THE CONTRACT OF RESERVATION AND PURCHASE AND SALE OF A PROPERTY.
Why is the reservation contract and the deposit payment important in the sale and purchase of a property?
Below, we explain what you need to know.
EARNEST MONEY CONTRACT
The legal business of buying and selling a property involves numerous formalities that many potential buyers are unaware of. Among them, the possibility of opting for the signature of a contract of sale or promise of purchase known as “earnest money contract” or to begin with a reservation contract prior to the sale. Although both serve to guarantee the purchase and sale, they do not follow the same development and do not have the same content.
Although this type of contract was more common in the case of off-plan real estate investments, i.e. the sale and purchase of newly constructed properties, it has also become widespread in the case of homes that have already been built. In the first case, the developer (future seller) is obliged to the future buyer to reserve a property to be built, clearly identified on the plan, and to sell it to him, and the latter is obliged to buy it. In the purchase of homes already built, we can receive this reservation both from the seller’s Real Estate Agency and from the Lawyers representing one or the other party.
Use of the Earnest Money Agreement in the Spanish Real Estate Market
In the Spanish real estate market, the use of this type of contract varies according to the area. In the Balearic Islands, for example, the most common practice is the signing of a purchase contract that includes a penitential earnest money clause, known as a “contrato de arras”. However, in practice this is usually extended in time by weeks, even months, due to the peculiarity of the properties on the islands.
For the buying party, it is essential to know all the legal and urbanistic aspects of the property. For this purpose, a Due Diligence Report must be provided, which must be positive or favorable before the signing of the aforementioned purchase contract.
Benefits of the Reservation Contract
What happens if another potential buyer appears interested in the same property during this time? What if the seller himself decides not to sell the property for some reason during this period?
That is why, once the price has been negotiated between the parties, the signing of a reservation contract as a commitment by both parties, with or without payment of a deposit or down payment, formalizes the intention to buy on the one hand and sell on the other. While the legal and urbanistic studies of the property are carried out and the terms of the purchase contract itself are negotiated.
THE STARTING POINT: THE SIGNING OF THE RESERVATION CONTRACT AND THE PAYMENT OF A DEPOSIT OR DOWN PAYMENT
Once the buyer has decided on the property he/she would like to purchase, by signing the reservation contract he/she commits the seller to withdraw the property from the market for a certain period of time. This will give the buyer peace of mind while his lawyers carry out the legal searches and legal and urbanistic study of the property. And, on the other hand, the seller obtains a purchase commitment for the negotiated price.
Advantages of Signing a Reservation Contract
- Security: Both parties commit themselves to continue with the sale and purchase under the negotiated conditions.
- Simplicity: It is essential that the contract be simple and not too long.
- Commitment: Confirm the commitment made by both parties, including the price, the deadline for signing the deed of sale, the amount of the deposit and the payment process to be followed.
Important Considerations of the Reservation Contract
Although the security is an advantage, if it is not subject to any type of condition, it is a tie. It is advisable to include a series of conditions for the tranquility of the parties.
Usually, the reservation contract formalizes the commitment of the parties to go ahead with the process of buying and selling the property as long as certain requirements or special conditions are met. If these conditions are not met, if the payment of a deposit or deposit has been agreed, this amount is returned in full to the buyer, without the parties having any future claims against each other. In addition, such deposit or deposit is considered part of the purchase price if the parties finally formalize the Public Deed of Sale.
Special Conditions of the Reservation Contract
The basic and most common special conditions are:
- Favorable legal report: Prepared by the buyer’s lawyers.
- Visit of the property: Especially for foreign buyers.
- Approval of the mortgage loan: Fundamental for buyers who need external financing.
However, there is freedom of agreement and it may happen that the seller does not accept some conditions. If the buyer decides not to go ahead for any reason, he could lose all or part of the down payment or deposit paid on account of the price.
Conclusion: The Main Advantage of the Standby Contract
In conclusion, the main advantage of the reservation contract for the buyer is the peace of mind of having a property reserved off the market for a certain agreed period of time.While the legal status of the property or possible financing is being studied, the seller also gets time to make the necessary arrangements.You can find a wide variety of properties to buy on our website Buy – Estela Exclusive Homes.
Additional Resources
For more information on reservation and purchase and sale contracts, you can consult the following resources:Administracion.gob.es – Buying and selling real estate.
- Notaries and Property Registries
- Idealista – Home Buying Guide
