It may have taken an extremely seller-favored market, but the average deposit on a residential transaction is higher than at any time in my observation. Listing agents are not so timid now that there are numerous buyers waiting at the door, each clamoring to present a “best” offer. This phenomenon does not answer for me these two questions: (1) is it enough, and (2) does the Seller really understand deposits and liquidated damages?
I recently represented Sellers in litigation where the Buyers chose not to follow through with their purchase (yes, there was a written agreement of sale) because they found a property they liked better across the street from my clients! What was unusual in my experience was that these Buyers had made a substantial deposit, $25,000.00, and the agreement made clear it was not refundable under any circumstance should the Buyers fail to close!
Good as this was, it wasn’t good enough.
Here let me insert a word of caution about making a deposit nonrefundable. Certainly, a deposit should be refundable if the Seller breaches, so we really don’t mean nonrefundable. As there is no standard clause regarding non refundability of a deposit, I urge you all to have legal counsel involved in drafting such a provision. But back to our story.
In addition to the deposit being nonrefundable, there was a checkmark box making that deposit the sole measure of damages available to Seller. Because the deposit was substantial, Seller was not particularly worried about the limitation and, unfortunately, the listing agent didn’t go into any depth in discussing the efficacy of allowing the checkmark.
When the Buyer decided not to follow through with the purchase, the Seller was disappointed but at least felt there was an available pool of funds to make things right. Unfortunately, even in this market, the offers that eventually came in were all substantially below what the breach in Buyer had offered. In fact, the best offer and the one accepted by Seller, was $75,000 less! Now that $25,000 deposit didn’t seem so good.
Whether a deposit is sufficient and whether damages should be capped at the amount of that deposit are decisions for our Sellers. The average Seller is not prepared to fully understand the pros and cons because the average Seller has very little experience. For the Seller to make a wise decision, we who counsel these Sellers need to make sure they are thoroughly familiar with possible consequences of their decision. Demanding the high deposit may turn away buyers; accepting a low deposit as a limited remedy may leave Sellers unprotected from Buyers who walk away without a cause.
A Seller who learns of the shortcomings of their deposit after a breach are more likely to turn their gaze to you, the listing salesperson. Will they claim they were not properly advised? They won’t if they remember how thoroughly you went over the subject and how you cautioned them.