As we all know, buying real estate in Toronto can be both an exciting and intimidating process. There’s a lot of money on the line, and as a buyer, you may be making one of the biggest financial decisions (and commitments) of your life.
One key step in the process of buying a home is making a real estate deposit. There are many questions to consider & understand to make sure you’re prepared to make a deposit, but also to mitigate the risk of losing it.
This article will provide an overview of the ins & outs about how deposits work in Toronto (and Ontario) to help you feel comfortable and empowered to make the right decision.
What is a Real Estate Deposit?
When buying a home in Toronto, the buyer makes a deposit to provide security to the seller as an act of good faith that the buyer is serious about the purchase and intends on following through with the deal, while taking on some level of risk until the deal closes. The deposit gets applied against the purchase price upon closing of the transaction.
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How Much Should My Deposit Be?
While there are no fixed rules or regulations as to what what constitutes a deposit, we generally recommend to offer a deposit of 5%.
There are situations where a larger or smaller deposit may be recommended depending on a few factors, some being:
- If there are multiple offers and all other things are equal, the offer with the larger deposit may be chosen. Sometimes you can get a lower purchase price by offering a higher deposit.
- If we’re in a declining market and the seller is worried about you being unable to close on time, they may prefer a larger deposit. If you find yourself with an appraisal gap and unable to close on the purchase, the seller may be entitled to keep your larger deposit.
- Your offer may not be taken seriously if your deposit is insufficient. The minimum down payment on a home purchase in Ontario is 5%. A seller may ask themselves, “If this potential buyer cannot come up with a 5% deposit, how are they going to come up with the 5% down payment to get approved for a mortgage?”
Our best advice: As soon as you begin your search you should have 5% of your expected purchase price liquid in your bank account to be ready when the right property catches your eyes.
What is the Difference Between a Deposit & a Down Payment?
The minimum down payment for a real estate purchase in Ontario is 5%. When your offer is accepted, the deposit you pay will be credited towards the down payment upon closing. This is a common misconception, you do NOT need another 5% for the down payment. Your lender & lawyer will see you’ve paid a 5% deposit already, which will have no negative impact on finalizing your financing and closing on the purchase.
Sometimes when negotiating with a seller and preforming counter-offers, the initial deposit amount is not touched while the purchase price may increase (or decrease).
When is a Deposit Due?
The most common delivery timeline for a real estate deposit is within 24 hours of acceptance of the Agreement of Purchase and Sale (your offer).
However, when drafting your offer you may choose one of these three options with your realtor:
1. Deposit submitted Herewith
Submitting a deposit “herewith” means you are providing the deposit along with the offer. By providing the deposit before the offer has even been accepted you’re essentially telling the seller “I have the money, this is my offer, do we have a deal?”
Commonly, even though the deposit is herewith, it isn’t actually paid until your offer is accepted. You’re simply providing a photo of the certified cheque or bank draft of the deposit along with your offer, showing the seller you’re ready to go. If your offer is accepted, you would be expected to deliver the deposit cheque ASAP.
Some situations where it may be in your best interest to submit a deposit herewith are:
- When you are bidding on a property with a set offer date and multiple offers, the seller may only be entertaining offers accompanied by a deposit, as they’re looking for the most qualified buyers with the fewest conditions.
- When you want to add some extra strength to your offer by showing the seller you’ve already gone to the bank and are ready to proceed with the purchase of their home.
2. Deposit submitted Upon Acceptance
This is the most common form of making a deposit on a real estate purchase.
With this option, you will be required to deliver the deposit within 24 hours of the offer being accepted.
Note: the standard wording is exactly “24 Hours”, meaning if your offer is accepted on Saturday night at 8 PM, the deposit is due by 7:59 PM on Sunday. If the banks are closed you may find yourself in a breach of the contract. This would be a circumstance where you would opt define alternative deposit arrangements.
3. Deposit submitted as otherwise described in this Agreement
When choosing to make your deposit “as otherwise described in this Agreement“, your realtor will add a clause into the Schedule A of the agreement detailing how and when the deposit is to be made.
