Why is a deposit so necessary to a purchase and sale agreement?
Several times clients that are purchasing real estate have asked, “Do I really need to give a deposit?” The parties say “This is a friendly transaction, is it really necessary to give the seller a deposit when entering into a purchase and sale agreement? There are actually several good reasons for requiring a deposit with a purchase and sale agreement.
A Purchase and Sale Agreement is a contract for the sale of land. In order to have a valid contract the law requires that there be an offer made, an acceptance and consideration for the contract. In a real estate transaction, the offer is made by the Buyer when wanting to purchase the property at a set price. Acceptance occurs when the Seller accepts the Buyer’s offer by agreeing to sell the property at the set price. The consideration of the contract then comes from both parties. The Seller’s consideration is the agreement to not sell the property to someone else during the term of the purchase and sale agreement. The consideration from the Buyer is the deposit.
Without a deposit being made, the Buyer has not completed their portion of the real estate contract, and thereby creates a defective or faulty contract. As the contract is considered faulty or defective then provisions in the contract are no longer binding on the Seller. For the Buyer, this can affect the standard residential real estate inspections clauses. The Buyer may have the inspections done; find an issue and then approach the Seller for repairs or a reduction in the sales price. The Seller may not want to repair the issues found by the inspection or take a reduced purchase price. Given that the consideration was not complete making the contract is defective, the Buyer will have no recourse to get the repairs done by the Seller. The Seller may still be willing to sell the property but he is not going to reduce his contract price to remedy the damages uncovered by an inspection. If the Buyer has her heart set on this property, then she may have to buy the property without the benefit of the Seller pitching in to resolve the inspection issues.
Other important questions would be: if there is no binding contract then does the Seller have to correct any title defect? Or can the Seller accept an offer from another Buyer who is willing to pay a higher price? It is best to pay a portion of the purchase price up front to have the peace of mind that a property you wish to purchase will be under contract and that all the contingencies and conditions provided by a valid purchase and sale agreement will be available to you.