Conveyancing Deposits – in plain English
Conveyancing Deposit, property buyingOne of the areas of conveyancing that causes a lot of confusion is the word ‘Deposit’. It’s caused because different people involved in conveyancing have completely different understanding of what the word means. I thought I’d just take a few minutes and set out what each of us means by it.
If you’re buying a property and you are a human being (as opposed to a solicitor), then when you say the word ‘deposit’ in relation to buying a house you usually mean the amount of money you yourself are putting down (as opposed to the amount that you are borrowing on a mortgage). So if you’re borrowing 60% of the purchase price on a mortgage then you in turn are going to put down a deposit of 40%. That’s what most people mean when they first walk into an estate agents or solicitors office and people start having a conversation about deposits
OK here’s the science bit. As solicitors are involved you can trust us to do things a bit differently. In the conveyancing process there is a clear and definite meaning to the word deposit. To explain this you have to firstly know a bit about the house buying, or conveyancing, process. Conveyancing takes place in two main parts – before contracts have been exchanged, and after contracts have been exchanged.
Before (or pre) exchange:-
up until the nanosecond that contracts are exchanged, either party can pull out of the transaction, with no comeback. You can have been in negotiations for months and months, and be all ready to exchange contracts. You might even have agreed you’re going to move in the following week. Even thought everything is gearing up to it all moving ahead, at this stage, if the other party change their mind then there’s nothing you can do about it.
Everything changes with exchange of contracts. From that moment on you are bound to buy the property, and the seller is bound to sell the property, at the price that is set out in the contract. This all has to happen on the date entered in the contract for completion (the completion date). Once contracts have been exchanged then if one party pulls out the other party can sue them for damages.
So imagine you’re buying a property for £100,000, and you’re having a £70,000 mortgage to help you. Your understanding of the deposit would be that it’s £30,000 – that’s the amount you’re putting down on the property. The solicitors understanding of the deposit is that it will probably be 10% of the purchase price (£10,000).
It might sound like I’m labouring a simple point here, but the problem often crops up because both the buyer and the solicitor walk to each other with a clear understanding with what they mean by the deposit – but both meanings are different.
A word about chains
So what happens if you have a chain of transactions – i.e. A is selling to B who’s selling to C who’s selling to D. In theory each buyer would take the deposit coming in on their sale and have to make it up to 10% before passing it over on their purchase. That is actually the correct situation and some sellers will insist on this (and they are perfectly entitled to). The normal course of events however is that whatever deposit is handed over at the bottom of the chain (i.e. by the first time buyer) is then passed up the chain, so the people in the middle of the chain don’t have to find anything extra for their deposit.
Estate Agents ‘Holding Deposit’
Sometimes Estate Agents may ask for a small deposit to ‘hold’ the property for you, or as an expression of goodwill. BEWARE! Handing over of a deposit at this stage does not bind the seller to sell to you at all. They can sell elsewhere and you can do nothing about it. Even though our advice would be not to do this, you may still want to do it (if it’s not a large amount) because you are wanting to keep the estate agent sweet. However it is generally only the estate agent who would benefit from this by having the holding deposit money in their bank account, earning them interest. You should be able to get your deposit money back from the estate agent if it all falls through, but if you haven’t handed it over in the first place then you won’t need to worry about getting it back will you?
Giving a ‘holding’ deposit direct to the seller
No no no no no no NO! We have had clients that have done this (years ago now) – they have fallen in love with a house and in an effort to convince the seller that they are deadly serious about it they have given them tens of thousands of pounds in cash. This is about as risky as you can get. The seller can take your money and spend it on a new car, and then sell the property to someone else. In these circumstances you could sue the seller for your money, but that’s never ever ever as good as holding onto the money in the first place. As an example the seller could clear off massive gambling debts with your money – when you sue them they own nothing and the house is in negative equity. You’ll get nothing, apart from a legal bill when you try and get your money back.
I’m painting a black picture here but it’s important that you understand the risks involved. NEVER give a deposit direct to the seller. As a final reason not to do it, handing a deposit direct to the seller is a recognised warning sign under money laundering regulations – which could in turn trigger you being reported for suspected money laundering.
I hope this clears a few things up – if you’ve got any questions about it then post a comment and I’ll try and answer it
Cheers
If only I had seen your site before! I handed over a cheque for £5000 to a local property developer as a holding deposit, my house sale fell through and I was delayed in purchasing his and now he has sold it to someone else and is refusing to return my deposit. I think I will have to sue him to get it back.
Thanks for the info you give on deposits, it clarified quite a few things for me but there is still one thing I was wondering about, if the buyer has paid his 10% deposit and the vendor then pulls out what happens to the deposit, I assume the buyer would get it back ? Thanks in advance for any info you can give me on this. JB
Hi Julie,
The thing about deposits is linked in to exchanging contracts (perhaps I ought to do a blog on that)- it’s the moment when contracts are exchanged when everything becomes binding. It’s at that point that the deposit is handed over to the sellers solicitors by the buyers solicitor.
