Real Estate Transactions Facts About Good Faith Deposits
In a real estate transaction, a touchy issue is how much trust the seller has in a buyer. The existence of a good faith deposit helps put a seller at rest.
What is a Good Faith Deposit?
A good faith deposit is what you should always require a buyer to make if you are selling your home, condominium, or other real estate. The good faith deposit has, to some extent, the financial capacity to follow through on the purchase and it simply establishes that the buyer is serious.
The amount of the good faith deposit is dependent upon the agreed sale price of the real estate. Although percentages vary from state to state, a cash deposit equal to three percent of the sales price is typical. For example, there will be a $9,000 if you sold a home at a price of $300,000. Just like with most transactions, you can negotiate this percentage. It is not recommended that you accept anything less than two percent.
Once the buyer and seller agree to the amount of the good faith deposit, you have to figure out what to do with the deposit. The seller should not hold the deposit because this can cause the buyer to be very uncomfortable. What you can do instead is deposit the money with a third party and hold it “in trust.” Escrow and title insurance companies as well as an attorney if such an involvement in required in your state are what you can consider as potential third parties.
A good faith deposit acts like an insurance option for a seller. Moving through escrow can take at least 30-60 days and during this time, the property is off the market. Essentially compensating the seller for this time in the event that the buyer is unable to follow through on the purchase of the property is the good faith deposit.
A buyer who can’t close will lose the deposit but this will depend on the laws in your state. Typically, the only exception to this is when the seller allows language indicating the deposit will be returned if the buyer can’t get a home loan. Of course, when bad credit buyers repeatedly fail to get funding, then including such language can open the seller up to repeated frustration.
Good faith deposits are a fundamental part of a real estate transaction. The buyers are expected to pay them while the sellers should demand them.
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