Ultra-Low Deposits

[Author – Tim ODwyer]

Every so often Target Stores have a 12.5%-off sale with “no deposit lay-bys”. As most keen shoppers know, sales are common but lay-bys without a deposit are unusual.

Ultra-low deposits are like no-deposit lay-bysTo purchase on lay-by you usually need to pay 10% of the price. If you have just $20.00 available, no more than $200.00 worth of goods will be “laid by” for you until you pay the balance.

Real estate sales in Queensland are supposed to work on a similar principle. But if you list your home for sale don’t be surprised if, sooner or later, you might be asked to put your property on lay-by. That is, under a contract where the buyer may have paid an initial deposit of – wait for it – yes, $20.00.

Most residential contracts in Queensland are signed and exchanged in one transaction with the owners’ estate agent. After an initial “holding” deposit, frequently about $20.00, a further, more substantial deposit is normally required to be paid later. The contract completes when the balance of the sale price is paid. Yet many sales contracts make no provision for the payment of any “more substantial” deposit. Signed contracts with “ultra low” deposits regularly arrive in my office. In each case a miniscule deposit has been taken by the selling agent as the full and final deposit.

In one sale a total deposit of $200.00 was paid on a Gold Coast unit. In another contract an amazing $100.00 tied up an Ipswich house. One house in suburban Logan City (where I practice) was also sold on a full deposit of $100.00. A pitiful $20.00 secured the purchase of a second Logan City home, while an incredible $5.00 “lay-byed” a house in the Logan suburb of Woodridge.

In these five not untypical sales, two of the selling agencies employed the slogan: “Dedicated to Service”. One boasted “The Right Advice”. Another described itself as “First for Service”, while the fifth agency went under the title: “The Professionals”.

Once the owners signed these contracts, their properties were “under contract” and off the market until all conditions were satisfied and the contract price paid. A paltry deposit of less than 1% of the purchase price secured each of these deals.

How could the owners sign such insecure contracts? Well they did, clearly trusting their real estate agents, who were clearly far from “professional” and whose “service” and “right advice” left much to be desired.

Sales on ultra-low deposits are not a new phenomenon in Queensland. When long-defunct company which went by the name of Medallion Homes defrauded scores of hopeful home-buyers on the promise of cheap finance, its scam was possible only because several real estate agents first sold houses to Medallion. Deposits of $100.00 were paid on each sale by Medallion. Trusting home owners signed these worthless contracts which had been prepared for them by the selling agents. None of the sales ever completed – and most of Medallion’s deposit cheques bounced. The agents neglected to advise their clients that such a minimal deposit might indicate a worthless buyer.

Real estate contracts are not legally enforceable unless they are in writing, but there is no obligation at law for deposits to be paid. Don’t ask how many agents’ contracts I’ve seen (and settled) without so much as a peppercorn paid as deposit. Scout’s honour, lots!

Why have a deposit anyway? Over a 100 years ago an English judge described a deposit as “a guarantee that the purchaser means business”. Another judge later explained that a deposit created “by the fear of its forfeiture a motive in the payer to perform the rest of the contract.”

Hence standard real estate contracts invariably provide that the seller may “elect to declare the deposit forfeited” if the buyer defaults.

Property law expert, Professor Bill Duncan, says that 10% of the sale price is the “usual and customary” deposit a seller should expect to secure a buyer’s performance” “Acceptance of a lesser amount may considerably weaken the seller’s position when it comes to … forfeiture of the deposit.”

In my experience residential contracts with a full 10% deposit are as rare in Queensland as 1930 pennies. The deposit taken by agents on most home sales is usually around 4% – barely more than the commission amount. Such deposit, in fact, secure agents’ commissions more than sellers’ contracts. Of course most agents’ listing agreements provide that full commission (you betcha!) is payable if the deposit is forfeited. So a seller can lose a sale, while the agent still gets paid.

By the way, no-one should worry how an agent will be paid after a contract settles with a deposit less than the due commission. This situation is invariably covered by a clever clause which agents add to sales contracts. The parties’ solicitors are directed to pay outstanding commission from settlement moneys. Most Queensland conveyancing solicitors seem to have no difficulties with this arrangement and happily act as unpaid collectors of agents’ commissions.

A Real Estate Institute of Queensland spokesman once astutely observed, “When people are selling their properties they want the best possible price”. To my mind sellers also deserve the “best possible” contact secured by the “best possible” deposit, especially if their agents expect the “best possible” maximum commission. This very generous remuneration should oblige responsible and professional agents to introduce and sign up purchasers who “mean business” – not shoppers who may be on the way home from the Target sale, with a couple of bucks in their pockets and spare time to look at houses.

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