How to Handle the Contract Deposit When You Buy a Home in New York
This article is general information about New York real estate practice, not legal advice. Fees, forms and procedures change, so confirm with the office involved and with your attorney before you act.
Buyers in New York meet the contract deposit the way most people meet a speed bump: all at once. You have a signed offer in your head, and then a request for a large check arrives.
Here is how the deposit works, who holds the money and what to do so that it stays safe.
What the deposit is and who holds it
Nolo’s guide to buying in New York describes the deposit as a payment made to the sellers’ attorney after the contract is signed. It is comparable to what other states call earnest money. The sellers’ attorney places it in an escrow account, a holding account rather than a spending account.
Nolo gives the typical amount as about 10 percent of the purchase price. That is a custom, not a rule written into law, so the number in your contract is what counts. Ask your attorney what is customary for your kind of property and what, if anything, can be negotiated.
Why it matters if you change your mind
The deposit is real money with real strings. Nolo notes that a buyer who walks away without a reason the contract allows can lose it. That is the whole point of the deposit: it shows the seller you are committed.
The reasons you can walk away and keep your money are the ones written into your contract. A mortgage contingency, an inspection contingency or a clear title problem is the usual suspect. If your contract does not contain the protection you assumed, the deposit is the thing at risk.
Steps to protect your money
- Hire your own New York real estate attorney before you sign. Your attorney should review the contract, including every contingency and the deadline attached to it.
- Confirm in writing who holds the deposit, in which escrow account, and under what conditions it is released.
- Get the amount in the contract, not in an email thread. If the number changes, the contract should change too.
- Use the payment method your attorney specifies. Wire instructions are a favorite target for fraud, so call a number you already trust, not one that appears in an email, to confirm them.
- Keep a receipt for the deposit and a copy of the fully signed contract.
- Calendar your contingency deadlines. A deadline missed can turn a protected deposit into an unprotected one.
Deposit, down payment and closing costs are different things
The deposit usually counts toward your down payment, but it is not the whole of it. At closing you will bring the balance of the down payment and your closing costs. A lender may also ask where the deposit came from, so keep bank statements that show the funds sitting in your account for the required period.
Plan the cash flow early. Moving funds between accounts the week before you sign invites questions that slow your loan.
When things go wrong
If the deal falls apart, do not send a message to the seller’s side on your own. Call your attorney first. Whether the deposit is returned depends on the exact language of your contract and why the deal ended, and the attorneys on both sides will have to agree or the dispute can take time to resolve.
If you are the one selling, the same structure applies from the other side. Your attorney holds the money in escrow and has to follow the contract when releasing it.
One more thing
This is a general overview, not legal advice, and practice differs between a one-family house, a condo and a co-op. Your attorney is the person to tell you what applies to your purchase. If you are working with an agent, ask them to walk you through the timeline so the deposit date never arrives as a surprise.
