What Is a Floorplan Deposit and How Does It Work?
Understand floorplan deposits: their purpose, how they work, and what determines their refundability.
A floorplan deposit is a preliminary financial commitment from a prospective buyer to a seller. It signals serious intent to purchase a specific item or secure an arrangement. This deposit assures the seller of the buyer’s commitment, allowing the seller to confidently remove an item from the market or allocate resources.
Core Definition and Purpose
A floorplan deposit, often termed an earnest money deposit in real estate, is a sum of money a buyer provides to a seller to show genuine interest in a purchase. This financial commitment is made when an offer is accepted. The deposit acts as a security for the seller, compensating them for the time and potential lost opportunities if the buyer fails to proceed with the transaction without a valid, contractually agreed-upon reason.
From an accounting perspective, for the seller, a refundable floorplan deposit is recorded as a liability, not immediate revenue. It represents an obligation to return the funds if certain conditions are not met, or to apply them to the final purchase price. For the buyer, it is recorded as an asset, reflecting a receivable that will either be returned or applied toward the purchase. This accounting treatment ensures funds are not recognized as income until the sale is finalized or the deposit is forfeited.
Common Scenarios
Floorplan deposits are common in transactions involving high-value items or significant commitments, where sellers need assurance of a buyer’s serious intent. Real estate is a prominent example, with earnest money deposits standard for home purchases. Buyers provide this deposit when making an offer to demonstrate their commitment.
Another common scenario is in the automotive industry, where a deposit holds a specific vehicle, especially if in high demand, customized, or needs to be ordered. This allows the dealership to take the vehicle off the market or initiate the order process. Similar deposits are seen in other sectors involving custom orders or limited inventory, such as boats, recreational vehicles, or certain types of equipment. These deposits ensure the seller does not incur costs or miss sales opportunities while waiting for a buyer to finalize arrangements.
How Floorplan Deposits Work
A floorplan deposit begins with the buyer submitting an offer and the deposit. This deposit is paid via certified check, personal check, or wire transfer. Funds are held by a neutral third party, such as an escrow company, real estate brokerage, title company, or legal firm, in a dedicated trust or escrow account. This arrangement safeguards the funds for both the buyer and the seller.
The deposit amount varies significantly depending on the industry and the value of the item. In real estate, earnest money deposits commonly range from 1% to 3% of the home’s purchase price, though they can be higher in competitive markets, up to 10%. For vehicle purchases, deposits can be as low as $500, or around 10% of the vehicle’s price, particularly for new or in-demand models. Once the transaction closes, the deposit is applied towards the buyer’s down payment or closing costs.
Refundability and Forfeiture
The refundability of a floorplan deposit hinges on the specific terms outlined in the purchase agreement. Buyers generally receive a full refund if the transaction falls through due to conditions or contingencies explicitly stated in the contract that are not met. Common contingencies include significant home inspection issues, a low appraisal value, or the buyer being unable to secure financing. If a seller backs out of a deal for reasons not permitted by the contract, the buyer is also typically entitled to a full refund of their deposit.
Conversely, a buyer risks forfeiting the deposit if they back out of the deal for reasons not covered by the contract’s contingencies or if they fail to meet contractual deadlines. If a buyer changes their mind after signing the agreement and no valid contingency applies, the seller may keep the funds. The purpose of forfeiture is to compensate the seller for the time their property was off the market and for any costs incurred. While complete forfeiture is possible, attorneys sometimes negotiate a split of the earnest money to cover the seller’s carrying costs, such as taxes or utility payments, if a deal collapses.