit you have very little to lose by not following through on the deal.

Some agents will insist that you put up a big deposit. They argue that this will help convince the seller to accept your offer. While there is a germ of truth here, there is also a lot of chaff, as we'll see shortly. You can offer any amount as a deposit.

TRAP—DON'T BE BULLIED INTO MAKING A BIG DEPOSIT

Today, a good agent may suggest you simply put up $1000 to $10,000 "to make the offer official." Of course, that same agent may insist that you be willing to increase that offer substantially once all contingencies have been removed.

Agents often suggest that you offer 5 percent of the purchase price. On a $100,000 property that's $5000. But on a $500,000 property, it's $25,000.

To my thinking, in today's market any initial deposit of more than $5000, or $10,000 for a very expensive home, is a waste. You're simply putting your money unnecessarily at risk. The reason is that, unlike in the past, today's deals hinge on all sorts of contingencies. For example, the deal is rarely solid until you've approved a professional inspection report and the seller's disclosures. If these contingencies aren't removed, the deal doesn't go forward and your deposit is normally returned.

Thus, a large deposit today doesn't mean what it used to. It won't impress the seller's agent. And it won't impress a sharp seller. (They would be more impressed by a solid pre-approval letter from a lender.)

TIP—A DEPOSIT IS MONEY AT RISK

No matter how likely it is that your deposit will be returned, any money you put up is at risk. Therefore, it's to your advantage to put as little at risk as possible.

Remember, you can agree to add to the deposit later, after you've removed the contingencies.

Sellers may demand in the purchase agreement that once the offer has been accepted and you've had a chance to inspect and approve the property and disclosures (and perhaps once financing has been arranged), you will put up an additional amount of money in the deposit. This could be a substantial increase.

Increasing the deposit has two important effects. It assures the seller that you are serious (in earnest) about completing the transaction. And second, it means that you might lose your deposit, since you've already cleared the contingencies that might otherwise allow you to gracefully get it back.

You won't want to increase your deposit unless and until you're sure you want to and are able to go through with the purchase. On the other hand, refusing to increase your deposit, as agreed to in the purchase offer, could nix the deal.

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