Structure the Good Faith Deposit Cautiously

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Let’s assume that you are a Buyer submitting an Offer on a million dollar property. The expectation is that you will come up with a good faith deposit in the amount of $50,000.00 representing 5% of the purchase price.

But, is that entirely fair?

If the deal falls through, the Seller gets $50,000.00 minimum without any proof that they lost any money at all.

Sure, if they lose $50,000.00, they should get $50,000.00, we all know that, but what if they actually sell for more money, should they still get to keep the entire $50,000.00? Shouldn’t they have to prove something?

Alternate Approach

Let’s structure the deal somewhat differently. If the whole $50,000.00 is a “deposit”, then “it’s gone”, that’s the law.

So, let’s call it something else!

We are going to call it “part payment of the purchase price”, and this amount will still be held in trust.

The Buyer will still come up with a “good faith” amount of $50,000.00 to be held by the Listing Brokerage in trust pending completion of the sale, but this time, there will be two parts:

  1. Deposit,
  2. Part payment of the Purchase Price.

Defaulted Transaction

Let’s assume that we structure the transaction as proposed:

  1. Deposit, $20,000.00,
  2. Part payment of the Purchase Price, $30,000.00.

The default occurs. It’s the Buyer’s fault, but this time the Seller actually sells at a profit of an additional $100,000.00.

In this case, the Seller keeps $20,000.00 for his trouble and also has the additional $100,000.00 from the second deal.

The Buyer gets back $30,000.00.

If the Seller could actually prove that he lost $60,000.00, then he would get:

  • the deposit,
  • the part payment, and
  • a Judgment for an additional $10,000.00.

The only thing we are actually changing is the automatic forfeiture provision. $20,000.00 is automatic and any losses above that need to be proven.

This might be a better way to do business. Remember that, in our example, the Buyer parted with the sum of $50,000.00 “in good faith” and placed the entire $50,000.00 at risk, but only $20,000.00 was subject to automatic forfeiture. Above that, the Seller had to demonstrate that he actually lost money.

Worth considering?

Brian Madigan LL.B., Broker

www.OntarioRealEstateSource.com

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