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First Time Home Buyer Questions #2: Will I Lose My Deposit Money?

First Time Home Buyer Questions: Part 2

Will I lose my deposit money?


One good thing that came out of the real estate market crash is the safeguards that were put into place to protect buyers and sellers and their money.

In a typical residential real estate transaction a buyer will put down 1-3% of the purchase price as a deposit called a "good faith deposit". The 3% represents the amount of money a buyer can lose if they default on the contract. The 3% deposit monies sit in an escrow account until the close of escrow or the transaction is complete.

In what instances would I be in default? Built into the contract are contingencies. The contingencies allow for the buyer to inspect the property, seller disclosures, get an appraisal from their lender and remain protected while their loan is reviewed and approved.

If a buyer gets to the last final days of the escrow period, releases all contingencies including the loan contingency and then decides, "This property isn't for me", gets an unexpected job transfer or some other major event occurs that prevents them from buying the property then they will most likely lose their 3% deposit.

Keep in mind that at this point everyone has been diligently working towards the close of escrow so it makes sense that the sellers should be compensated in this case. They have taken their home off the market.

The contingencies protect the buyer and give them "outs" in the contract during the process. The first hurdle is the inspection period. A buyer typically has 10-17 days to perform any inspections on the property they deems necessary.  This is your chance to drill down and get the real story on the house. Yes, the floor plan is lovely and you like the fireplace in the bedroom but are there termites? Roof leaks? Dry rot?

Inspections are performed, reports provided and reviewed by the buyer. Before the inspection contingency time period runs out the buyer decides if they want to move forward with the purchase based on the information found in the inspections. There are always issues with homes so it's all about determining your comfort level with the issues that arise, their cost to cure and the value of the home to you.

Let's say the buyer finds out there is a crack in the foundation and it will cost $50,000 to fix or the pest report shows $30,000 in dry rot damage. Is it worth it to you based on the offer price to move forward? Do you negotiate?  You have options and one of them is to cancel the contract, get your deposit back and walk away. You have spent some money on inspections, and invested your time but it's always better to find out up front what you are buying.

I always consult my buyers not to use this as an easy out and to go into an offer situation only if they are committed to buying the house. Inspections are costly yet necessary and do provide that safety net if needed.

Bottom line is our standard purchase contract has built in protection throughout the process and with a diligent, organized Realtor on your side your deposit money remains truly a "Good Faith" gesture during the transaction process.

If you still have questions after reading this, please feel free to email me at [email protected]

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