The convention in New York City and many other housing markets is for buyers to offer to put into escrow a 10 percent deposit when they go to contract to purchase a property.
That deposit, which is called a binder or earnest money in some areas, are funds that buyers put at risk. It is meant to ensure that the buyer ultimately conforms to the terms of the sale contract and then closes on the transaction.
If buyers default, they don’t get the deposit back. That is obviously a significant penalty. It doesn’t matter whether a buyer loses his or her job, suffers a grave illness or makes a disastrous bet on the stock market. No close, then no return of the deposit. Typical contract language reads as follow:
“In the event of a default or misrepresentation by Purchaser, Seller’s sole and exclusive remedies shall be to cancel this Contract, retain the Contract Deposit as liquidated damages and, if applicable, Seller may enforce the indemnity as to brokerage commission or sue.”
Therein lies the power of the deposit to make or break a purchase offer in a competitive situation. Although most offers hinge on price foremost and then terms such as whether a mortgage must be obtained, I rarely have seen that the amount of the deposit is used for additional leverage.
But think: If you are the seller of a $500,000 co-op or condo and have received two similar offers that different in one respect – one with a $50,000 deposit and one with $100,000 deposit – which would you prefer?
Of course, you’d take the one with the bigger deposit. It is the offer with which the buyer has the most to lose and, therefore, the greatest motivation to proceed to the closing.
If you are a buyer in what some call a bidding “war,” the strategy of offering a big deposit can be the single most effective arrow in your quiver.
Licensed Associate Real Estate Broker
Senior Vice President
Charles Rutenberg Realty
127 E. 56th Street
New York, NY 10022