What actually happens to the deposit??

[psubr]

I'm currently negotiating a deal and one of the bargining "chips" is the amount of deposit.

I don't like to make a deposit as my understanding was that the money just sat in a trust acount earning interest for the agency until the deal settled. At which point the agents fees were deducted and the rest, if any, was paid to the vendor.

Now, the agent I'm working thru currently has told me pretty much what I've mentioned above, except that the funds are divied up once the contract goes unconditional.

The difference between the two potentially has a large impact upon my negotiations. I want to be able to solve the vendors problems (to my advantage). So if I don't pay a deposit then the vendor has to find $10k once the contract goes unconditional. Now this could be a real issue for them so it's something I could work on.

Perhaps each agency operates in their own way.

If there's anyone out there who knows how this part of the process works then I'd really appreciate some feedback. This of course could be helpful for everyone who reads this thread.

Thanks in advance.

[CJ]

Other option is to have it held in your solicitors trust account.

As far as interest goes, I believe the interest goes to the person who owns the money. Ie the puchaser before settlement and the venfor after.

The agent likes to have it in there account so they dont have to chase for fees, ust release the net amount. they shouldn't mind too much if in your solicitors. If this seems to be a sticking point for the agent (not the vendor) make you depost just enough to pay their commission if they dont like a small goodfaith deposit of say $1,000.

[zensei]

Correct me if I'm wrong, but from what I understand, by law, monies held in a trust account will not earn interest. That's what my mortgage broker told me as well.

Andre

[captaincrab]

After you go unconditional your deposit belongs to the Vendor. 10 days after that the Agent can apply to the vendor to "release" their commission. Some do some dont.Trust accounts certainly earn interest.And if it is in your S&P, you get the benefit of that interest. They are required by law to have the account audited every year. The above is the usual way of doing things but if you negotiate any variation on this is possible. I have seen law firms in the South Island release Deposits to Developers to use as funding for their Project!! Now thats a no no.In Queenstown during the boom , it was common for the interest to be paid to the developer. Since the market has changed I dont think they get away with that now.

[Heg]

Hi All,
Deposit is a security for the vendor. Agents commissions are paid out from the deposit, but only after the contract has gone unconditional.
The deposit MUST be held for 10 days before it is allowed to be released to the vendor. What usually happens is that the deposit stays in a trust account (held by the lawyer or real estate company -and to my knowledge non interest bearing) until settlement. A vendor can ask for early release of the deposit, but this does not happen very often.
Most agents will try to get a deposit 'on acceptance of this offer' but as an investor you are far better to pay a deposit when the contract is unconditional.
Very rarely will a vendor be happy with NO deposit until settlement as it leaves them no security if the buyer walks away from the deal.
Cheers

[fudosan]

Thanks Heg for this insider info that I did not know. It's always good to hear from investors who are also RE agents.

[roseneath_rat]

Psubr unless your finances strongly dictate otherwise I would recommend making a deposit, even if its under 5% of purchase price (eg- $5k, 10k) as it keeps the vendors, agents & solicitors happy.


Especially if your vendor is in distress (and thus buying at a discount) forcing the vendor to come up with cash could work against you.

If you intend on purchasing a decent chunk of property you probably don't want to burn your bridges in those areas as it may bite you in the future.

[psubr]

Thanks all. I was wanting to know who was directly affected by the (non)payment of deposit so I could structure my negotiations accordingly.

For those that are interested, should the vendor accept my offer I will be keen to pass it on for a small fee. (Upper Hutt, 3bdr, gge, est val $240-$250, purchase <$225, rent $250pw). I'll post more details in the commercial seection if I can secure the contract.

[fudosan]

Hi psubr,

purchase <$225, rent $250pw)

What makes this property attractive to someone you can onsell to? The yield appears quite low at 5.7%? Am I missing something? What other twists to the property can you find?

[xris]

An interesting subject, with some of the usual half truths and guesses. Heg is correct in all respects.

A small addition to her comments are as follows:

An agent will want a deposit on acceptance as security for the vendor - his client - and also because it is stipulated in the S&P Agreement as the preferred time to pay it. By not trying to obtain a deposit on acceptance the agent may be open to accusations of not doing his job properly.

In psubr's case, his willingness to offer a deposit large enough to help out the vendor is laudable and a quite obviously way of strengthening his offer. About exactly how much to offer, that is very simple: ask the agent, or if need be ask the agent for a written counter-offer on the deposit from the vendor.

[Tucker]

The deposit is paid into the real estate agents trust account. This trust account by law can not earn interest. Every cent in this account has to be accounted for and it is audited quite often, if interest was earnt it would be too difficult to account for every cent.
What you can do is just pay a deposit that would cover the agents fees as this make them very happy. This is all the agent is worried about as it means come unconditional day they can pay themselves in full.

[captaincrab]

The deposit will eventually end up in the vendor soliciotsr Trust account. Trust accounts do earn interest. I've had a deposit in a Trust account since 8/03 and it has been earning interest quite nicely. The accounts are easy to reconcile.

[Tucker]

Yes but REAL ESTATE AGENT TRUST ACCOUNTS DO NOT EARN INTEREST BY LAW. Solicitor trust accounts do but the deposit sits in the agents account until unconditional date. Only pay a deposit that will cover the agents fees or less. You do not have to pay a deposit at all but you can decide what amount you want to pay. Agents are only concerned about getting their fee.