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Large deposits

Discussion in 'Real Estate' started by Jacque, 17th Aug, 2005.

  1. Jacque

    Jacque Team InvestEd

    Joined:
    16th Jun, 2005
    Posts:
    1,885
    Location:
    Sydney
    No doubt we've all heard that a great negotiating technique is to attach a healthy deposit cheque (10%) to a written offer on a property you'd like to purchase. Several respected property investment gurus and authors alike have suggested this as an effective tool in securing that much wanted property.

    Though I've tried this technique a few times myself (with no success, as my offers were too low) I must admit I hadn't really given it enough thought, until I recently read a few case studies that provide food for thought about doing this. It also emphasizes the essential need for having legal representation before you sign the contract of sale.

    In one case, the buyer made the NSW contract subject to the usual finance and pest/building inspections. Putting a 10% deposit down, he decided the pest problem (though minor) was not to his liking, so he asked for the contract to be terminated. Even though he was aware of the penalty of .25% of the purchase price for pulling out during the cooling off period, he was not prepared for what happened next. The seller objected strongly on the grounds for termination, as he had evidence to demonstrate that expensive maintenance had been carried out on the termite problem over years and so argued that the buyer hadn't acted "in good faith" and subsequently refused to refund the deposit.

    The matter was eventually resolved, with the buyer not wanting to pursue costly legal action, and so he came to an agreement with the seller, forfeiting $10 000 to get back the other $20 000 of his original $30 000 deposit.
    The article goes on to suggest that, had the buyer paid only a token deposit (eg $1000) with the balance due within 3 working days of satisfaction of the pest and building report, then the seller wouldn't have had the financial incentive to apply pressure in the way he did.

    I guess the lesson we can learn from case studies like this are to ensure you have your legal advisor peruse the contract before you sign and also to leave smaller deposits. Of course, there will always be exceptions to this, but on the whole I consider it prudent to be aware of how much to make that initial deposit.
     
  2. Up- Beat

    Up- Beat Member

    Joined:
    18th Aug, 2005
    Posts:
    15
    Hi Jacque,

    Interesting post, you are absolutely right. Leaving a large deposit in this situation led to a disastrous result, especially since he didn't have to.
    Sometimes emotions play a big part in obtaining that special property.



    cheers Up-Beat