Real estate negotiations can be intense, especially in today’s market, which highly favors property sellers. There are so many buyers competing for very little inventory. This means that sometimes a buyer will need to do something a little unconventional to make their offer stand out. Many buyers have dropped contingencies like the inspection or appraisal, which are written to protect the buyer since they allow them to walk away if the home doesn’t pass the inspection or appraisal. Waiving these contingencies puts your deposit on the line because you cannot use those protections if you later decide not to buy the property. But what if you just decided to make your deposit non-refundable? Would this make your offer more competitive and entice the seller to work with you over all of the other offers they received? Possibly. This is a significant risk, and there is much to be considered before offering this, but can a non-refundable deposit be a smart move when purchasing real estate?

What is the Point of a Deposit?

You may have heard the deposit referred to as earnest money or the good faith deposit. What it is, is just a deposit showing that you are entering into an agreement with the intention of fulfilling all terms of the contract. The amount you put down for the deposit is negotiable and will be determined as part of your initial purchase agreement, which buyers and sellers may haggle. Typically, the deposit on a residential resale transaction is approximately 1-2% of the total sales price, which is due upon the agreement being accepted and signed by all parties. The deposit is not an additional fee being charged. Your deposit will be applied towards your down payment and/or closing costs when the transaction closes. 

The buyer will deposit the funds which will be held by an escrow company, the neutral third party responsible for transferring ownership from the seller to the buyer. The escrow company acts as a referee and will interpret the terms of the contract should the transaction fall apart. For example, as the buyer during the inspection period, you discover that the property is in the direct flight path of a nearby airport, and you do not want to continue with the transaction because the noise bothers you. You would inform the escrow company and all other parties to the transaction in writing that you wish to cancel the transaction. The seller objects to this, claiming that you should have been aware of the airport at the time of making the offer. The escrow company would have to decide based on the way the contract was written who gets the deposit in the cancellation. In this case, they would return the deposit to the buyer since they are allowed to back out for any reasonable reason during the inspection period. 

This leaves the seller with nothing but wasted time and the need to start their home sale process from scratch. 

Is it Worth the Risk?

When a buyer and seller agree to the deposit being non-refundable, it becomes just that; non-refundable. The seller will have the right to keep the deposit should any terms of the contract be breached, even if they are the fault of the seller, causing the transaction to be canceled. 

As a buyer, is it really worth risking thousands of dollars? Here are some things to consider:

• If you are putting down a non-refundable deposit, you need to be 100% sure you have the cash or can get financing. Usually, if a loan is denied, the buyer will have the deposit returned to them. Still, if you agree to make the deposit non-refundable, that would not be the case. Since obtaining financing can be a challenge depending on your financial situation, it is a considerable risk to agree to a non-refundable deposit. 

• Unfortunately, especially in the wholesale real estate investment industry, there are horrible, dishonest human beings who will take advantage of a non-refundable deposit. Try to always place a very specific condition as to when the money goes hard, so there are possible “outs”. For instance, the transaction falls through due to the actions of the seller. 
• The real estate market is moving quickly right now. Suppose you are purchasing the property as an investor. In that case, you may not be able to run all your numbers prior to making an offer to ensure it is a good buy. You will need time to look at the repairs required and how much they will cost, along with how much money properties in the area are renting for. There are also areas where rentals have very specific regulations that will need to be followed, and you may not find that out until you are handed a copy of the CC&Rs during the escrow period. If you found that the numbers or the regulations don’t make sense from an investment standpoint and you decide to walk away from the property, you would lose your deposit.

Even though we are only talking about 1-2% of the purchase price, that can still end up being a lot of money to throw away on a property you really don’t know much about. Of course, you want to have your offer accepted, but is it really worth it to put thousands of dollars on the line?

Other Options to Consider

Instead of putting your deposit on the line from the get-go and essentially locking yourself into the purchase of a property, you may be able to make the offer a little more of a win-win.

• Offer a large earnest money deposit amount. Instead of the typical 1-2%, why not offer 5%? That money will go toward your closing costs anyway. As long as you do not breach your contract and are careful to follow all the timelines for submitting requests and documents, that money will be returned to you in the event the transaction is canceled. Showing the seller that you are willing to risk a larger amount of money may make them more apt to work with you since it shows you are serious in your intention to purchase their home.
• Make the deposit non-refundable but with some conditions. You could offer to make the deposit non-refundable after the inspection period, for example. That way, you still have time to do any research and inspections you need to do before feeling completely comfortable with going through with the purchase. This also will help appease the seller that you will not back out on day 28 of a 30-day escrow due to something beyond their control. This seems to be more of a “win-win” way to negotiate.

Final Thoughts

While offering to make your deposit non-refundable is a great way to stand out from other offers, it poses a lot of financial risk on the part of the buyer. If you choose to go this route, make sure there is some sort of verbiage which makes it clear that should the seller fail to perform, the deposit will be refunded to you, the buyer. Truthfully, if a seller has a problem with that, they may not be the best person to get into a contract with.

As always, we are here to help you through your real estate journey. Give us a call or contact us through our website.