In a real estate transaction, a touchy issue is how much trust the
seller has in a buyer. The existence of a good faith deposit helps put
a seller at rest.
Good Faith Deposit
If you are selling your home, condominium or other real estate, you
should always require a buyer to make a good faith deposit. The good
faith deposit simply establishes that the buyer is serious and, to some
extent, has the financial capacity to follow through on the purchase.
The amount of the good faith deposit is dependent upon the agreed sale
price of the real estate. Although percentages vary from state to
state, a cash deposit equal to three percent of the sales price is
typical. For instance, the deposit would be $9,000 for home selling at
a price of $300,000. As with most transactions, this percentage is
negotiable. I don’t recommend that you accept anything less than two
percent.
Once the buyer and seller agree to the amount of the good faith
deposit, you have to figure out what to do with the deposit.
Importantly, the seller should not hold the deposit as doing so could
make the buyer very uncomfortable. Instead, the money should be
deposited with a third party and held “in trust.” Potential third
parties include escrow and title insurance companies as well as an
attorney if your state requires their involvement.
A good faith deposit acts like an insurance option for a seller. Moving
through escrow can take 30 to 60 days, during which the property is off
the market. The good faith deposit essentially compensates the seller
for this time in the event the buyer is unable to follow through on the
purchase of the property.
Depending on the laws in your state, a buyer who can’t close will lose
the deposit. Typically, the only exception to this is when the seller
allows language indicating the deposit will be returned if the buyer
can’t get a home loan. Of course, including such language can open the
seller up to repeated frustration when bad credit buyers repeatedly
fail to get funding.
Good faith deposits are a fundamental part of a real estate
transaction. Buyers should expect to pay them and sellers should demand
them.
