Why 5 Days?
Years ago the Pennsylvania Association of Realtors® adopted the practice of inserting default timelines in its standard forms. All of these defaults can be overridden, but mostly they become standards.
By default, a buyer has 5 days after execution of a standard agreement to tender a deposit. At one time, from the advent of standard forms to nearly present day, the standard was to tender the deposit with the offer. Those were the days when offers were hand delivered to listing agents and so it was easy to paperclip a deposit check to the front of the proposed agreement. On-line execution and delivery of agreements makes that impractical. There are some runarounds that accommodate same day delivery of a deposit that involve software provided by third parties and banks.
My favorite means of accommodating day 1 funding of deposits is to have the buyer broker hold the deposit in his/her escrow account (an escrow account is an escrow account whether held by a buyer or seller broker). A buyer agent will have met the buyer on multiple occasions before that offer is submitted. Why not get a deposit check on one of those occasions and place it in the buyer broker’s account so that when the buyer makes an offer, it will indicate that the deposit will be tendered zero days from seller’s acceptance. Buyer agent can provide proof of funding when the offer is submitted. As good as this idea seems to me, I know that it hasn’t caught on, but I am hopeful.
So what’s wrong with getting a deposit 5 days after the contract is executed? Usually, nothing; however, as a repository of horror stories and lawsuits, I have heard plenty. Take, for example, the buyer who is required to tender an $11,000 deposit within 5 days of the agreement’s execution, who did so then called the agent and told her to hold the check. Whether holding the check is a violation of a rule and regulation of the Real Estate Commission is a question I’ll pass on for this article. It wouldn’t have made any difference if buyer agent had delivered it to the listing agent anyway as the buyer stopped payment on the check.
The seller’s question, of course, was whether he had any recourse against the buyer. Stated another way, will the seller get any money from the defaulting buyer? To answer this question, one must turn to the deposits paragraph of the agreement and see whether the deposit was a liquidated damage or whether the seller retained all legal avenues to recover damages.
As with most agreements I see, the parties had agreed that the buyer’s deposit would serve as a liquidated damage. Actually, the agreement provides that “all sums paid” on account of the purchase price will serve as a liquidated damage and since no sums were paid the seller will recover zip. Now there may be one or two of you who are thinking that since the buyer tendered a deposit check, he “paid” his deposit and therefore owes the amount of that check. Clever, yes, but I’m not buying it!
Clearly, clearly, clearly it is best to have a deposit in hand when accepting an offer. So listing agents, consider this: negotiate the agreement but do not have seller execute until the deposit is in the listing broker’s hands. In other words, “seller will sign the offer when we have the deposit check.” I once urged PAR’s Standard Forms Committee to amend the liquidated damage clause to keep all avenues of recourse open until receipt of the deposit, after which that amount would serve as the liquidated damages. That’s a little complex and was not my first suggestion to be nixed!
I know there are readers who do not worry about deposits promised 5 days after an agreement has been accepted. After all, this is fairly common and is seldom a problem. I can only respond by noting how often I have had this come up. Regardless of your practice, let your sellers know the disadvantages of having a waiting period before the deposit is received.