Good Faith Deposits: A Part of the Process or a Despicable SCAM?

I am often asked by clients about “good faith deposits” and whether they should be skeptical about providing a deposit when submitting an application for an apartment. The answer is, it depends. If the deposit is going to the landlord, that is likely above board. However, if the deposit is being paid to the broker, your skepticism is well founded and you should be prepared to ask MANY questions. I will prepare you for both scenarios…

Landlord requires a “Good Faith Deposit”: In fact, there are landlords both large and small which ask for a “good faith deposit” in order to take an apartment “off the market” for a period of time (48 to 72 hours typically) while they work to approve an application for rent. A landlord’s reasoning behind requiring a deposit is to ensure you are serious and committed to moving forward if approved so they don’t pass on another (more serious) applicant. Deposits range from a fixed dollar amount of a few hundred dollars ($500, $1000, etc.) to first month’s rent and/or a one month security deposit. The important questions to ask your broker are, “What are the details of the deposit?” and “What are the risks/obligations?”

Typically any deposit is contingent upon approval. If for some reason you are not approved (insufficient income, credit issues, etc.), you are entitled to receive your deposit back (less application fees which are non-refundable and usually $75-150/applicant). In fact, even if you are “conditionally approved” (i.e., the landlord asks for extra security or upfront rent as a new condition of approval) and do not take the apartment because of the new condition(s), you should receive your deposit back in full. The bottom line is that you should be told the terms of the “good faith deposit” in advance, so you understand your risk and potential obligation.

Broker requires a “Good Faith Deposit”: It is NOT common for a broker to receive funds on behalf of a landlord. Think about it, if a landlord wants a deposit in “good faith”, why would they let the broker hold it rather than collect it in their name?! Prepare to ask a lot of questions if your broker asks you for money in advance of the lease signing (other than an application fee of $75-150/applicant). First question to consider, “Who is collecting and holding your deposit?”

I have heard story after story from clients about swiping their credit card in the broker’s office or handing over cash to a brokerage firm for a deposit. They were told that the landlord asks for a deposit, however, the money goes straight to the brokerage firm. Although there are special circumstances (in rare cases), this is likely a SCAM! Is the landlord really requiring the deposit? Is the brokerage firm taking your money and immediately handing a check to the landlord on your behalf? If so, why not cut out the middleperson and give your deposit straight to the landlord? All good questions. In my many years in real estate, I have had one landlord ask me to hold money in the form of a deposit on their behalf. One. Because of how this could be perceived by our clients, I politely asked this landlord if they would allow us to hold the deposit in the form of a check in the landlord’s name rather than in ours or in cash. Of course, they said yes.

So, why do certain brokerage firms ask for a deposit? Let’s play out a scenario to show how this SCAM works. You see a $3000/mo. apartment on Friday and love it. Your broker escorts you back to their office and asks you to fill out applications and informs you there is a one month “good faith deposit” to hold the apartment. You really want the apartment and don’t want to lose it (after all, the price seems too good to be true), so you swipe your credit card in the amount of one month’s rent. $3000 to the brokerage firm. Low and behold, the next day the broker tells you either 1) that the apartment already has an application on it and therefore your application cannot be submitted or 2) the landlord decided to take another application instead of yours. However, your $3000 is still in the hands of the brokerage firm. They then explain that your $3000 will be credited toward any apartment that you choose moving forward. Now they have you. You are $3000 in with the brokerage firm and essentially forced to use them or walk away from a large sum of money. The question to ask is, “Did that apartment ever exist in the first place?” Who is to know? Even if you wanted to make that claim, how would you prove it? That is the brilliance of the SCAM. Of course, the market moves quickly in NYC and there is no guarantee that you will be the first to apply or the one who ultimately “gets” the apartment; that is true. But why would you further complicate an already frustrating experience by giving money to a broker without knowing exactly where it is going?

