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« Placer County Real Estate Sales November 3rd - November 9th, 2008 | Main | Financing a Bank Owned Home - VA, FHA or Conventional? (Less Down = Less Likely) »

November 14, 2008

Deposit Checks – Bigger is Better (To a Point)

For the third post in my series on Getting Your Offer Accepted on a Bank Owned Home I will look at how providing the appropriate deposit can make or break a deal.

A Great Offer With an Inadequate Deposit is Not a Great Offer

If an offer is written with a great price, a quick close, tight inspection contingencies and otherwise great terms, but it has an underfunded deposit, it can and will usually be rejected.

Without an ample deposit, there is nothing to stop a buyer from walking away from a transaction on a whim.

Knowing this, banks will almost always require a deposit of at least 1% and sometimes more when dealing with lower priced properties. 

While 1% is the Minimum, A Larger Deposit Can Improve Negotiating Strength

A larger than required deposit can improve the strength of your offer, while at the same time it will not change the bottom line price you will have to pay.

If you move forward with a transaction after you have performed your inspection your deposit will be applied towards your down payment and closing costs, or it will be refunded to you at close.

If you decide not to move forward after performing your inspections and you are still within your inspection periods, your deposit will be returned to you.

By increasing your deposit, you show that you are serious about purchasing the property and you also show that you have the funds on hand to move forward.

If You are Planning on Flaking, Don't Put Down a Large Deposit

If you know that you are the kind of person who regularly changes their mind a the last minute, do not put up a large deposit.

Once your inspection periods are over, typically within 5 to 10 days of the offer being accepted, if you back out, your deposit will be relinquished to the bank.

If on the other hand you are not a flake and you plan on moving forward if the home passes your inspections, is appraised for at least what you are purchasing it for, and your loan is relatively certain, raising your deposit can be a great way to strengthen your offer.

How Much More Should You Give as a Deposit?

If you are are making an offer with financing, I suggest that you make a deposit up to 3% of the purchase price.

There is nothing that says you cannot make a larger deposit, but I find that 3% is enough to get the point across. It is also the maximum amount the banks can keep as liquidated damages per California law.

If you are making a cash offer on a property, making a larger deposit will help you gain the full advantage of making a cash offer.

I would suggest that you make a deposit of around 10% of the purchase price. This figure is completely arbitrary and is based only on my anecdotal experience, but it seems to work.

Writing a cash offer with a small deposit undermines the point of a cash offer, which is to provide certainty that you will be moving forward with little or no hassle. A small deposit on a cash offer indicates to the bank that you are wary of the property and withholding judgment until after an acceptance is given. The bank would rather accept a financed offer from a motivated buyer than a cash offer from a buyer who has one foot out the door.

You Need More than a Large Deposit to Get Your Offer Accepted

While writing an offer with a strong price, a quick close and a large deposit will put you well on your way to getting your offer accepted before the competition, there are a number of other terms that need to be dialed in.

As this series continues, I will cover many of these other terms.

The next post in this series will be posted next week, and it will be titled "Financing a Bank Owned Home - VA, FHA or Conventional? (Less Down = Less Likely)"


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