Paying the deposit

As well understood as a deposit is, it’s not uncommon for deposit payments to be a cause of confusion, (and sometimes concern).

As with any significant commercial transaction, any executed contract must be accompanied by a consideration. A consideration is merely a part payment, (usually a small portion of the desired deposit payment). In previous decades it was common for buyers to have chequebooks on hand, and a consideration was often stapled to a signed contract when submitted in person to an agent or their agency.

These days, personal cheques are far less common.

While personal cheques are widely accepted, buyers can opt for EFT transfers, bank cheques, direct payments via a portal, (such as DEFT) and also deposit bonds. The latter are less preferred by agencies, and not for two reasons; they are less understood, and the vendor, (and their agent) cannot access the deposit funds before settlement with a Section 27 early release of deposit. However, a deposit bond, (also known as a deposit guarantee) is credit assessed and essentially an underwritten guarantee from an insurer that the purchaser has access to the funds for settlement.

Agents are often asked by purchasers for contract flexibility on the payment of a 10% deposit. Some buyers may request a longer period of time to pay the full deposit. Some may require a smaller deposit amount, while others could request payment via different sources, for example; two separate payments from differing accounts. There are many reasons why purchasers request flexible payment terms, and in most cases we’ve been involved with, a mutually agreeable arrangement results. Occasionally, a vendor (or their agent and/or solicitor) may be rigid on a full ten per cent payment on the fall of the hammer; particularly if a legal requirement for such an arrangement exists. A mortgagee sale is one example of a strict set of deposit payment conditions.

In the case of an auction, there are only two methods that a purchaser could employ to meet such a requirement.

They could either carry a personal cheque to be filled out immediately following the auction, or they would require access to the funds for immediate electronic transfer. In situations like this, it is imperative that purchasers are not restricted by any maximum transfer limits, (imposed by their bank or their account set up).

Some reasons why a purchaser may need to request a smaller deposit than ten per cent include;

• A loan LVR (loan to value ratio) of greater than 85%. This often impacts first home buyers who are borrowing a higher amount due to their savings balance being less than 10% of the purchase price. Pending their personal situation and any eligibility to reduced stamp duty, they may have to allocate a stamp duty payment out of their savings also.
• The purchaser may be securitising the loan with another property. If the vendor agrees to a reduced deposit, it saves the purchaser the task of accessing equity separately for a deposit payment.
• The purchaser may have the money coming to them at a later date, (whether it be a gift, an inheritance, an equity release or a payment owed to them).
• The purchaser’s funds may be locked up in a term deposit, superfund etc. and available only at settlement.

One of the interesting concepts that many don’t fully understand relates to deposits in trust accounts. Even when the purchase is not unconditional, (ie. the purchaser has a clause that needs to be fulfilled before the contract is deemed unconditional), they are still required to pay a deposit. An example of this is a finance clause. If the purchaser’s finance approval has been delayed and their condition date approaches, they have the option to request an extension to their condition. The vendor may grant the extension, but unless the deposit payment date is also agreed to be extended, the purchaser will be required to pay their deposit.

The deposit funds then remain in the trust account.

In the event that a sale does not proceed and the purchaser brings the contract to an end via the legal channels, the deposit payment is refunded in full to the purchaser.

However, things can get stressful when a deposit payment is due and the payment is late.

The failure to pay the deposit by the date specified in the contract constitutes a default.  

This can be addressed by the vendors legal representative issuing either a default or rescission notice.  The effect of a default notice is to notify the purchaser of a default. While most defaults of this nature in real estate transactions can be rectified with some stern reminders, some result in a far more serious outcome. If the default is not remedied, the vendor may issue a rescission notice.

Once a rescission notice has been issued, should the default not be remedied within the prescribed timeframe, (usually 14 days) the contract is deemed at an end.

In the event that a rescission notice is served, this doesn’t limit the purchaser to merely a cooling off penalty. They could be liable for any damages caused by the failure to pay the deposit in time also.

It is critical for buyers to be prepared with their finance and upfront with their agent and legal representative at the commencement of signing a contract.

Pre-approval is only the first step.

Understanding where, when and how the deposit funds will be available for payment is essential.

Sources Wikipedia, Deposit Power, Docusign, Investopedia, Unsplash