So, what can you do to avoid this SCAM? First, ask every broker you speak to AT THE ONSET, what their policy is with deposits. Ask them if deposits are made in the LANDLORD’S name or given directly to the LANDLORD. If you are not satisfied with their answer, do NOT work with them. No apartment is that good. Second, if they do ask for a deposit, ask them what happens if you don’t get the apartment. Do you get it back immediately? Can they put that in writing immediately? If not, run (don’t walk) away from that broker. They should be able to give you this information and have a duty to do so as your agent. Third (and most important), trust your gut! Of the many clients I’ve helped out of these situations, all of them sensed something wasn’t right. They should have trusted their instincts.

The good news is, with a little pushback and a threat or two about a negative online review or BBB complaint, you WILL get your money back. That said, why put yourself in that position. Work with someone you trust! You will have a much more positive experience and we all have access to the same stuff anyway!

Feel free to email me any time at egislason@halstead.com with questions on this or my upcoming blogs. I am honored to help!

Thank you for reading and happy apartment hunting!
Eirik

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My name is Eirik Davey-Gislason and I work in real estate in New York City. This blog is an opportunity for me to educate everyone who has a horror story or is on the verge of one. By sharing, preparing and advising my audience on what to expect, what is normal, what is right, and what is wrong, I hope to do my part to expose the wrong-doers and shape the future of this dysfunctional thing we call NYC Real Estate.

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5 thoughts on “Good Faith Deposits: A Part of the Process or a Despicable SCAM?

  1. I found Eirik through this blog post while I was in the midst of some apartment search woes. I had submitted an application for an apartment with my boyfriend, and the brokers requested a good faith deposit in cash, which we naively handed over without second thought. Pretty soon thereafter the broker asked if we could provide a guarantor, amongst some other requests. The broker stopped being communicative with us and disregarded several direct requests for the final status of our application even after we thought we had made it very clear we could not meet the new conditions.

    Scared I would lose my deposit in any attempt to move away from my current application (there was very specific wording on our “receipt” that refunds would be denied if applicant withdrew before receiving a denial), I emailed Eirik after reading this article. I had no idea if he would reply, and was floored when he responded that same afternoon with suggested wording to send to my broker! He even counseled me over the phone regarding what practices/excuses I should look out for, and he gave me his overall assessment of the situation as a professional in the industry. Armed with his advice, I reached out to my broker again…and the resolution was swift! Got an explicit reply within the hour, and picked up my refund within the next.

    To be clear, I was a random person on the internet who was in no way a client of Eirik, yet he offered me his time and counsel simply because he is a good guy! If you’re navigating New York real estate, Eirik will have your back hands down. My only regret is that I didn’t reach out sooner, because without the right advice I just made the experience more drawn out and overly difficult. So don’t be intimidated! Reach out to Eirik and find your dream home 🙂

    Liked by 1 person

    1. Kim, thank you so much for the kind words and I am so glad I was able to help! As I mentioned to you on the phone, this is EXACTLY why a write this blog. It is important that renters, buyers and sellers know their rights and (more importantly) don’t allow bad actors to get away with bad, unethical or unprofessional behavior. Good luck to you!!!

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  2. I was suppose to move in a share space studio but after packing all my things so I could in but realize this place is going to be extremely to small. And can’t move in . So I ask for my deposit back from the landlord he told me no and this was non refundable deposit but I had gave my deposit to the landlord in advance. I didn’t sign a lease. Am I in title to a refund

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    1. Hello Isolia,

      Thank you for reading my article and taking the time to send me a message, I appreciate it! I would love to learn more about your specific circumstances and the details leading up to your decision not to take the apartment. I would especially like to know what, if anything, you signed regarding your good faith deposit with the landlord. The point of taking a good faith deposit from the landlord’s position is to prevent the tenant from committing to an apartment and then backing out after being approved. Although you did not sign a lease, it does seem like that is the case based on the few details I have. That said, the details matter so I would love to hear more so I can give you better advice. Please feel free to reach out to me directly via phone at 917-558-3992 and I will give you my opinion on the matter. Thanks! Eirik

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