Some examples of this may be:
The Buyer agrees to pay a deposit of THIRTY FIVE THOUSAND DOLLARS ($35,000.00) not later than 5 p.m. on A SPECIFIC DATE.
This allows you to define a date you intend on making the deposit by. Sometimes you’re moving money over from various investments, withdrawing from an RRSP, or waiting on a gift from a family member to arrive in your account.
The Buyer agrees to pay a further sum of FIVE THOUSAND DOLLARS ($5,000.00), not later than 11:59 PM on A SPECIFIC DATE.
You would choose the above option if your circumstances required you to make multiple deposits in relation to the same transaction, where you would define when the additional deposit is due and how much it must be.
The Buyer agrees to pay a further sum of FIVE THOUSAND DOLLARS ($5,000.00), at the time of notification of fulfilment or removal of the condition pertaining to SOME CONDITION.
You would choose an option like this to only increase your deposit upon one or multiple conditions of your offer becoming fulfilled. Maybe to make your offer stronger you choose to offer an additional 5% after having the home inspected and the inspection comes back satisfactory to you.
What Happens when a Real Estate Deposit is Late?
If the deposit is late then the Buyer is in clear breach of contract. This means the Seller may terminate the agreement, sell to another Buyer without notice, and even sue for damages (such as the new sale price being less than the one you had agreed to).
If some circumstance resulted in your deposit being late, your best course of action would be getting written permission to deliver it late without penalty or consequence.
Who Holds the Real Estate Deposit?
The real estate deposit is most commonly held by the listing brokerage in their Real Estate Trust Account. These trust accounts are regularly audited and heavily regulated to protect consumers.
When there is no listing brokerage involved in a purchase, the deposit would typically be held in the Seller’s lawyer’s trust account. Some circumstances will call for the deposit to be held in the Buyer’s brokerage Real Estate Trust Account, or with in the Buyer’s lawyer’s trust account.
How is My Deposit Protected?
Yes, real estate deposits are insured in Ontario. All brokers and salespersons are required by law to participate in an insurance program that includes consumer deposit insurance at no cost to you.
Consumer deposit insurance offers protection in the event of fraud, insolvency, or misappropriation of funds.
The insurance provides coverage up to a maximum of $200,000 per claim. If your deposit exceeds $200,000, you may choose to provide multiple deposits (one to the Seller’s brokerage, one to the Buyer’s brokerage or to the Seller’s lawyer) to reduce risk.
How to Prepare a Real Estate Deposit
Your realtor will receive deposit instructions from the listing brokerage. These deposit instructions will detail the Trust account details and acceptable methods of deposit.
When deposit instructions are received electronically it is recommended to contact the brokerage directly to verify the deposit instructions are correct and that no third-party has provided false banking information in an attempt to defraud you (it has happened, emails get hacked and it’s always better to be safe than sorry). Speak to your realtor over the phone to confirm the instructions are coming from them directly, and that they have been verified.
Most commonly, you must go to your bank and prepare a bank draft, certified cheque or money order. Cash and personal cheques are not generally accepted.
The deposit will be made payable to the Listing Brokerage (or whomever is to be holding the deposit as per the Agreement of Purchase and Sale).
When you have the deposit in hand, you must take a photo of the draft/certified cheque/money order, and then follow the deposit instructions:
Deliver the Deposit Directly to Your Realtor
Your realtor may receive the deposit from you and deliver it themselves to the deposit holder. They must provide you a receipt for the deposit.
Deliver the Deposit to the Listing Brokerage
You may take the deposit directly to the listing brokerage’s office (or lawyer/other deposit holder), they will ask you what property the deposit is for, collect your ID, and provide you a receipt for the deposit.
Direct Deposit at the Listing Brokerage’s Bank
The deposit instructions will tell you which institution the deposit holder banks with. You may go to any branch of that bank and provide the deposit along with the deposit instructions to the teller. They will make the deposit into the trust account and give you a receipt for the deposit.
