How to deal with advance payments during property purchase

Prop Mania, September 5, 2020

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We look at some of the various advance payments that buyers may have to make during a property purchase and ways to safeguard their interests, vis-à-vis such payments

A buyer has to bear a lot of miscellaneous costs while purchasing a property, including the cost incurred towards legally transferring the asset under his name. Buyers may sometimes find themselves in a position where they are asked for advance payments of various kinds by the seller/builder.

So, what are the various advance payments that the seller could demand and what should the buyer do under such circumstances?

High token money / earnest deposit/booking amount

Sellers may sometimes refuse to discuss the terms and conditions of the transaction unless they are certain of the genuine intentions of the buyer. In order to gauge the seriousness of the buyer, they often demand that the buyer prove that he has the financial wherewithal to make the purchase. So, they would ask for a goodwill deposit, token money, booking amount, earnest deposit, bayana, etc., before they are willing to discuss the deal.

Irrespective of the term used to describe this advance payment, the impact on the buyer is the same. They have to pay a certain percentage of the transaction value as the proof of their intention. Typically, builders allow buyers to book homes by accepting as less as Rs 1 lakh as the token money. Sellers will also demand at least that much money, in any real estate market, to initiate the dialogue.

Stamp paper purchase

Under the provisions of the law, buyers have to pay the stamp duty on the property purchase. However, one should not rush to do this. If you were to withdraw from the deal or if the seller decides to back out, all the money invested in the purchase of stamp papers would go waste, as these documents are non-transferable and non-refundable.

Advance TDS payment

The law also makes it mandatory for the buyer to deduct 1% tax at source (TDS) on property purchase, from the transaction amount and deposit it with the government. So, if a property is being purchased for Rs 50 lakhs, the buyer will pay the seller only Rs 49.50 lakhs. The remaining Rs 50,000 will be deducted as TDS and deposited with the tax authorities. In case of NRI sellers, the TDS charged is much higher, since the buyer actually deducts the capital gains tax on the transactions.

Money for home loan pre-closure of the seller

If the seller still has a running home loan on the property, they would ask the buyer to make advance payments, which could be used to close the loan and complete the sale with the help of the documents required. In such cases, the lender will have to provide a no-objection certificate (NOC), stating that the loan has been repaid and there are no pending dues against it. It is advisable for buyers to avoid making such payments.

Advance payment of brokerage

Buyers have to pay between 1% and 2% of the property value as a brokerage charge. Unless the broker has provided you all the services that they promised, as part of the post-sales assistance, avoid making the full payment.

Source: https://housing.com/news/advance-payment-in-a-property-deal