The Role of Deposits in a Real Estate Contract in Canada

When selling a home in Canada, the deposit plays a crucial role in the transaction. While it may seem like just another formality in the offer process, the deposit serves as a sign of commitment from the buyer and provides the seller with a level of financial security.

Understanding how deposits work and how they can be leveraged in negotiations can help sellers protect their interests and secure a smooth transaction.

What is a Deposit in a Real Estate Transaction?

A deposit is an upfront payment made by the buyer once an offer is accepted on a home. It is typically held in trust by the seller’s brokerage or lawyer until closing. The deposit is then applied toward the total purchase price of the home.

Deposits are not the same as a down payment. While the down payment is the portion of the purchase price that a buyer contributes toward the home (beyond the mortgage amount), the deposit is a good faith payment that shows the buyer is serious about completing the transaction.

Why is a Deposit Important for Sellers?

1. Demonstrates Buyer Commitment
   A significant deposit signals that the buyer is financially prepared and serious about the purchase. Buyers who offer a strong deposit are less likely to walk away from the deal without consequence.
   
   
2. Reduces the Risk of a Failed Transaction
   A strong deposit deters buyers from backing out without valid reasons. If a buyer fails to fulfill their contractual obligations (such as not securing financing or simply changing their mind), the seller may be able to keep the deposit as compensation.
   
   
3. Strengthens the Seller’s Negotiating Position
   When reviewing offers, sellers often look beyond just the purchase price. A higher deposit can make an offer more attractive, especially in competitive markets. If two offers have similar prices, a higher deposit can give a buyer an edge.
   
   
4. Provides Financial Security
   If a buyer defaults on the agreement after the deposit has been paid, the seller may be able to claim the deposit to offset any losses—especially if the home needs to be relisted at a lower price.
   
   

How Much Should the Deposit Be?

While there is no fixed rule in Canada, deposits typically range from 5% to 10% of the purchase price, depending on the market. In highly competitive areas, buyers may offer larger deposits to stand out.

A strong deposit shows financial strength and confidence. Sellers should always weigh the deposit amount as part of the overall offer, alongside price, conditions, and closing date.

Deposit Considerations When Negotiating a Sale

1. Higher Deposits Can Strengthen Offers
   If a seller receives multiple offers, the deposit amount can help determine which offer is more secure. A buyer offering a high deposit with fewer conditions may be more desirable than a higher-priced offer with a smaller deposit and more contingencies.
   
   
2. Ensuring Deposits Are Held in Trust
   Deposits should never be given directly to the seller. They must be held in trust by the listing brokerage or the seller’s lawyer to ensure legal protection for both parties.
   
   
3. Refundable vs. Non-Refundable Deposits
   
   

• If a deal falls through due to a valid condition, such as a failed home inspection or financing not being secured, the deposit is typically refunded.
• If a buyer backs out for no contractual reason, the seller may have legal grounds to retain the deposit.

1. The Timing of the Deposit Matters

• In competitive markets, buyers may provide the deposit with the offer, showing confidence in the deal.
• Standard practice is for the buyer to provide the deposit within 24 hours of offer acceptance.
• Sellers should always confirm that the deposit has been received before considering the home “firmly sold.”

What Happens if a Buyer Defaults?

If a buyer fails to close on the deal, the seller may have the right to retain the deposit as compensation for the inconvenience and potential financial loss. The seller may also be able to take legal action if damages exceed the deposit amount.

Final Thoughts: Protecting Your Interests as a Seller

The deposit in a real estate contract is more than just a formality—it is a powerful tool for securing a serious buyer and protecting against risk. When selling your home, evaluating the deposit amount as part of an offer is just as important as considering the price, conditions, and closing date.

If you’re planning to sell your home and want expert guidance on how to negotiate the best terms, our team at Engel & Völkers One Group is here to help.

Ready to discuss your home sale strategy? Contact us today.