In the world of real estate, negotiations between buyers and sellers are a delicate dance, and one of the key elements that can significantly impact the outcome, but is often overlooked in the initial negotiations surrounding an offer, is the deposit. As an agent representing a vendor, advocating for a larger deposit can be a strategic move with numerous benefits, but inertia in the St. John’s marketplace has prevented this from becoming commonplace, with deposits sitting generally at $1,000 on most transactions. In this blog post, I will outline some of the reasons why requiring a larger deposit is beneficial for my selling clients, and discuss how the resistance to deposit increase impacts the decision on when to push for a larger deposit and when to go with the flow.
WHAT IS A DEPOSIT?
People often confuse a deposit and a down payment. While they're both upfront costs in the home buying process, the two terms are entirely different. A deposit is money you attach to an offer to show a home seller that you're interested in buying their property. A down payment is a percentage of the home price you pay upfront, at time of closing, to close the purchase of a house. Across Canada, the anecdotal average deposit is 1% of the purchase price, and a deposit is credited toward your down payment upon closing. A down payment will be at minimum 5% of the purchase price and is due at closing.
WHY SIZE MATTERS!
1. Demonstrates Buyer Commitment:
A larger deposit is a tangible sign of a buyer's commitment to the property purchase. By putting down a substantial amount of money upfront, the buyer is signalling that they are serious about the transaction. This commitment can help reduce the likelihood of the buyer backing out of the deal, providing the vendor with a more secure position.
2. Negotiating Power at Inspection:
A larger deposit gives the vendor and their agent increased negotiating power, especially on home inspection matters. Inspections are typically conducted within 10-14 days of acceptance of an offer, and are intended to find deficiencies with the home that can be either disregarded, addressed by the seller, or compensated for in lieu of the seller completing repairs. A seller can feel held hostage by a buyer who insists on marginal inspection deficiencies being addressed or compensated for if the purchaser feels they can walk from a deal with impunity, given the loss of their deposit would be marginal. A seller may give up more in home inspection negotiations than they otherwise would if the deposit was large, and the cost to the buyer was more significant for walking away. Small deposits increase a buyer’s negotiating power, while more skin in the game from the buyer increases the seller’s bargaining position.
3. Financial Stability and Qualification:
Requiring a larger deposit often means dealing with financially stable buyers. Buyers who can afford to put down a substantial deposit are more likely to have the financial means to complete the purchase. This can save time and effort for both parties, as dealing with financially qualified buyers reduces the risk of the deal falling through due to financing issues.
4. Protects Against Buyer Default:
In the unfortunate event that the buyer defaults on the contract, a larger deposit may provide somewhat of a financial cushion for the vendor. This can help cover any damages or losses incurred during the process of re-listing the property. Having a substantial deposit also provides the vendor with more options and resources to pursue legal remedies if necessary.
5. Enhances Perceived Property Value:
In competitive offer situations, requiring a larger deposit can positively influence the perceived value of the property in the eyes of potential buyers. It suggests that the property is in high demand and that serious buyers are willing to invest a significant amount upfront. This perception can attract more interest from potential buyers and create a sense of urgency, potentially leading to a faster sale.
DEPOSITS IN THE ST. JOHN’S MARKET
Given all of these benefits, why wouldn’t sellers’ agents be pursuing larger deposits for all contracts? It is hard to say for certain, but some explanations might be related to not wanting to rock the boat on a potential deal by pushing for a large deposit that is perceived to be outside the norm in the industry. Additionally, many agents view deposits as nothing more than meaningless formalities. When a deal does fall apart, a vendor can threaten to keep the money all they like, but in most cases they still want to proceed with obtaining a sale, and the quickest and most affordable way to do that is often simply to sign a deposit release form, returning the marginal deposit money back to the purchaser, and moving on promptly.
There is also a sensitivity to affordability in general in the St. John’s market right now, with inflationary pressures on shelter pushing buyers to their brink. Agents don’t want to be the ones who attempt to forge forward individually with aggressive new deposit standards that may negatively influence a buyer’s opinion of a potential property of interest, however, that type of reaction would be extreme and unlikely in my opinion.
Overall, I believe the increase to deposits would be a beneficial for our industry as a whole, increasing the reliability of sales, while making transactions more predictable. While it may require some finesse during negotiations, the benefits for the vendor make it a worthwhile strategy, especially in the current hyper-competitive real estate landscape. But, until the industry moves forward as a whole with a policy on deposit increases, I will continue to take an ad-hoc approach to deposits with my selling clients to determine what is the best means for advancing their needs.