Deposits when buying a home: it’s a matter of trust

If a deal doesn’t close, the parties can discuss the terms under which all or part of the deposit is returned. (Photo: iStock)
If a deal doesn’t close, the parties can discuss the terms under which all or part of the deposit is returned. (Photo: iStock)

There are times when real estate deals go askew. But what happens to the funds that have been held in trust by real estate companies as deposits in those instances? Most people think it’s just handed back to the purchaser but that isn’t the case.

A deposit is sort of like a guarantee and for the most part, is about 5 percent of the purchase price. So, if you’re shelling out about a million dollars for your home with 20 percent down, you’re looking at a $50,000 deposit with $150,000 on closing.

The Real Estate Business Broker’s Act states that a real estate broker can’t release deposit funds from a trust account without a mutual release that both the vendor and purchaser have signed. And if the real estate brokerage inserts a clause in the offer that states any money in trust will be released to the buyer should the deal fall through, they are breaking the law since you can’t contract outside the law.

If a deal doesn’t close, the purchaser and vendor can discuss the terms under which all or part of the deposit is returned, otherwise, it’s off to litigation for what is usually a long, drawn-out process.

A pricey penalty

If a brokerage firm is found guilty of mishandling deposit monies in trust, they could pay a hefty price. Recently, a Toronto-area real estate company pleaded guilty to mishandling trust accounts that came up short in funds. An Ontario court imposed the maximum fine of $250,000. The broker was fined an additional $30,000. He also had to dig deep to fork out an additional $64,000 to an insurance company for the payout of commissions and deposits.

To add insult to injury, the broker also lost his business to bankruptcy and was sentenced to 100 hours of community service and slapped with two years’ probation for not complying with the real estate act.

The bottom line is that brokers have defined responsibilities when it comes to deposit money. But as a buyer, if you think the seller’s broker may use your deposit money for a fun frolic in Fiji, don’t let him hold it at all.

There are two other ways to deal with this:

  1. Let the real estate company you’re working with hold your deposit. They’re a registered brokerage, so there shouldn’t be a problem. They can just as easily transfer the funds on closing as the seller’s broker.
  2. Let your lawyer hold the deposit in a trust account for you.

But if a deal goes sideways, there is no easy way for a buyer to get his or her deposit back, especially if there are sour grapes with the seller. And if the seller’s brokerage is holding the deposit in trust, it stands to benefit from any interest that money accrues.

What if the real estate company goes under?

Any deposit money held by a brokerage in trust is insured, so even if the real estate company that is holding it goes under, a buyer’s deposit money is protected.

The Real Estate Council of Ontario (RECO) regulates all brokerages, salespersons and brokers in the province. As such, it enforces the law that brokerages must have deposit insurance to protect consumers from losing any deposit money should the company, broker or salesperson commit fraud or have financial problems. The insurance, administered by RECO, ensures that consumers are covered by a maximum of $100,000 per claim.
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