An important part of the process of buying an apartment is the preliminary agreement and the associated down payment. Understanding the difference between a deposit and a down payment, and learning the legal aspects of these concepts, will allow you to make informed decisions and avoid costly mistakes. So let’s explain everything you need to know about an apartment down payment.
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Calculating, negotiating with the bank, determining the amount of down payment for the apartment are tasks that cause you a lot of anxiety and uncertainty? In such a situation, it is best to start working with mortgage experts. Meet Entremise. We are a team of experienced experts specializing in mortgages and comprehensive support for the process of buying real estate, including apartments. We can provide you with professional support at every stage of the transaction, from choosing the right loan offer to finalizing the purchase.
What distinguishes us in the financial services market is our individual approach to each client and a comprehensive analysis of his situation. Importantly, on our part you can count not only on full support in choosing the most favorable mortgage. We will also help you in negotiations with banks and developers. In addition, we offer substantive support on issues related to the preliminary agreement and down payment. Check out the details of our offer.
What is a deposit and what is its role in a preliminary contract?
A deposit is a specified sum of money that the buyer gives to the seller at the conclusion of a preliminary contract for the purchase of real estate. It acts as a security for the interests of both parties to the transaction and is a form of guarantee that the contract will be fulfilled.
The deposit is intended to motivate both parties to fulfill the terms of the contract and finalize the transaction by the agreed date. In the case of a preliminary contract for the purchase of an apartment, the deposit is part of the price of the property and is credited to the buyer’s performance.
If the contract is fulfilled as agreed, the deposit is included in the price of the apartment. On the other hand, if one of the parties fails to fulfill the contract, the deposit acts as a kind of financial “penalty”.
Legal aspects of a down payment
A deposit is a legal institution regulated by the Civil Code. This gives it special importance in real estate transactions. Article 394 of the Civil Code sets out the basic principles of the deposit, its legal effects and the consequences of the parties’ failure to perform the contract.
A deposit is not a down payment!
Down payment and down payment are terms that are very often used interchangeably by people interested in buying real estate. Quite wrongly, because in fact they are two different forms of prepayment. Although both are paid before finalizing the transaction, their functions and legal consequences differ significantly.
The deposit acts as a security and incentive for both parties, while the down payment is simply a partial payment towards the future price.
Understanding the difference between a deposit and a down payment is the basis for safely completing an apartment purchase transaction. Why? Choosing one form of down payment can have a significant impact on your rights and obligations in case of possible complications or cancellation of the contract.
Down payment vs advance payment – differences and similarities
- A deposit is legally regulated by Article 394 of the Civil Code, an advance payment has no clear legal regulations.
- The deposit has a security function, the down payment is only part of the payment.
- In the event of non-performance of the contract, the deposit may be forfeited or doubled, the down payment is usually refundable.
- A deposit motivates both parties to finalize the transaction, a down payment has no such effect.
- Both forms are credited to the price of the property upon execution of the contract.
Why is a deposit paid?
First of all, the deposit protects the parties to the transaction from the other party’s default. So for you, as a buyer, it is a guarantee that the seller will not back out of the deal or sell the apartment to someone else. For the seller, on the other hand, it is a safeguard against a situation in which the buyer abandons the purchase at the last minute.
The deposit also has an incentive function. It encourages both parties to honor the terms of the agreement and finalize the transaction. For the buyer, it is a kind of proof of serious intent and readiness to purchase the property. For the seller, the acceptance of a down payment implies a commitment to sell the apartment to a specific person under agreed terms.
What amount should the deposit be?
The amount of the down payment when buying an apartment is not strictly defined by law. It is customary to assume that the deposit is between 5% and 10% of the value of the property, although in practice it may be an amount set individually between the parties to the transaction.
Several factors should be taken into account when determining the amount of the down payment. First, the down payment should be high enough to effectively motivate both parties to finalize the transaction. On the other hand, it should not be too high, as this could place an undue burden on the buyer, especially if he plans to finance the purchase with a mortgage.
