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Who Holds a Deposit Matters!

Apr 27, 2022 | Real Estate

Deposit

Often in our real estate practice, we represent the Sellers in a transaction. Specifically, there are some Buyers that insist on having either their attorney or their agent hold the deposit, as opposed to what is usually the norm. A commonplace practice is to have the Seller’s attorney hold the deposit, ensuring the good faith compliance of the Buyer. Many people do not believe that this makes a difference. However, it does.

If someone goes to buy a car, to reserve and hold the car pending the final transaction, one typically leaves a deposit with the dealership. Why should real estate be any different?

The contract is formed when the Buyer makes an offer, and the Seller accepts same. However, what people do not realize is that a contract could only be effective if there is some form of consideration given by the Buyer. That consideration must be the tendering of some form of currency in furtherance of the contract while the transaction is pending until closing. That money is then submitted as a deposit, and it needs to be held by an agent for the Seller. Disturbing this dynamic renders the contract technically void. Assuming that there are stipulations in the attorney review that still allow the contract to be valid despite this disturbance, the need for a more practical analysis of this issue is required.

First, by tendering a deposit to be held by the Seller’s attorney, the Buyer instantly feels that they are committed to the transaction and that their obligations as set forth in the contract of sale must be administered in good faith. Typically, when we have seen a Buyer that is hesitant to have a deposit held by us as the Seller’s attorney, the Buyer is not fully committed to the transaction. This is problematic because – even if the Buyer’s attorney or agent have ethical obligations to properly not return the deposit to the Buyer if there is a breach of contract – psychologically, it signals to the Seller that the Buyer may later try to find any way out of the contract since they were never fully committed in the first place. While it is true that a Buyer’s attorney or agent holding a deposit in such an instance could not legitimately give back the deposit if the Buyer is held in breach of contract (unless, of course, they want to be sued later on), the insistence of a Buyer to not allow the Seller’s attorney to hold the deposit sends a signal that this is not a strong buyer who is committed to the transaction.

Lastly, there are some Buyers who feel intimidated by the process and, as such, like to be extra careful by having the deposit held by either their attorney or their agent. While it is understandable that a first-time homebuyer may feel more comfortable having their agent or their attorney hold the deposit, it is incumbent on their attorney to properly advise them that the typical course and the proper interpretation of contract formation, requires that the Seller’s attorney hold the deposit. They should be told that Seller’s attorney is an officer of the court, and is subject to ethical standards, especially when dealing with their trust account.

Therefore, I hope that anyone reading this article understands that the proper process for contract formation requires that the Seller’s attorney holds the deposit pending closing. The idea of wanting to simply move forward quickly through attorney review and compromise on such a point may seem expedient, but later, it may prove to be a waste of time if one encounters a Buyer who is not fully committed to the transaction.

With the various steps of attorney review considered, it is crucial to have a skilled real estate attorney to guide you through one of the largest transactions of your lifetime. Contact Abdou Law at (732) 540-8840 or (201) 450-9990 for more information on attorney review, the contents of this blog or any of our other services.

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