Most people are more likely to associate holding deposits with rental properties, but there are some instances where a home buyer can end up paying a deposit to the seller. This type of payment is known as a pre-contract deposit and is requested by the seller and paid via the estate agent.
The practice is legal, although not particularly common.
What is a pre-contract deposit?
These payments, often in the region of around £1,000, are designed to limit gazumping - the practice of accepting higher offers after previously accepting an offer from another prospective buyer.
Sellers who request pre-contract deposits take their home off the market, allowing the buyer who has paid to essentially 'reserve' the property. If the sale goes through, the deposit is taken off the buyer's purchase costs. If, however, the buyer withdraws their offer without 'good reason', the deposit is paid to the seller.
The idea behind these deposits is to mark out serious buyers. Someone who is not completely committed to a property purchase is unlikely to want to spend £1,000 on something they're not necessarily going to go through with.
Pre-contract deposits become more common at times when there are more buyers than properties available. Prospective buyers are aware of the increased competition for each property and so many are willing to pay in order to secure their desired home. What's more, if demand for a property is particularly high, charging a pre-contract deposit allows agents and sellers to see which buyers are the most serious.
Why has this practice been criticised?
Critics of pre-contract deposits say they are a way of estate agents making money out of buyers. Agents traditionally only act for the seller and don't take any money from property purchasers. In the past, media coverage has highlighted agents pocketing deposits rather than passing them on to sellers, as well as the issue of charging pre-contract deposits as non-refundable reservation fees. The problem with this is that there are so many ways in which a property purchase can unravel that buyers are leaving themselves open to losing a large sum of money and not getting anything in return.
It seems the majority of estate agents charging buyers for deposits are stipulating that they will only be repaid in the event the property is deemed ‘unmortgageable’.
So, for example, if a survey reveals that a property needs significant work done, but isn’t totally beyond repair, a prospective buyer who has paid a pre-contract deposit may subsequently decide to pull out of the transaction. It is unlikely that they would get their deposit money returned to them, because they could still reasonably buy the property if they wanted to.
Pre-contract criteria
In October 2016, the Property Ombudsman updated its code of practice stating that agents can only take deposits from buyers if certain criteria are met.
Though they advise agents to avoid charging pre-contract deposits, they can take deposits, providing they create a written agreement that clearly sets out the circumstances under which the money would be used towards the purchase, returned to the buyer or retained by the seller.
Should you pay a pre-contract deposit to an estate agent?
It certainly is a difficult and often rather complicated situation for property buyers. First thing's first, if an estate agent asks you to pay a pre-contract deposit you need to check if they are a member of a redress scheme like the Property Ombudsman.
You'll also need to ask the agent the proposed conditions of the pre-contract deposit and make sure you're not signing up to a non-refundable reservation fee. For some buyers, if they're happy with the conditions of the agreement, they'll be willing to pay the deposit to give themselves the best possible chance of securing the home they want to purchase.
When the demand for properties outweighs supply, buyers must be cautious about signing contracts and paying any additional fees. If you are unsure about anything that you are being asked to fill in or pay by an estate agent, the best thing to do is to get in touch with their redress scheme.