All negotiations are based upon leverage, and the good faith deposit used by homebuyers can establish whether or not home sellers are concerned about the strength of these buyers.
And this concern works in two different ways. The seller might be concerned about losing a strong buyer (thus the buyer has gained leverage), or the seller might think the buyer is not viable (thus the buyer has lost leverage).
Therefore, a smart homebuyer who wants to get the best deal possible will discuss the use and size of the good faith deposit with the real estate buyers agent before making an offer.
The Reason For A Good Faith Deposit
When a buyer is interested in making an offer on a house, he shows that he is serious by including a good faith deposit with the offer.
This good faith deposit goes into an escrow account (trust account) at the real estate company or law firm doing the closing, and its release requires both the buyer and the seller's permission. In essence, this "binder deposit" becomes co-owned by both parties.
The contract is thus bound by this money, so the commitment level of the buyer can be measured with the amount of the binder deposit in the escrow account.
Determining The Amount Of The Good Faith Deposit
For the buyer, the larger the good faith deposit, the stronger the offer. A prudent home seller might accept a lower offer from a buyer who looks very strong.
But this also means the homebuyer now has signification motivation to stay committed to the purchase, so the buyer has to be sure he wants the home.
This is another reason why I strongly urge people who want to buy a home to follow a smarter process. Imagine getting excited about a home, chunking down a huge good faith deposit, and then a few weeks later finding out that you cannot buy the home for an unrelated reason. It is this fear which makes buyers want to use a small binder deposit, and ultimately makes them look weaker to the seller.
The "right amount" for a good faith deposit also depends on the situation. These are some of the questions that I consider before recommending an amount for the binder deposit:
- Is it a seller's market or a buyer's market?
- How well is the home priced?
- How long has the home been on the market?
- Is it a short sale or foreclosure
- What is the likelihood of the seller receiving competing offers?
- How strong is the seller's real estate agent?
Finally, you should look at the down payment specified in the real estate sales contract.
When you are buying a home, the seller is going to want to know that you have the ability to cover the down payment (and qualify for the loan), so a binder deposit should be a hefty portion of the down payment required. Nothing says "weak offer" more than somebody who wants to come up with the good faith deposit at a later date.
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So buyers, be prepared to commit to the home that you want to buy when you make an offer, and use the good faith deposit to gain leverage in the sale.
Joe Manausa, MBA is a 26 year veteran of real estate brokerage in Tallahassee, Florida and has owned and managed his own company since 1992. He is a daily blogger with content that focuses on real estate analytics and providing his clients with a tactical advantage in today's challenging market.