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.
What is a Good Faith Deposit?
You should always require a buyer to make a good faith deposit if you are selling your home, condominium, or other real estate. Simply establishing that the buyer is serious is the good faith deposit and to some extent, it 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. Just like with most transactions, you can negotiate this percentage. Accepting anything less than 2% is not really a good idea to begin with.
You have to figure out what to do with the deposit once the buyer and seller have agreed to the amount of the good faith deposit. Another thing to remember is that the seller should not hold the deposit because if he did, it could make the buyer very uncomfortable. The money should instead be deposit with a third party and should be held “in trust.” Included as potential third parties are title insurance companies, escrow, as well as an attorney if your state would require such an involvement.
For a seller, a good faith deposit will act like an insurance option. It can take 30-60 days to move through escrow and the property is off the market during this time. 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 will lose the deposit if they can’t close. 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, when bad credit buyers repeatedly fail to get funding, then including such language can open the seller up to repeated frustration.
When it comes to real estate transactions, good faith deposits are a fundamental part. Buyers should expect to pay them and sellers should demand them.
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