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What Is a Good Faith Deposit?

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  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 27 March 2014
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A good faith deposit is a sum of money paid to a seller or third party to secure a transaction and allow it to move forward. For certain types of contracts, a deposit may be required for the contract to become effective. In the event that the person who pays the deposit backs out or does not fulfill the deal, the recipient can retain the money as compensation.

One common situation where the good faith deposit arises is in real estate contracts, where it is known as earnest money. In these transactions, the buyer puts down a percentage of the offered price as assurance of commitment. If the deal goes through, the good faith money will be applied to the sales price. If it does not as a result of a fault of the buyer, the seller retains the deposit.

Good faith deposits are also used by underwriters for securities, such as municipal bonds and stocks. When a securities offering is prepared, underwriters are given an opportunity to bid on it. Bidders must put down money as an indicator that they are ready to complete the transaction. This ensures that companies and governments offering securities can select an underwriter in confidence.

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For people involved in trading stocks and futures, a this type of deposit may be required to maintain a margin. This protects the other party to the deal from losses. In all of these situations, the deposit is a percentage of the proposed sale price. The percentage chosen varies depending on the nature of the contract and the preferences of the parties. As a general rule, there are industry standards that most people follow when determining the amount.

Good faith deposits can also be used by sellers and brokers of commodities such as crops. Potential buyers put down money that assures they will pay on delivery of the product. If there is a problem with the contract, the buyer is able to retain the deposit.

When putting down good faith money, a receipt of the deposit is provided so that in the event there is a dispute, the amount is clearly documented. People are also provided with a contract that indicates when and how the money can be retained or released. It is important to read the terms carefully to avoid surprises and to bring up any questions before signing the contract and turning over the funds.

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Discuss this Article

MrSmirnov
Post 9

Always read your good faith deposit contract very carefully. There is no set form for this kind of deposit and it is up to the seller to decide how and when you will lose your deposit.

I made the mistake of putting in a good faith deposit on some business supplies for my company when I was first starting out and didn't really read the good faith deposit too thoroughly. I wish I did because there was a clause in it that allowed the supplier to fill partial orders and retain the deposit even if they couldn't give you everything that you needed.

This kind of clause made me much more business savvy when it comes to looking at contracts because it meant that you have a lot less flexibility to go elsewhere, which can be a huge problem if you don't spot a problem early on.

drtroubles
Post 8

In realty is a good faith deposit always required when you are putting in an offer on a home, or is it only needed when there is some competition around?

I am going to start looking at buying my first home soon and would really like to make sure I have enough budgeted for the endeavour. I already have a 20% deposit for the home price and a pre-approved mortgage, but should I count on needing another 10% or so of the house cost in case I run into a hot property I really want.

I would like to make sure everyone knows I am a serious buyer and don't have problems coming up with the additional good faith deposit if needed. I just need a little advance notice.

helene55
Post 7

@recapitulate- I agree that sounds silly. I imagine, though, that they do that to simplify transactions on their own part. I imagine the deposit was done through a booking website, while the hostel itself may not have the machinery involved for dealing with credit cards.

That said, it can be really annoying when you don't have the cash and have to hunt it down- especially if you were somewhere like New York!

recapitulate
Post 6

I have had to leave deposits often when staying in hostels, both in the US and abroad. While I appreciate it then as a good idea for someone trying to make money off their space, the last time I stayed somewhere I made the deposit online with a credit card, but they wanted to rest in cash only, which I had not been told about before. I feel like if you are willing to accept my deposit in credit, you should accept the rest using the same form of payment.

How many people carry around several hundred dollars in cash especially when traveling to places like New York City?

icecream17
Post 5

@Sunshine31 - I know what you are saying, but short sales are like that. Buyers walk away from deposits all of the time because these agreements never get resolved in a timely fashion and people end up finding other properties to buy.

I think that your realtor should have placed a stipulation that if the issue is not resolved within thirty days then you should be able to recoup your deposit.

I think that the sellers really have to have a good faith deposit agreement because they need to know that you are serious about purchasing their property. Short sales are tricky, but they do work out for some buyers.

sunshine31
Post 4

I understand the need for a good faith deposit agreement, but there are times that I think that a earnest money deposit is a little unfair. A few years ago, I was in the market for a vacation home and placed an offer on a short sale property.

I also was required to place a deposit in an escrow account as part of the home purchase agreement. The problem was that the seller and I agreed on a price, but the bank had not agreed on a price.

As a result, I had to wait months for my short sale to finally get resolved and the bank rejected my offer which freed me from losing my deposit.

If I had walked away from the seller before the bank came back to us, I would have lost my deposit. I understand the need for having a buyer place a deposit on a property, but in my situation I felt that it was a little unreasonable because I had to wait so long in order to hear anything and it felt like they held my money hostage. I will never consider buying a short sale again.

burcinc
Post 3

I sell property and the biggest confusion I see with my customers is that they think that a good faith deposit is the same thing as a security deposit or a down payment. This usually happens when the good faith deposit is considerably high, anything around 10% of sale price usually creates a frustration with the customer and they think that we are trying to rip them off. What this shows me is that the customer is still not one hundred percent sure about buying.

The issue is that the customer wants to secure the property with only one small payment but they want to be able to change their mind if they want without any consequences. That's not realistic or fair to me because I have considerable costs that I have to think about and if I am accepting a good faith deposit, I will be taking that property off the market. If the customer changes their mind, I will have additional costs of putting it back on the market and finding new customers.

I always explain to my customers about the good faith deposit required and the down payment. I know that if someone is really interested in buying, they won't have any problems with this since it is subtracted from the total price anyway.

candyquilt
Post 2

@burcidi-- I think requirement for and amount of good faith deposit really depends on what you're buying and how costly it is.

I've paid a good faith deposit for both my house and my boat, which are both highly valued. The point of a good faith deposit is to give the seller the confidence that you are sincerely interested in buying. It's also a way to make sure that the seller doesn't keep showing a house or talking to other potential buyers while you are in the process of buying. So it literally is a sign of good faith by both sides.

I think the percentage of a good faith deposit varies based on that market. In my state, there is no law that says what percentage of the total cost the deposit has to be. Different markets have different unofficial rules and customs about it.

I don't see why the deposit couldn't be different than what the custom is if both seller and buyer agree. After all, it's a deal between the two of them.

burcidi
Post 1

Is it up to the seller to decide whether a good faith deposit will be required?

Is there any flexibility with the deposit amount? I know it's based on the total cost, but can the buyer and seller decide on a different amount if they agree?

The other question I have is, what happens if there is a third person that requires payment, like a real estate agent that gets paid commission. Is that commission usually included in the good faith deposit?

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