Wire transfers into the listing brokerage’s trust account are also an option, however you will be required to cover any potential wire fees the brokerage incurs, and you must consider the slower processing time for a wire transfer.
Is a Real Estate Contract Binding Without a Deposit?
A Real Estate is a binding agreement even if the deposit was not made. The consideration of a real estate deal is the promise to transfer the property to the buyer in exchange for the buyer promising to pay the purchase price.
If a buyer decided not to abide by the terms of the Agreement of Purchase and Sale by not paying the deposit, the buyer is in breach of the Agreement. Such a beach allows the Seller to rescind the Agreement, pursue damages, or seek specific performance by having a court force the buyer to complete the transaction.
What Happens to My Deposit if the Seller Doesn’t Accept My Offer?
If a seller declines your offer, you may simply return your deposit back to your bank and deposit the funds back into your bank account.
Bank tellers in Toronto are used to homebuyers coming in to prepare a bank draft and then returning to deposit it again after an unsuccessful offer. Many even waive the bank draft fee.
What Happens to My Deposit if Conditions are Not Fulfilled?
If your offer to purchase a property is conditional and for some reason a condition was not fulfilled, the deposit is to be returned to the buyer.
That being said, if the seller believes you did not act in good faith in trying to satisfy the condition, they may refuse to release the deposit. If this happens, the deposit would be held in the trust account until a judge rules on it. This can be a long process, so it’s always recommended to act in good faith by making sure clauses and conditions of your offer are clear in their meaning and in line with your intentions.
We see countless realtors, brokers, lawyers, buyers & sellers who believe they are free to walk away from an agreement due to having the wording “sole and absolute discretion” in their clauses, this is simply NOT TRUE. A commonly cited case is Bhasin v Hyrnew, as it spells out the duty of good faith in contractual performance.
Example; If you have both a financing condition and a status certificate review condition, do not remove the financing condition to try and make your offer stronger and assume you will still be able to use the status certificate review condition to get out of the deal.
How Long Can My Real Estate Deposit Be Held?
In order for funds to be removed from a Real Estate Trust Account, the buyer, seller, listing brokerage and buying brokerage must all sign a Mutual Release Form. After which, funds will be promptly returned to the buyer.
When there is a dispute due to suspicions or evidence of a party not acting in good faith, the mutual release may not be signed resulting in the deposit being locked in the trust account until a Judge eventually orders the release of funds to the buyer or seller through a court order (if not settled in advance).
When is a Buyer’s Deposit Forfeited?
In most cases where a Buyer does not close on a firm sale (meaning there were no conditions), the Buyer would forfeit the deposit and may be sued by the Seller for additional damages, such as carrying costs until the property is resold, the difference between the eventual sale price and the failed transaction (if it’s lower), legal fees and more.
Making a firm offer or fulfilling/waiving conditions comes with serious consequences. It is important to understand how to avoid losing your deposit when buying real estate in Toronto. The following tips can help you to protect your deposit:
- Make sure you understand the terms of the purchase agreement before signing.
- Make sure you understand the conditions (if any), and the risks of fulfilling or waiving them.
- Read the fine print on your mortgage pre-approval and make sure you are aware of any hidden costs.
- Get a home inspection to ensure the property is in good condition.
- Work with a knowledgeable realtor who understands the market & neighborhood you’re purchasing in to ensure the property is worth what you’re paying.
- Ensure that your lender is reputable and that your loan is secure & approved. Do not take out any new loans or debt. Do not buy a new car.
- Have all of the funds for the deposit ready at the time you make the offer to make sure you’re not late.
- Ask for a receipt for the deposit that you provide.
- Seek professional advice from a trusted real estate lawyer.
- Do not make any large changes to the purchase agreement without consulting your lawyer.
Following these tips can help you to avoid any unpleasant surprises and keep your real estate deposit safe. Having a strong understanding of the deposit process is essential when buying real estate in Toronto, as it can help ensure that you make a well-informed decision.