Buyer’s Deposits

            You finally found the home you have been searching for and you’re holding your checkbook, pen poised to write that first check — but do you know what will happen to your deposit money if you change your mind? What if you don’t get a mortgage? Or if the home doesn’t pass inspection?

            The Pennsylvania Standard Agreement of Sale identifies the amount and the due dates for deposits right on the first page. Stop, slow down and read it. Buyers usually are expected to post a small deposit at the time they sign the Agreement. A more substantial additional deposit is usually expected within 30 days or so after the Agreement is signed. The due dates and amount of both deposits are set by the parties and the dates and amounts are filled in on the front page of the Agreement. Sometimes the second deposit is calculated to bring the total deposit to 10% of the purchase price—but the amount is not set by law and is up to the parties to establish. Try to time the second deposit for a date by which you can have all your financing in place and all inspections complete. Make sure that the precise amounts and dates of all deposits are clearly filled in on the Agreement and be sure you mark the due dates on your calendar. If you need to mail a deposit, make sure you mail it on time. The deposits usually are held by the home seller’s real estate broker unless the parties agree otherwise.

            What if you have made one or both deposits and you just change your mind. What if you find that while you qualify for a mortgage you really can’t afford the home? If a buyer backs out or fails to make a timely second or subsequent deposit, the seller is entitled to reject the deal and keep all previous deposits. If a buyer furnishes false or incomplete information about his or her financial or legal status to the seller or to anyone else specifically identified in the Agreement—brokers, realtors, lawyers, inspectors or others involved in the sale and named in the Agreement—the seller may reject the deal and keep the deposit. Finally, the seller is entitled to reject the deal and keep all deposits if the buyer breaches any provision of the Agreement. Buyers who expect to avoid forfeiting their deposits must stay on top of their obligations and complete their financing, inspections and all other agreement obligations on time. Buyers who expect to avoid forfeiting their deposits must be clear and honest about their financial and legal status. Don’t conceal your marital status, misstate your income or exaggerate your assets on a mortgage application—this kind of dishonesty can lead to the loss of your deposit.

            What happens if you back out of the deal because you have a right to back out? If you reserve a right to have the home inspected and it doesn’t pass inspection, you are entitled to a return of all your deposit money. If the Agreement relieves you from your obligations to buy if you can’t get a mortgage, you get your deposit back if you make all necessary efforts but can’t get a mortgage. But the inspection and mortgage clauses are very specific—buyers who don’t follow the exact terms of those clauses can’t later use them just to get out of a deal. And a buyer who breaches the terms of the inspection clause or mortgage contingency has breached the Agreement and is vulnerable to loss of deposit monies.

            The Standard Agreement generally requires that disputes are resolved by mediation—not by lawsuits. This mediation clause applies to all disputes, including disputes over deposits. If you want to retain the right to litigate disputes, the Standard Agreement does provide a clause the parties can check to indicate that they reject mandatory mediation. Usually mediation is the least expensive and most efficient way to resolve disputes.

            It can come as a rude shock when a buyer learns that he or she has lost a substantial amount of money due to a forfeiture of a home purchase deposit. Deposit money isn’t just a temporary security—it’s money a seller is absolutely entitled to keep if a buyer doesn’t perform all of his or her obligations under an Agreement of Sale.