Pass through deposits can be an effective strategy when buying or selling any type of real estate. Let’s look at how pass through deposits work in real estate transactions, how they are represented in standard real estate purchase agreements, and how buyers or sellers can use them to their advantage.
First, what are pass through deposits? Pass through is simply a feature of a deposit that directs escrow to release all or part of the deposit to the seller prior to close of escrow. The release is usually triggered by either 1) completing a specified task or 2) reaching a milestone date or event in the purchase schedule. The pass through feature can be applied to either the initial deposit (aka earnest money) or to additional deposits (aka increased deposits). Here is a simple comparison of standard and pass through deposits:
Standard: Held in escrow until completion of sale, refundable to buyer if sale is not completed.
Pass Through: Held in escrow until release is triggered, typically not refundable if the sale is not completed. See Note 1.
As buyers, we might use pass through deposits to strengthen our purchase offer when competing with other buyers or when working with a weakly-motivated seller, such as when making an unsolicited offer (see Making An Unsolicited Offer On An Unlisted Property). A pass though deposit reduces the risk that the buyer will cancel the deal and provides the seller with cash to meet any immediate financial obligations that might be nagging them. Here is an example of wording that might be found in an offer that includes a pass through deposit:
“Within 30 days after acceptance, Buyer shall make a second deposit of Two Hundred Thousand Dollars ($200,000). This deposit shall be non-refundable and shall be released to Seller within two business days after receipt in escrow. The deposit shall be applicable to the purchase price.” See Note 2.
As sellers, we can include pass through deposits in counter-offers. In addition to providing near-term cash that we might need, we can use the pass through deposits requirement to identify the strongest buyers.
Note 1: Although use of non-refundable deposits is common in several types of purchase contracts, e.g. when buying land on which to build subdivisions, there have been court challenges that in specific circumstances resulted in making the deposits refundable.
Note 2: Please don’t use this specific language in a purchase contract, it’s for illustration purposes only. Consult with a licensed real estate professional or an attorney whenever preparing an offer to purchase real estate. All of the terms of this illustration are variables, e.g. the deposit may or may not be refundable and may or may not be applicable to the purchase price.