Earnest Money Reassures Seller Of Buyer’s Intention
Legally Speaking - Property and Housing Laws | By Solicitor Gajanan Khergamker
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I am on the brink of closing a deal for a three BHK flat at Ghatkopar. However, being a first-time buyer, I have little idea about the concept of earnest money. How do I go about paying earnest money and how much exactly does earnest money comprise? Is it a percentage of the price of property fixed and, in case the deal falls through, what happens to the earnest money?
- Vishal Rastogi, Ghatkopar (Mumbai)
Most prospective buyers are always confused about the amount of money that they should pay up as earnest money before buying a new home. Generally, an offer to buy a home is accompanied by a check which is referred to as an earnest money deposit.
The idea behind this being that the seller understands and is reassured that the buyer ‘earnestly’ intends to buy the seller’s property.
The amount of deposit obviously varies from place to place because there are a number of factors involved.
For example, if a particular property is considered ‘hot property’, buyers generally have to make a large deposit and the same holds true when the property market is on a high. Under normal circumstances, buyers should easily deposit about one to two percent of the purchase price as their earnest money deposit.
But at the same time, it’s always advisable to try and keep the deposit as small as possible.
Generally speaking, once the deal is closed, the earnest money is applied to the buyer’s down payment. Some buyers are of the opinion that they will automatically get the money back if the deal falls through while some sellers think that if the deal falls through, the earnest money is automatically forfeited.
This is not the case. Neither the seller nor buyer automatically gets the entire earnest money deposit even if the other party is to blame for the non-completion of the deal. Before releasing the earnest money make sure you read the agreement carefully. As a buyer, you should consult with your legal advisor if you do not understand any of the terms in the agreement.
A standard agreement usually specifies the proper disposition of the earnest money and how to proceed in certain contingencies. For example, if the deal does not close, there are a certain points to be considered before disbursing the earnest money correctly.
For example, it has to be determined if the buyer made a good effort to obtain financing, if the buyer needs to sell his or her property to finance the new property, if the seller was unable to provide a good title etc. If the seller does not meet his end of the obligations, then the buyer can be entitled to a refund.
But if the buyer breaches the agreement then, the earnest money can be forfeited. Sometimes, the injured party affected by the breach may seek cover for additional damages by asking for a specific performance where the court may have to intervene.
So be sure to consult with a lawyer or a legal advisor to understand the consequences and remedies before giving signing over an earnest money deposit.Flat owners can form own cooperative housing society
Legality of Ownership
What is the procedure for clearing out all legal discrepancies in the title of a property before one invests money in it? Is it a lengthy one that needs the involvement of a lawyer? Could they create any problems in the future vis-à-vis the legality of the ownership or possession?
— Shanti Goel, Viman Nagar (Pune)
There are a few factors need to be fulfilled in order to obtain a clear title to a property. The owner of the property has to firstly produce all the originals of the title deeds in his possessions after which records pertaining to the property have to be searched from the specific offices maintaining them.
Even slight discrepancies in the title of the property can lead to immense problems in the future vis-à-vis rights that arise from ownership and possession.
Like public notices that have to be issued in newspapers inviting claims or objections from anyone affected in respect of the said transaction. Following the public notice, if an objection is lodged, the person should be asked to substantiate it within a stipulated period of time or else, ignored.
For a transaction to be considered valid in a court of law, it must be registered accordingly. The registration of a document serves as a notice of the transaction to those affected by it. The seller has to clearly mention in unequivocal terms that there are no encumbrances or mortgages on the property being sold. Very often, several months after the deal has been struck, an unassuming buyer realises that the property purchased has been mortgaged to someone else and that he has been duped.
Often, in order to save on a little money, a buyer may ignore the registration aspect of a document. If a document isn’t registered properly, it fails to confer any title to the buyer who could land with several problems.
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