Dos and don’ts for paying token money for a property purchase

What is token money?

Once a home purchase deal is finalised between a buyer and a seller, a formal process is initiated to conclude it legally. This starts with the buyer paying the seller a small portion of the transaction value, to show his genuine intentions. This payment, in Indian real estate parlance, is commonly known as the ‘token amount’. The payment and receipt of this token amount is standard practice, irrespective of the type of property or deal value.

Since the buyer pays this money to show his genuine interest in the property, this amount is also referred to as the ‘advance deposit’ or ‘earnest deposit’. Other terms used are ‘binder’ or ‘good faith deposit’.

 

When is token money paid?

The token money is paid when the buyer and seller reach a verbal agreement to conclude the deal. At this stage, the paperwork is yet to start. While there are no written rules about it, another standard practice in India’s real estate market is that the sellers get to forfeit the entire amount, if the buyer backtracks from his verbal promise. The seller, on the other hand, will have to return the token money to the buyer, if he cannot complete the transaction, because of any reason.

 

 

How much money has to be paid as token amount?

There are no fixed rules pertaining to the amount that the buyer has to pay to the seller, as token money. This amount differs from case to case. “A buyer pays a part of his down payment for the property as the token money, in case he is buying the property from a developer. So, if a buyer plans to pay Rs 10 lakhs from his own pocket for the purchase of a property that is worth Rs 50 lakhs, he would typically give the developer Rs 1 lakh as the token or booking amount,” explains Rahul, Sales Director at Gateway Propmart.

It is pertinent to note here that the token amount is only a part of your down payment and the two terms cannot be used interchangeably. The down payment is the amount you pay upfront to buy a property. The token amount is just a part of it.

 

Can token money be refunded?

If, for any reason, the buyer fails to complete the transaction, the seller would forfeit the token money, unless the parties have made a notarised agreement stating otherwise. “The token amount is usually paid by the buyer to the seller, directly after the verbal commitment. At this stage, most buyers fail to pay attention to the paperwork, since it seems like an unwanted hassle. However, a notarized document would come handy, as proof that the token money has been paid to the seller and also lay the ground rules for the purchase,” says VK Chhabra, MD of Gateway Propmart.

However, as this document does not have a legal validity, because it has not been registered, it mostly acts as a proof of payment, rather than a legal document that could be produced in court, in case of a dispute. The buyer and the seller enter into a registered contract, only when the buyer pays at least 10% of the deal value and a builder-buyer agreement or an agreement for sale is signed between the two parties.

 

How to pay token money?

As there is hardly any way to ensure refund of the token money, in case the property purchase fails, the buyer must keep the token amount as low as possible and commit to a seller, only after making all monetary arrangements to complete the transaction. For example, it could be risky to pay the token money, unless the bank has approved your home loan application.

 

Ascertain the credibility of the seller before paying the token money and avoid making the payment in cash. If you pay the token money through banking channels, the seller would not be able to prove otherwise.

 

FAQs

What is token money?

Token money is the advance payment that a buyer pays to the seller, after reaching a verbal agreement to buy his property.

How much do I have to pay as token money?

There are no rules with regard to token money payment in real estate transactions.