What’s the Deal with Binder Deposits?
What’s the Deal with Binder Deposits?
Also known as a “good faith deposit” or “escrow deposit”, this is a deposit made after the purchase and sale contract is agreed upon and signed by both parties. It is NOT the same as the down payment. This deposit shows that the buyer is making an offer in good faith and has some skin in the game. If the buyer backs out of the contract after the due diligence period and for reasons other those relating to the loan, the seller can retain that deposit to cover damages and compensate them for taking the house off the market for a period. The amount of the deposit is agreed upon in the contract and we often get questions from our clients about it. Here are a few things to consider when determining what is good, bad or indifferent.
- Basics
The deposit must be held in an escrow account at the seller’s choice of title company, closing attorney, or real estate broker’s office. The holder of the funds is called the escrow agent, and they cannot release the funds if there is a dispute. In Florida there is not a mandated minimum deposit amount. In the Jacksonville area, the greater of 1% or $1,000 is the lowest amount in common practice. Higher percentages are typically expected in all cash purchases. If the buyer is paying all cash, the only reason for a low binder would be indecision and sellers don’t like indecision.
- What does a relatively low deposit say?
Reasons for putting a low offer could range from indecision to limited cash on hand. No matter what the actual reason, assumptions can and most likely will be made. A seller is more likely to accept one offer with a typical or high deposit over another similar offer with a lower deposit amount. There is a lot of amateur psychology going on in contract negotiations. Some sellers will assume that a low deposit indicates that the buyer is not very serious or may not have enough cash on hand to go through with the purchase. The buyer wants to put as little money at risk as possible while not being written off.
- Why offer/require a high deposit?
The higher the deposit the more serious a buyer appears. It is easier to walk away from $1,000 than it is to walk away from $10,000. A seller may want a higher binder to cover the costs of taking their home off the market. Generally, people sell one home and buy another. If the sale of their home falls through they could have to pay double mortgages until it sells or risk losing a deposit on another home. The deposit is, in many cases, their only practical recourse for the money and time lost to a buyer that does not follow through on the contract.
- What happens to the deposit if the deal falls through?
It depends on why the transaction did not end in a sale. If negotiations break down within the inspection/due diligence period, the deposit should be released back to the buyer. If a loan was not approved for any reason or if the home did not appraise at the agreed upon value and the difference cannot be made up the deposit should be released back to the buyer. If the buyer backs out after the inspection period and for reasons not relating to the loan, the binder should be released to the seller.
- What happens is there is a dispute over who is owed the money?
Depending on where the deposit is held the rules vary slightly. Basically, the first course of action would be the agent(s) negotiating for the fair distribution based on the contract. If one party is not willing to approve the distribution of the funds to the other party, legal requirements dictate how things are handled and the methods differ based on where the funds are held. None of the approved legal processes are cheap. A significant amount of the deposit can be chewed up by legal fees if the parties disagree. Unless the answer is extremely apparent, the prevailing party is likely to “win” a significantly reduced amount after all is said and done.
Even though a deposit is not required to make the contract binding, it is expected and might say more about you than you think. The purchase price, condition of the home, amount of time before closing and type of financing all influence the customary amount. As with nearly everything, the amount of the deposit is negotiable and influences the sellers opinion of the offer. We help buyers and sellers navigate real estate deals everyday, if you have any questions let us know. If you have an interesting opinion or story about this portion of contract negotiations, we would love to hear it.
