One of the biggest questions I hear from buyers when they’re writing an offer is, “What happens to my deposit if the deal doesn’t go ahead?” It’s a good question. A deposit can be a significant amount of money, and buyers want to know when they’re protected and when that money could be at risk.
In Alberta, the answer depends largely on the terms of your purchase contract and, importantly, whether your purchase is still conditional or has become unconditional. Here’s what Calgary home buyers should know about real estate deposits, conditions and when a deposit may be returned.
What is a real estate deposit?
A real estate deposit is money a buyer provides when making an offer on a property. It demonstrates that the buyer is serious about completing the purchase.
Under the standard Alberta Real Estate Association (AREA) Residential Purchase Contract, the deposit forms part of the purchase price. It is not an additional amount on top of the purchase price. The deposit is normally held in trust by the trustee named in the purchase contract until the transaction is completed or the contract provides for the deposit to be returned or paid to the seller.
Is a deposit the same as a down payment?
No, although the two are connected. I have explained the difference in another blog.
Your deposit is part of the money you are putting toward the purchase of the home. If you're getting a mortgage, the deposit you have already paid will generally form part of the funds going toward your down payment at closing.
For example, if you purchase a $500,000 home and provide a $20,000 deposit, that $20,000 is part of the purchase price and typically part of your total downpayment. It isn't another $20,000 added to the price of the home.
When do you get your real estate deposit back?
This is where understanding your conditions becomes important.
Many offers in Alberta are conditional on things such as financing, an inspection or reviewing documents. These conditions give the buyer an opportunity to make sure the purchase works for them before committing to the transaction without those protections.
If a condition isn't satisfied and the contract is properly terminated under that condition, the deposit is generally returned to the buyer under the standard AREA contract. Conditions are deal breakers.
For example, let's say you make an offer that is conditional on financing. If you aren't able to obtain the financing required and the financing condition isn't satisfied, the purchase can generally be terminated according to the terms of the contract and the deposit returned.
The important part is that the condition needs to be handled properly and within the timeframe set out in your contract.
This is one reason I always tell buyers not to treat their condition dates casually.
Can you get your deposit back if you don't like the home inspection?
It depends on the wording of your contract and the inspection condition.
If your offer is conditional on an inspection and you don't want to proceed based on what you discover, the inspection condition may allow you to terminate the purchase and have your deposit returned, provided you follow the terms of the contract.
This is very different from having an inspection after you've already removed all of your conditions.
Your conditions are there for a reason. Before you waive one, make sure you understand exactly what you're giving up.
What happens if you change your mind after removing your conditions?
This is where a buyer's deposit can become much more serious.
Once all of the conditions have been satisfied or waived, you have made a much stronger commitment to complete the purchase.
If a buyer then simply changes their mind and doesn't complete the transaction, the deposit can be paid to the seller under the terms of the standard AREA contract. The seller may also have other remedies available.
That's why I spend time with my buyers making sure they understand their conditions before they remove them.
An unconditional offer isn't the same as an offer that is still subject to financing or an inspection.
Can you lose your deposit if financing falls through?
This depends on when the financing problem happens.
If your purchase is still subject to a financing condition and you aren't able to satisfy that condition within the agreed timeframe, the contract can generally be terminated under the financing condition and the deposit returned, assuming the contract's requirements have been met.
If you've already removed your financing condition and your financing then falls apart, that's a very different situation.
This is why it's important to have a clear conversation with your mortgage professional before removing a financing condition. Pre-approval is helpful, but buyers still need to understand what their lender requires before the financing condition is waived.
Who holds your real estate deposit?
Your deposit is normally held in trust by the trustee identified in the purchase contract.
In many Alberta transactions, a real estate brokerage is named as the trustee. Under the current AREA Residential Purchase Contract, the trustee is required to deposit the money into a trust account within three business days of receiving it.
The deposit isn't simply handed over to the seller when you make your offer. It is held according to the terms of the contract.
How much deposit do you need when buying a home?
There isn't one standard deposit amount that every buyer has to provide in Alberta. The deposit is a negotiated term of the purchase contract, and the amount can depend on the purchase price, the property, the market and the circumstances of the offer.
A larger deposit can demonstrate a stronger financial commitment, but buyers should also consider how much cash they have available.
If you put a significant amount of your available funds into a deposit and your conditional purchase doesn't proceed, it can take some time for those funds to be returned. That may be something to consider if you're also looking at other properties.
What if your deposit is late?
Your purchase contract will specify when your deposit is due. This isn't something I recommend buyers leaving until the last minute.
Under the current AREA Residential Purchase Contract, if the buyer doesn't pay the deposit by the agreed deadline, the seller has the option to void the contract by providing written notice.
Before submitting an offer, make sure you know how you're going to provide the deposit and that the funds will be available when required.
What happens to your deposit if the seller can't complete the deal?
A deposit isn't automatically the seller's money simply because the buyer has paid it.
The standard AREA contract provides circumstances where the deposit is returned to the buyer if the seller fails to perform the contract. The exact circumstances depend on the terms of the agreement.
The most important thing to remember about your deposit
Your deposit is an important part of your offer, but you don't automatically lose it if a purchase doesn't go ahead.
The biggest thing to understand is the difference between a purchase that is still conditional and one where the conditions have been satisfied or waived.
Conditions can give buyers important protection when they are properly written and dealt with within the agreed timelines. Once those conditions are removed, your obligation to complete the purchase becomes much more significant.
So before you make an offer, make sure you understand the deposit, the conditions, the deadlines and what happens if the transaction doesn't proceed.
A good real estate professional should be able to walk you through these things before you sign, so there aren't surprises later.
Buying a home in Calgary?
If you're thinking about buying a home in Calgary and have questions about deposits, conditions or the purchase process, I'm happy to walk you through what to expect before you make an offer.
The more informed you are before you write an offer, the more comfortable you'll feel when it comes time to make one.
This article is intended for general information only and is not legal advice. Real estate contracts can vary, and buyers should obtain appropriate legal or professional advice regarding their specific circumstances.