What is a a preliminary contract of the purchase and how to arrange it correctly, than the deposit is different from the advance payment, what can be returned from it, and what is not? These issues are faced by most people who are going to buy or sell property. We tell you what is best to choose, how to avoid mistakes in the process of buying a house and paperwork.
Article 570 of the Civil Code of Ukraine that:
- The transfer of funds from buyer to seller should be considered as a deposit. This amount is recognized in subsequent instalments and serves as evidence of intent to purchase. It also serves as a guarantee of performance. The security deposit shall be fixed in the text of the contract of purchase/sale or in the annexes and supplements thereto.
- In the case that it cannot be established in court proceedings that the funds transferred by the buyer pursuant to the contract were as a deposit, these funds should be considered as advance.
It should also be noted that the deposit is transferred after the contract has been signed or at the same time as the document has been signed. Consider the three functions that the deposit performs:
- Payment. Part of the funds transferred to the seller by the buyer under the contract.
- Evidentiary. Acts as proof of purchase.
- Security. Guarantee that the parties fulfil their obligations.
After the transfer and documentary confirmation of the receipt of the deposit, the parties to the contract assume certain obligations that must be fulfilled. It should be understood that a deposit agreement cannot be formalized without the signature of the main contract.
At the same time, the buyer will not get back his funds, even if he refuses to buy the property. It is very convenient for the seller. However, if the transaction has been cancelled at the seller’s initiative, the seller must return the money in double amount.
It acts as a prepayment given by the buyer to the seller in order to confirm its willingness to conclude a transaction. However, the advance does not have a security function and is transferred to the seller before a proposal is made for the processing of the real estate. The advance serves as proof of intent to purchase. This payment is accepted as part of the total amount per apartment. After delivery of the advance, the buyer and the seller must sign the contract. The advance performs only two functions:
- Evidentiary. Acts as proof of purchase.
- Payment. Part of the total purchase amount.
In contrast to the deposit, the advance payment must be returned to the buyer on a mandatory basis.
How to make a proper advance payment and deposit
If the contract for the purchase/sale of real estate has not yet been signed, it is impossible to issue a deposit. But you can give an advance payment, which will be part of the preliminary contract of purchase of the property. In this document it is forbidden to use the term «deposit», because such a contract will be invalid in case of court proceedings. The funds transferred by the buyer may be considered as a security or guarantee amount supporting the conclusion of the transaction.
All nuances and «details» need to be fixed in official documents. Including penalties and possible consequences if one of the parties reneges. This applies to both buyer and seller equally. If a penalty is included in the contract, it may be expressed both in the amount of some compensation and as a percentage of the advance payment.
Amount of deposit when buying a property
Most often, the amount of the advance payment depends directly on the price of the house and the verbal agreement of the seller and the buyer. The specific amount that will fit all cases, it is impossible to name. Therefore, for each transaction everything is decided individually.
It is worth paying attention to the fact that, if you want, you can do without any preliminary payments, and immediately begin to draw up documents, collect inquiries and expert evaluation order.
If the parties decide to make a deposit transfer, its size usually ranges from 3 to 10 per cent of the purchase price. Most buyers try to reduce the amount of the deposit, because if the deal falls through their fault, the money will not be returned to them. Conversely, the seller would normally be interested in receiving the highest possible deposit.
The best option for the initial purchase of an apartment is to sign a preliminary contract. According to the art. 182 of the current Commercial Code, the pre-purchase agreement establishes the obligations of the parties to further sign the main contract. As per the terms of the prior arrangement.
According to this document, the right of ownership of the residential property is not yet transferred to the new owner, but the parties fix the terms of purchase/sale in writing. There are two types of such agreements:
- Preliminary purchase contract.
- Agreement of intent.
The latter does not bind the parties to any action or obligation. More often than not, it is possible to change any terms in the main contract if one of the parties so requests. The parties to the treaty, however, have the right to withdraw unilaterally without effect. Basically, it’s just a written agreement about wanting to make a final deal in the future.
With the preliminary purchase contract everything is different, because it is already a legal agreement, the rules of which are mandatory for implementation. Signatories must comply with the treaty, and if they do not do so, penalties may be imposed.
How to prepare a preliminary purchase contract
It is mandatory to draw up such a document in the presence of a notary. This ensures that there will be no future conflict of interest between the parties. The lawyer formalizes the contract in accordance with the requirements of the current legislation, verifies the authenticity of the documents of ownership and guarantees the legality of the future transaction.
After signing such a document, the seller and the buyer will have notarized terms of the future transaction in writing. This guarantees the parties’ intentions and good faith.
The notary must be the witness of the transfer of the deposit, because in case of a dispute between the parties this can be used in the court proceedings. This will prove that the buyer is right and will guarantee that it will receive compensation in all circumstances, if such is established in the text of the document.
Price of the preliminary purchase cotract in Ukraine
The price of such a document is usually one percent of the advance payment. This amount is used to pay the fee. In addition, it is also required to pay for the work of a notary. The total cost is usually about two thousand UAH.
For this modest compared to real estate market valuation amount both parties can be confident in the legality of all actions and security of the transaction. After all, if you make a wrong receipt, then the money may not be returned. And no one can prove anything. A competent lawyer can prevent such mistakes and save your money.
Notarized preliminary contract, which details all nuances, rights and obligations of the parties, their intentions, as well as possible penalties for violation of the terms of the agreement – this is a guarantee of security, calm and reliability.
Refund of advance or deposit
There may be various contingencies associated with the payment of the primary contribution. As already mentioned, the advance must in any case be returned to the buyer. Of course, if the preliminary contract did not indicate otherwise. In some situations, if the buyer’s refusal is punishable by a fine, the full amount may not be refunded, but only part of it. In any case, it is not worth bringing to court, because it is much easier and faster to solve everything between the parties, just finding a compromise.
However, if the seller is adamant about not returning the funds, this is a serious problem. Then it is necessary to file the appropriate claim to the court for further proceedings.
Difficulties may arise if the court decided in favour of the buyer and ordered the seller to return all the funds, but the owner of the property is not officially working and has already spent the advance. In such an unpleasant situation it remains only to wait until the debtor returns all the funds. Here even the court can not affect the process. After all, the advance can be paid in small instalments over a long period of time.
Currently, realtors use enough of many tricks, or simply do not understand legal issues. That is why mediators believe that the advance payment, deposit and preliminary purchase contract are the same. Such unscrupulous realtors have only one goal – to get a commission for the transaction and leave the buyer to solve all the problems on their own.
In order not to be deceived, you should seek help from qualified lawyers who will ensure the protection of interests, conduct a comprehensive consultation, protect from mistakes. The real estate lawyer accompanies the entire purchase/sale transaction, ensuring its safe conclusion.
Giving a deposit is not always a valid argument for buying and apartment evaluation, because person can simply change his mind for certain reasons, sometimes beyond his control. If you improperly issue a deposit agreement, you can lose not only money, but also housing. Experienced lawyer will verify the authenticity of all documents and help in their processing, guaranteeing security for the client.
We would like to draw your attention to our other articles about corrupt brokers who deceive trusting clients when buying and selling and renting real estate.