Real Estate: Deposit Protection Basics
Buying a home is an exciting, but sometimes very confusing and stressful, time in our lives. There’s a lot to consider when you are making this type of serious commitment, and just as much to worry about. This is especially true in terms of financing and payments. Not only are there down payments and mortgages to consider, there’s also deposits. Below we’ll introduce you to deposits and share some information on protection programs to give you some peace of mind during this exciting process.
What is a Deposit?
Similar to a down payment, a deposit is a payment that shows the seller that you are committed to purchasing the property and that you are in a financial position to do so. It is money you pay to secure an agreement of purchase and sale. It is applied to the purchase price at the time the deal closes.
The amount of the deposit can vary, as can the timeline for payment, and will depend on your agreement with the seller. Regardless of what you agree to, it should be clearly outlined in the agreement and the terms of your offer.
Deposits and Loss of Sale
Much like a seller requires protection – which can come in the form of a deposit – as a buyer you will also need protection, especially when you have a financial stake in the sale. Although deposits are non-refundable, there are some exceptions in place.
Say you’re in the market for a new-build home and want to move forward with a purchase. The home is still being built, but you have signed an agreement for purchase and sale and have placed a deposit to show your commitment. You are excited, making plans, and eagerly awaiting the completion of your new home, but it never comes. The builder has gone bankrupt and as a result is unable to fulfill their end of the deal. Aside from disappointment, you’ve also just paid a significant deposit that you’re not sure you can get back.
This is just one example of how a sale can fall through leaving you without your new home and uncertainty around whether you will be able to reclaim your deposit, so it’s important to know how to protect yourself in such an event.
As a consumer, your deposit may be protected under the Real Estate Council of Ontario’s (RECO) deposit insurance program through the Tarion Warranty Corporation (Tarion). Tarion protects deposits made when you sign an agreement of purchase of sale for freehold homes, condominium units, and other payments, including upgrades and extras applied to a freehold home or condominium unit. Importantly, payments made prior to signing an agreement of purchase and sale are not covered by Tarion, and neither are payments made to individuals or companies not registered with the RECO. Because of recent changes to deposit protection, there is different coverage depending on the type of real estate, the sale price of the home, and the date the agreement of purchase and sale was signed.
For example, a deposit made on a freehold home that has a sale price of $600,000 where the agreement of purchase and sale was signed on or after 1 January 2018, is protected up to $60,000, but a deposit made on a condominium unit is protected up to $20,000. A more detailed breakdown of deposit protection amounts can be found here: Tarion Warranty Corporation.
Although there are protections in place for deposits, there are requirements surrounding what and how much actually falls under these protections. In order to ensure that you are in a position to receive protection in the event of a dissolution of the sale, consult a lawyer before signing any agreement or making a deposit. You can call or email one of our real estate lawyers for free consultation for any of your residential, commercial real estate legal closing requirements.