We asked a couple of property experts why deposits are so important and what the implications could be if a buyer doesn't put his money where his mouth is.
Why you should insist on a deposit when selling your house
Picture the scenario: You've put your home on the market and managed to secure a buyer in a very short time. And perhaps, best of all, the purchaser has the necessary funds so there's no risk of the sale falling through because finance can’t be raised or an existing property needs to be sold.
The sale is in the bag and because it's a cash deal, the buyer doesn't have to put down a deposit. Right? Actually no, it's always advisable for a seller to insist that the buyer puts down some sort of deposit even if he is able to furnish proof that there is enough money in an account to fully cover the purchase price.
Myles Wakefield, CEO Wakefields Real Estate notes that a signed sales agreement, no matter whether cash or conditional, is a wholly legal and binding document, which, if breached can be enforced and/or sued upon in a court of law. This is particularly so if the seller can prove he’s incurred damages such as a decrease in the price on resale, loss of tenant’s rent, and so on when the buyer defaults.
“But that’s in a perfect world, and none of us live there,” he says. “Yes, it’s a legal, binding document, but does the court time, process and potential cost make it worthwhile pursuing?
Different stages of security in a sales agreement
“In any sales agreement, there are different stages of security along the way for the seller, and with a cash sale, a deposit is undoubtedly one which shows serious, committed intent. Often a buyer has very solid financial reasons why payment can only be made in a month’s time, but even if he can prove unequivocally that he has those funds in the bank or they’re en route there, that is unfortunately no real guarantee that this money will be paid over to the seller.”
Arnold Maritz, Southern Suburbs Co-Principal for Lew Geffen Sotheby’s International Realty agrees, noting that although proof of money in a bank account can be an indication to the seller that the purchaser can afford the property, this doesn't afford the seller any form of guarantee.
“The ‘proof’ could be fraudulent, or the funds could be intended for a different purpose, or may not still be available at the time of transfer,” he says. “The old adage that possession is nine tenths of the law still applies, and while the purchaser possesses the funds, the seller is not assured that the sale will proceed.”
So why is it always advisable to secure some form of deposit?
Elana Hopkins, a specialist conveyancing attorney with Dykes Van Heerden says: “In my experience very few cash sales or even bond transactions fall flat after a deposit has been paid. People who are not committed to a sale will not part with money, no matter how small the sum.
“Always remember that “cash is cash”. A deposit has to be paid into the trust account of the transferring attorney or the estate agent to be a deposit, as defined in a regular deed of sale. As such, the funds need to be ready for payment and not wound up in an investment or shares to be liquidated. A deposit should preferably be paid on acceptance by the seller or within no more than seven days, otherwise it defies the object of having a deposit.”
What steps should sellers take to ensure that the sale of their property is secure and viable?
Ian Olivier, Pam Golding Properties Area Principal in Port Elizabeth says there are three things that are critical to ensuring the lowest possible risk to a seller, regardless of whether it's a cash deal or if finance is being raised in the form of a bond.
“Obtain a deposit of at least 10 percent - more if possible - to ensure that the buyer/buying entity (CC, Limited liability or trust) is financially secure. In other words, that there are sound financial sources, and proof of funds available to purchase the property. Also, ensure that the contract provides for guarantees to be furnished by a certain date – this is usually 14 to 21 days from the time the seller's attorneys request them.
It's also advisable to include in the contract that the buyer's guarantees are transferable to the seller as his guarantees for his next purchase.”
He adds that sellers should make part, if not all, of the deposit non-refundable, so that the buyer has something to lose. The seller can then sue for damages if the purchaser doesn’t deliver. And, regardless of the circumstances, there must always be a sales contract that is binding and enforceable.