In this briefing, we go over the purpose of a real estate deposit and its important role in a real estate transaction.

The Purpose of a Deposit

A deposit is a financial payment made by the Purchaser to the Vendor as consideration for entering into an Agreement of Purchase and Sale.

Under common law, the deposit is a good faith guarantee by the Purchaser to the Vendor that the Purchaser intends on satisfying its obligations under the Purchase Agreement, and acts as security that the contract will be performed by the Buyer. On closing, the deposit is credited towards purchase price payable by the Buyer. 

How much should you pay as a deposit

Generally, the amount of the deposit is the subject of negotiation between the parties. Vendors want to have as much money paid up front as a deposit. Purchasers obviously want as little amount paid as a deposit as possible.

The Deposit Section in the Ontario Real Estate Association Agreement of Purchase and Sale Form 100.

When is the Deposit Paid?

The Purchaser usually pays the deposit within 24 hours of the offer to purchase property has been accepted as provided for in the OREA Agreement of Purchase and Sale.  However, parties can negotiate an extension to this period.

Who is the Deposit Paid to?

Generally, deposits are paid to lawyers or real estate agents with the expectation that these amounts will be held in trust.

Where the property being bought is a new property yet to be constructed, these deposits are paid to the person building the Property.

How is the Deposit Paid?

The Purchaser usually pays the deposit to the Seller’s real estate agent via cheque, money order or on the rare occasion wire transfer.

What happens to the Deposit if the transaction does not close?

If the transaction does not close, the real estate agent generally holds on to the Deposit until either

  • both parties agree on who the real estate agents should pay the deposit to or
  • the real estate agent receives a court order directing who is entitled to the deposit.

If the Purchaser is the party responsible for the failure of the transaction to close, the Vendor is generally entitled to the deposit. However there are circumstances where a court may order the return of the deposit to the Purchaser – such as when the Vendor was also not ready to close the transaction on the day of closing.