So in answer to your question, if contracts haven’t been exchanged (so you’re the buyer and your deposit is just sat with your solicitor) then if the seller pulls out there is no comeback on him and yes your solicitor will return the deposit to you.
If contracts HAVE been exchanged then again the buyer gets their deposit back from the sellers solicitors but the difference this time is that the seller is legally in breach of contract and the buyer can also sue them for any loss they have suffered as a result of the sellers actions.
Just so you know, since I’ve been at this firm (since 1985) I’m only aware of one case where contracts were exchanged but it didn’t complete, so we’re talking about a pretty rare event.
Hope that helps
Mark
Hi Mark,
Thanks for your reply:-)
Julie
Like the site.
Hi Mark, my mortgage fell through and am awaiting another mortgage offer yet contracts are ready to sign. the solicitor said i can sign and they’ll keep on the file. however, what happens if when the mortgage starts going through and the valuer picks up something and we need to re-negotiate the price, would this be a lot of hassle if i’ve now signed. should i hold off signing until my offer is more formal?
Hi Nicola,
There shouldn’t be any problem in you signing at this stage – by just signing the documents you aren’t committed to anything – you won’t be bound to is until contracts are exchanged and your solicitor shouldn’t do that until you are ready to go (if they do then the solicitor will have a problem!). From a practical point of view it would make sense to sign now so that when the mortgage offer does come through, once you’re happy with it you can go ahead straight away.
If you delay signing until you’ve got the mortgage offer then you may not be able to get into the office for another couple of weeks (your holidays, the solicitors holidays etc) so it would make sense to sign the documents now and go through any concerns that you have.
Hope this helps
Cheers
Mark
Thanks Mark, you are a star!
You’re welcome
Another question Mark, when can we exchange. Can they do it with a mortgage in principle or must it be a formal mortgage offer? How long does that usually take. I know they allow 6-8 weeks for the whole mortgage to go through but it’s usually a couple of weeks between exchange and completion normally. Just trying to tie the deal up as soon as we can but waiting on a Transfer for a property I’m currently on but trying to get off (hence why my mortgage was refused as it flagged on the system that I am on that one). Trying to speed things up but at least if after signing there are a couple of weeks between exchange and completion then that brings the mortgage process down to say 4 weeks rather than 6 so we can actually exchange? Hope this makes sense! Thanks.
Hi Nicola,
Right! Firstly you need a formal mortgage offer in order to be able to exchange contracts. By formal offer I mean that XYZ mortgage company agrees to lend you X pounds over Y years for your purchase of Z property. They’ll attach other conditions as well and your solicitor will go through those with you.
You need that in place BEFORE you can exchange contracts (otherwise they could change their mind after exchange and you’d be committed to buying a property you couldn’t afford). With regard to your 6-8 week timeframe –
I’d normally be looking at that as a rule of thumb for your house purchase – probably 6-8 weeks from start to exchange of contracts. Having said that it is only a rule of thumb and it can take from 6-8 days to 6-8 months. In my experience most mortgage offers take 2-3 weeks to be produced. You’ll get a better idea from your mortgage company so it would be good to check this with them. In special cases it can sometimes take longer but then it’s usually a good idea for your to chase it as well – it’s too easy for these things to sit on someone’s desk (I’m not saying that’s what’s happening but it wouldn’t do any harm to chase it).
With regard to tying it in to your transfer of equity that will add a bit more complexity to the whole transaction but your solicitor should be able to tie these in OK – as there is no exchange stage on a transfer of equity, what you sometimes get is exchanging contracts and completing on the same day. Basically your solicitor shouldn’t allow you to be in a position where you’re committed to one transaction and not the other. Probably it would therefore be wise to set everything up for a day of completion but not exchange on your purchase until he gets the money in from your transfer of equity (don’t know if I’m getting the wrong end of the stick here but it wouldn’t be the first time!)
With regard to the suggested timescale and the mortgage offer I think you’re possible getting confused on it a bit. The mortgage offer needs to be issued in order for you to exchange contracts. From then on they just wait until your solicitor writes to them and requests the mortgage moneys (one slight gotcha is that there’s sometimes a longstop date on how long the mortgage offer is valid for but that’s not usually going to be relevant). So once you’ve got the mortgage offer, it doesn’t matter whether there is a month, a fortnight, a week or an hour between exchange of contracts and completion – your solicitor will set things up for the completion date and this will involve requesting the money from the mortgage company.
Basically the sooner you get your mortgage offer the sooner you’ll be able to wrap it all up, so give the mortgage company a bit of a kicking
Hope that helps
Cheers
Mark
Brilliant, thanks Mark. Luckily there is no money exchange involved so am hoping it will go through quickly. Mortgage company have sealed the Transfer and sent back to the solicitor who will then forward to the Land Registry to change their records this week. When the mortgage company get this confirmation they’ll update the change of parties so am hoping they will sort this quite quickly then I can get on with applying for my new mortgage. Thanks for your help Mark, great site by the way!
No worries – glad you like it, and next time give us a chance to do the conveyancing for you as well! Good luck with it all,
Cheers
Mark
Thanks, I really wish I had found you guys before :0(