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The role of deposits in buying or selling property

If you’re thinking of buying your first home, you’ll notice the word “deposit” comes up a lot during the process. In fact, it’s one of the many things you’ll need to sort out before you can call a property your own. While deposits generally mean having to sort out financing so you can provide the “down payment”, deposits play a much broader role in the residential property conveyancing process than most people think – for both buyers and sellers.

The conveyancing experts at HomeLegal are happy to explain why deposits play an important role as a component of (real estate) contracts. Before you start searching for your dream home, or selling your old home for a new one, learn more about deposits below.

Deposits communicate commitment

First, deposits are known as an “earnest” of the contract, i.e. part of the purchaser’s commitment to the transaction.

Deposits provide the vendor with a measure of assurance that the purchaser will proceed with settlement of the contract. This is because failure to complete settlement puts the buyer at risk of the deposit being forfeited, which happens when they act in compliance with the requirements of the agreement in relation to deposit forfeiture.

Just as relevant to the above, the vendor also becomes liable to real estate agents for commission when the agreement goes unconditional, irrespective of whether the transaction proceeds to settlement and the vendor receives the proceeds of sale.

Deposits are usually 10 per cent of the purchase price, which is generally sufficient to cover the agent’s commission entitlement. If the vendor has to pursue the purchaser for enforcement of the agreement, the deposit provides a fighting fund toward the cost of litigation.

Where the deposit goes

Finally, the deposit is part-payment of the purchase price with a credit for the same being received on settlement. Deposits are often (by agreement) expressed to be payable when it becomes unconditional. As a buyer, you won’t wish to be out of pocket any sooner than you need to be.

While the agreement remains conditional, the real estate agent holds the deposit as stakeholder, i.e. for both parties.

Subject to the terms of the agreement (most commonly the Auckland District Law Society form), once the agreement becomes unconditional, the vendor is then entitled to receive the balance deposit after deducting their agent’s commission (subject to the provisions of Section 123 of the Real Estate Agents Act 2007). This obliges agents to retain deposits in their trust account for a period of 10 working days from the date they receive it.

Agents may pay the deposit out sooner if both parties agree.

Releasing the deposit early

Where a request is made by a vendor for early release of the deposit (often to assist a vendor, or on payment of the deposit on their next purchase) the buyer is under no obligation to agree – but often does.

However, before agreeing to release the deposit, vendors need to bear in mind that circumstances may arise where the deposit becomes refundable, for example if the building burns down prior to settlement.

In this case, the obligation between the agent and the vendor to pay commission is likely to be unaffected. If commission has been taken and the balance deposit paid out to the vendor, the purchaser will be relying upon the vendor’s ability to pay the commission rather than seeking reimbursement from the agent. Legal advice should be taken before agreeing to early release.

HomeLegal – Our expert property conveyancers can help answer all your questions

Residential conveyancing is often more complex than most people anticipate. Here at HomeLegal, we specialise in ensuring our clients are informed every step of the way, whether they’re buying or selling a house.

HomeLegal lawyers are available to meet in our offices at Wellington, Lower Hutt, or Upper Hutt – contact us today at 0508 HOMELEGAL!