Do I have to pay a deposit? Where does it go once it is paid? What happens when the home you are selling goes unconditional and yet doesn’t settle or the vendor pulls out of the deal at the last minute even though the contract is unconditional and a deposit paid.
This nzherald article got me thinking about the public perception of the job of real estate agents and also about the issue of a deposit when purchasing a house.
Where does the agents job that he/she is contracted to perform end and when should they get paid?
Does it end at the time of an unconditional sale?
Or is the agent legally obliged to be involved until the house settles?
The piece of paper governing the agent’s relationship with the seller is known as a listing / agency agreement or authority to market. For those readers who haven’t seen one of these documents, I have scanned an example here. All agencies will have a similar document that will need to be signed by the homeowners at the time of appointment of the agency. No similar piece of paper is signed by the purchaser and the agent unless you as a purchaser contract an agent to find you a house and are willing to pay a finders fee. This happens outside of New Zealand but is still relatively uncommon here. Therefore, the agent has no legal obligation to aid the purchaser, though it can be argued that there is a moral obligation.
The listing agreement sets out among other things, the commission payable and when. As you can see from the example, the agreed commission payable is triggered when the contract for sale and purchase of the homeowners property “becomes unconditional and binding on both parties”.
Reading down further in the Terms and Conditions (section 1a), the signing homeowners authorize the agent “to deduct any fees, commissions and other expenses from the deposit”. This deduction of fees from the deposit is standard industry practice.
Officially on paper, the real estate agency is contracted to market a property for sale. Once a binding and unconditional contract is reached, the contract with the agent ends! Anything further to do with the property and the contract needs to be done through the solicitors acting for each party. If a house doesn’t settle because one of the parties pulls out, then the other party has to sue based on the breach of contract. Though it has nothing to do with the agent at all, he/she would be called in as a witness to the contract and its breach. I have never been involved in such a situation and am glad that it is rare as it would be expensive, stressful and time consuming for all parties concerned.
However, in actuality, the agent continues to work as a go between communicating verbally between the purchaser and vendor up until and even after settlement and possession have taken place. This is seen by agents as goodwill and relationship building even though they aren’t getting paid for this job. Contrary to public opinion, this is not part of an agents legally contracted job! It is worth remembering that agents are engaged to market the property for sale and to secure a binding contract, they are not hired by purchasers to be available for pre-settlement inspections or to physically help the vendors pack up and move out even though the expectation is sometimes there that this is part of their job.
I myself have been involved on numerous settlement days to make sure things go smoothly when one party is moving in on the same day that the previous owners are moving out.
I remember one settlement that was delayed as the moving truck for the previous owners had broken down. My phone was ringing hot late into the evening of settlement with the almost deranged purchasers screaming at me to get the previous owners moved out immediately! There was nothing at all I could do in this situation, but the purchasers (who I have no legal relationship with by the way) expected, nay demanded that I be actively involved in getting the vendors out of the house! The sad thing to me is that even though I made myself available to try and keep both parties from throttling each other, including visiting the house on three occasions on the afternoon of settlement with the last time being at 11pm (!) , the buyers finished the day with ill feeling towards me because the vendors weren’t out of the house when expected.
Is there a standard size expected for the deposit?
Most agencies and solicitors see a 10% deposit as a fair amount. But in recent times with many young people scratching together all the spare cash they can to get their foot on the property ladder, a 5% deposit has become more common. Even then, coming up with $20k on a $400k house purchase can be a bit of a stretch. Real Estate Agency fees usually sit in the 3-4% range so a 5% deposit will usually be enough to cover the real estate commission at the very least and this is why agents want to collect at least this percentage in deposit. There are some solicitors operating in the conveyancing field that tell their clients not to pay any deposit which throws a bit of a spanner in the works on the odd occasion. I always come back to these solicitors and ask them what they would say if they were on the other side of the transaction, working for the home seller. At this point the answer is usually, “Please collect a 10% deposit!”.
Does a Deposit have to be paid?
Yes and no. It is my understanding that you can buy a house in NZ without offering to pay a deposit BUT. Very few sellers (or their solicitors) will sign an offer for sale and purchase without some sort of deposit. If you are buying a house and make this a sticking point, the owners will get suspicious and wonder if you have the ability to buy the house in the first place.
More reading on deposits here.
Lessons I have learned regarding deposits…
As an agent, I am obliged to collect a deposit. I try to make sure the deposit is high enough to cover the commission payable at least. If a buyer won’t pay the deposit amount that was agreed on in the sale and purchase agreement, I need to inform the vendor and/or the vendor’s solicitor as soon as I am aware there is an issue.
As a purchaser, there is little that you can do to protect yourself that I am aware of unless you want to try and pay no deposit at all. I have encountered this only a handful of times and it is usually from buyers who have gone through a get rich quick course or have a solicitor who has told them they don’t need to pay a deposit. In reality, your offer will be looked at with suspicion by a vendor if you put up no deposit and could result in you losing the chance to buy the house if you stick to your guns. Minimize the amount of deposit payable as much as possible. If the agent insists on 10% of the purchase price, tell them you’ll only pay 5%. This is usually enough to cover the commission so he/she will be pacified at this point in most cases. You could talk to your solicitor about notifying the vendors solicitor that you don’t want the deposit released until settlement takes place. I haven’t heard of this from a purchaser personally, but I guess you could always try.
As a vendor, you need to make sure that the deposit is high enough to more than cover the agents commission in case there are issues, but contrary to public opinion, you can’t just help yourself to the deposit if the buyers pull out of an unconditional deal. You have to go through the courts and sue for damages based on the remedies outlined in the sale and purchase agreement you have signed with the other party. Aim for as high a deposit as possible from the purchasers but understand that some well intentioned buyers don’t have the facility to pay a huge wad of cash before settlement.
If you as a vendor are uncomfortable with the deposit being released to pay commissions and other fees (including solicitors fees in some cases too), you need to talk with your solicitor and tell them not to allow the agent to deduct their fees until settlement. Conversely, you can ask that your solicitor holds the deposit in their trust account. Of course, the agent will be uncomfortable with this!
The opportunity for vendors to reneg on paying agency commissions is greater when the vendor’s solicitor holds the funds. And if you don’t think this happens, I can tell you that I personally am still owed $3500 in commission from the sale of a property well over a year ago where this scenario took place. The vendor wanted a huge deposit because the settlement was at least 6 months after the unconditional sale date, and he wanted the deposit held by his solicitor. On settlement, my agency sent an invoice to the vendor’s solicitor for the commission payable. Unfortunately for us, the solicitor released all of the monies on settlement to the vendor and told him to pay our invoice. This never happened… So for me it is deal made and no commission!