Tip from a mortgage expert
When determining the amount of the down payment, follow the principle of the golden mean. A down payment of 5-10% of the value of the property is usually enough to secure the interests of both parties, while not being too much of a financial burden for the buyer. The main thing is that the amount of the down payment should be reasonable and proportional to the price of the apartment.
Preliminary contract for the purchase of an apartment – what must it contain?
The preliminary agreement should contain all the essential elements of the future sales contract. A properly drafted preliminary agreement minimizes the risk of misunderstandings and potential conflicts in the future.
There is a ready-made template for a preliminary agreement, which contains all the necessary elements and protects the interests of both parties. It is worth using it.
Elements that a preliminary agreement should contain
- Details of the parties to the contract (buyer and seller).
- A detailed description of the property (address, land register number, area).
- Property price and payment terms.
- Amount and date of deposit payment.
- Deadline for concluding the promised agreement.
- Conditions for withdrawal from the contract.
- Procedures for dealing with contractual defaults.
- Seller’s statements about the legal and technical condition of the property.
- Any additional arrangements between the parties.
Preliminary contract for the purchase of an apartment – when should it be concluded?
A preliminary contract for the purchase of an apartment is usually concluded early in the process of buying a property. This is the moment when both parties are interested in the transaction, but need time to complete the formalities (for example, related to the mortgage) or meet certain conditions before concluding the final sales contract.
How to secure a deposit to avoid problems?
The primary way to secure a down payment is to conclude a precise and comprehensive preliminary agreement. The agreement should clearly specify the amount of the down payment, the deadline for its payment and the consequences of default by either party.
According to our experts, you should consider drawing up a preliminary agreement in the form of a notarial deed. This form gives you additional security and the ability to pursue claims in the event of non-performance of the contract.
Remember!
Before paying a deposit, carefully check the legal status of the property (including a current copy of the land register) or entrust this task to mortgage experts. This will help you avoid problems related to possible encumbrances or third-party claims to the property.
What if the seller or buyer does not honor the contract?
If one of the parties fails to honor the terms of the preliminary agreement, the other party is entitled to certain actions. If you are the one who fails to fulfill the contract, the seller can keep the deposit paid. On the other hand, if it is the seller who withdraws from the contract, then you have the right to demand a refund of the deposit in double the amount.
If the damage sustained exceeds the value of the down payment, the injured party also has the option of seeking compensation on general principles. In this case, it may be necessary to take the matter to court.
Expert advice from Entremise:
- Before you decide to take legal action, always try to resolve the dispute amicably.
- Thoroughly document all arrangements and communications with the defaulting party.
- Consider mediation as an alternative to litigation.
- Remember the statute of limitations for claims (in the case of preliminary contracts, it is one year from the date on which the promised contract was to be concluded).
Conclusion of the promised contract – what does it mean for the deposit?
At the time of signing the promised contract, the deposit for the apartment ceases to have a collateral function and becomes part of the price of the property. This means that the amount of the down payment is credited against the agreed purchase price of the apartment. It is very important to make it clear in the promised contract that the down payment paid in advance is part of the price.
The transfer of ownership of the property is the final stage in the process of purchasing an apartment, where the deposit ceases to play a role. At this stage, all settlements should already be made and the deposit fully credited to the price of the property.
In the event of termination of the Promised Agreement for reasons beyond the control of the parties, the deposit is refundable in full.
Want to learn more about the down payment?
The mortgage experts at Entremise specialize in providing comprehensive services for the real estate purchase process, including issues related to down payment and preliminary agreements. We can help you safely handle the entire transaction, from analyzing loan offers to finalizing the contract. And if you’re asking yourself: will Entremise take care of everything in my case? The answer is YES! Our activities include:
- Full support in choosing the most favorable form of collateral for the transaction.
- Assistance in negotiating the terms of the preliminary agreement.
- Substantive analysis of documents related to the purchase of real estate.
- Support in the process of obtaining a mortgage.
- Comprehensive care at every stage of the purchase of an apartment.
Review our offer and contact us by filling out the form available on the Entremise website or use the other forms of contact listed in the“Contact Us” tab. We will answer factually all your questions related to the down payment, mortgage and other issues of real estate purchase. You are welcome to contact us.
