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By John Souerbry | Broker in Palo Alto, CA
  • Real Estate Jargon: "Non-Refundable" and "Pass-Through" Purchase Deposits

    Posted Under: Home Buying in California City, Home Selling in California City, Property Q&A in California City  |  February 5, 2011 11:57 AM  |  2,795 views  |  2 comments

    Buyers, sellers, investors, welcome back to another installment of Real Estate Jargon, aka, simple explanations of real estate terms normally not found in nature.

    Real estate purchase contracts have a lot of moving parts and smart negotiators know how to align those parts to create an offer that stands out from the others.  Even in down markets, some properties receive multiple offers and the winning offer can be tough for a seller to choose.

    Today, we’ll take a look making an offer stronger with “non-refundable” and “pass-through” security deposits.

    Of the dozen+ features that a buyer might use to make his offer most attractive, one of them is including either a non-refundable or pass-through feature regarding his purchase deposit.  To re-cap the process, when a buyer makes an offer he usually includes a promise to deliver a portion of the purchase price to either the seller’s broker or escrow.  This deposit is called an “initial deposit” and is supplemented with additional deposits later during the contract period until the amount on deposit is enough to cover closing costs and the amount of the purchase price not covered by lender financing.

    But let’s say that a buyer has already had a good look at a property and is sure he wants to buy it.  He’s got great credit, tons of money in the bank, and will buy the property with cash if his bank loan doesn’t come through.  He sits with his broker to craft an offer that will be strong based upon the seller’s priorities (as disclosed by the seller’s agent).  In this example, the seller is moving out of town and could use some cash now to help with a deposit on his new home and some up-front moving expenses.  To make his offer the winning offer, our buyer starts with a great price, a 30 day escrow, and two features that directly address the seller’s immediate need for cash.

    First, he makes 50% of his initial deposit non-refundable.  Once the contract is signed, the seller will keep 50% of the initial deposit even if the buyer cancels the purchase.  This is a serious commitment, but our buyer is positive about his intention to buy.  However, the non-refundable deposit doesn’t satisfy the seller’s need for cash before close of escrow.  After all, the seller will receive the entire deposit plus the remaining purchase amount after expenses at closing.

    So, our buyer adds another feature to increase the attractiveness of his offer.  Since he is not concerned about financing, just roof and termite inspections, he has his broker add to the offer that the non-refundable portion of the initial deposit will pass-through to the buyer upon release of inspection contingences, which will occur no later than 17 days after the contract is signed.  In other words, in 17 days escrow will send a check to the seller for an amount equal to 50% of the buyer’s initial deposit.  This money is the seller’s to keep, even if the deal doesn’t go through.  Our buyer is confident that these two features will greatly add to the strength of his offer and result in a sale.

    Non-refundable and pass-through deposits add to a buyer’s risk, so they are not for everyone.  If the amount of the deposit is a significant expense for a buyer, the buyer should consult with a qualified personal financial advisor before undertaking this type of commitment.

    Oh, by the way, sellers can also write a counter-offer that contains these features if they are concerned about the buyer’s commitment to the purchase.

    If you have questions about real estate jargon or buy/sell/invest strategies, please share your comment on this blog or drop me a line!  john@jsrealproperty.com

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