What Is a Deposit and How Does It Work When Buying Real Estate?

In everyday language, when we talk about a deposit, we usually consider it an amount used to confirm a reservation in the purchasing process, in this case when buying real estate. However, it is not merely a reservation, as a deposit also has legal significance. According to the Law on Obligations, a deposit is a sum of money or a fungible item that one party gives to the other at the time of concluding a contract, as a guarantee of the contract’s performance.

Under the same law, it is stipulated that in the event the buyer withdraws, the buyer forfeits the deposit, while in the event the seller withdraws, the seller is obliged to return double the amount of the deposit to the buyer.

Once the contract is fulfilled, the deposit is either returned or credited toward the purchase price, depending on the agreement.

Deposit for an Apartment – When Is It Paid and Why Is It Important

In the real estate purchasing process, the deposit symbolically represents the buyer’s financial commitment and serves as a sign that both parties are continuing toward the completion of the sale. Its importance lies in the fact that it is a legal instrument confirming the intention to conclude the main contract. It protects both the seller and the buyer.

Difference Between a Deposit and an Advance Payment

Although they are often used as synonyms, a deposit and an advance payment are not the same. An advance payment has no legal weight or penalty function, whereas a deposit is subject to sanctions.

It is important to emphasize that not every payment constitutes a deposit, as a deposit must be explicitly specified in writing in the preliminary contract. If it is not defined in this way, the payment may be considered an advance payment and will not be subject to sanctions in the event of withdrawal from the process.

Typical Deposit Amount in Real Estate Transactions

The deposit amount when purchasing real estate most commonly ranges between 5% and 10% of the total agreed purchase price. There is no law prescribing an exact deposit amount. The amount depends on the agreement between the buyer and the seller of the property, the condition of the property, and market demand.

When Does the Buyer Pay the Deposit

The deposit is most often paid at the time of concluding the preliminary sales contract.

The preliminary contract clearly defines the agreed purchase price, the deadline for concluding the main contract, as well as the conditions and methods for paying the remaining balance.

The buyer should ensure that the payment of the deposit is documented in writing, that the refund conditions are clearly defined, and, as recommended, that the payment is made via bank transfer in order to ensure a transaction trail.

Preliminary Real Estate Sales Contract and the Deposit

The preliminary contract should define the final agreed sale price and, consequently, the amount of the deposit and the payment methods. This is precisely why this document plays an important role in protecting both the buyer and the seller. It is not always mandatory, as a sale may also be completed without a preliminary contract, meaning it can be concluded directly through the main sales contract.

What Is a Preliminary Real Estate Sales Contract?

A preliminary contract is a legal document in which two parties, the buyer and the seller, undertake to conclude a sales contract within a specified period. The preliminary contract contains and defines all essential elements that will later appear in the final contract. It has legal force and serves as formal confirmation of the agreement.

How Is the Deposit Defined in the Preliminary Contract?

The exact amount of the deposit must be explicitly stated in the preliminary contract, and it must be clearly indicated that it is a deposit. The preliminary contract clearly defines that the paid amount is considered a deposit, the exact amount, the method and date of payment, and the consequences in the event of withdrawal.

As previously stated, if these elements are not clearly defined, the paid amount may be considered an advance payment and thus loses its legal validity.

Mandatory Elements of the Preliminary Contract Related to the Deposit

With regard to the deposit, the preliminary contract must clearly include the following:

• full details of the buyer
• an exact description of the property
• the total agreed purchase price
• the deposit amount, with a clear indication that it is a deposit

In addition, the preliminary contract must specify the deadline for concluding the main contract, the conditions under which the deposit is returned or credited toward the price, and the signatures of both parties.

The preliminary contract does not require notarization; however, it should be carefully reviewed.

What Happens to the Deposit If the Sale Does Not Go Through

The purpose of the deposit is to ensure that both parties fulfill their obligations. However, for various reasons, the main contract may not be concluded. In such cases, what matters is what is stated in the preliminary contract, namely how it has been agreed what happens if the transaction fails.

In the event the buyer withdraws, the seller has the right to retain the paid deposit. In this case, it represents a form of compensation for the damage incurred by the seller while the property was “reserved,” during which time the seller lost potential buyers.

If the seller withdraws from the sale, they are generally obliged to return double the amount of the deposit to the buyer. This compensates, for example, for costs incurred by the buyer, such as property valuation, bank fees, and similar expenses.

Legal and Financial Pitfalls Related to the Deposit

Although a deposit serves as a protective tool, if it is poorly or incorrectly defined, it can become a source of problems.

Risks If the Deposit Is Not Clearly Defined in the Contract

One of the mistakes in drafting a preliminary contract is the one previously mentioned, namely when the deposit is not defined as a deposit and is therefore treated as an advance payment. In this case, the buyer may be entitled to a refund if they withdraw from the purchase, while the seller would not be required to return double the amount in the event of their own withdrawal. If it is not clearly defined, the deposit loses its legal force.

What Happens to the Deposit If the Bank Does Not Approve the Loan?

A large number of buyers purchase real estate through a loan. However, the bank is not obliged to approve the loan. Therefore, the preliminary contract should include clauses that protect the buyer by ensuring the deposit is returned if the loan is not approved.

Conclusion

A deposit is not merely a reservation, but a legal tool that protects both the buyer and the seller. For it to serve its purpose, it must be clearly defined in the preliminary contract, together with the amount, deadlines, and consequences of withdrawal. It is particularly important to regulate in advance the situation in which a loan is not approved.

Avoid verbal agreements, make all payments via bank transfer, and carefully read all documents before signing. A properly agreed deposit reduces risks and ensures a smoother real estate purchasing process.