What is token money in property purchase?

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 token money to the seller.

What is token money?

Token money is a small portion of the transaction value that a buyer pays to the seller to show his genuine intentions. Once the seller accepts the token money, it means that he is in agreement with the deal offered by the buyer and won’t show the property to anyone else going forward.

The payment and receipt of this token amount is a standard practice, irrespective of the type of property or deal value.

See also: How is money refunded when a property deal is cancelled

What are the other terms used for token money?

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

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 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. To set all this in record, nowadays an agreement is notarised between the seller and the buyer.

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 Gaurav Singhal, a Delhi-based property broker.

How should a buyer 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.

A common range that buyer’s pay as token money is 1 to 5% of the value of the property. So, for someone who is buying a property worth Rs 90 lakh, he has to typically pay a token money between Rs 90,000 to Rs 4.5 lakh.

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 and the buyer can also keep track of the token money payment.

What are the advantages of paying token money?

• Locks property price: Once you pay the token money, you don’t have to worry about any surge in property price that happens in the transition period.
• Get priority: Once you pay the token money, you get priority over others on buying the property. This is important if you are chasing a property that is in heavy demand.
• Sets the process: Once the token money is paid, the home buying process starts.

What is the difference between token money and down payment?

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. This money has to be paid so that you can take apply for a home loan. The token money amount is just a small part of the down payment and is a gesture to secure property.

What are the dos and don’ts for paying token money?

Paying token money is important and these things should be taken care of when paying token money.

Dos

1. Document payment of token money: Outline the terms and conditions that should be documented when you pay the token money. This should include money paid, channel by which it was paid, property details, conditions when the token money can be refunded.
2. Verify property document: Before paying token money, verify property documents and ensure all titles are clear and property is free of legal encumbrances. Use lawyer’s services to double check.
3. Include clauses protecting buyer and seller interests: The agreement should include clauses that protects interests of both buyers and sellers. For example, one of the clauses should be that in case the property title is not clear, the seller should refund the token money.

Don’ts

1. Don’t pay token money using cash: Do not pay token money in cash. It is best to use banking channels with which you can record the transactions.
2. Don’t skip due diligence: Never skip due diligence as it is the most important step while buying a property.
3. Don’t fall for verbal agreements: There is no legal binding of verbal agreements and hence one should not fall for verbal agreements when it comes to token money.

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. At this stage, most buyers fail to pay attention to the paperwork, since it may seem like an unwanted hassle, or the buyer is shy or is finding it awkward to ask for notary of the token money. “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 notarised 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 Manoj Kumar, a Delhi-based lawyer who specialises in property registrations.

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.

Under the RERA rules, a seller has to return a token money after deducting 2% of the amount if the buyer cancels the deal within 45 days of receiving allotment letter. This 2% is to cover the losses that the seller had to undergo because of the indecisiveness of the buyer.  Earlier the seller would cut as big as 10% of the amount before refunding the token money.

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.

What happens if the buyer changes his mind after paying the token money?

If the buyer changes his mind immediately after paying the token money, there is a chance for him to convince and get the money back from the seller. However, in case the deal is blocked for some time and then the buyer backs out, he may to be ready to let go of his token money.

Housing.com POV

Token money is the first step in buying a property. It is important that the buyer and seller notarise the agreement so that they cannot look at the clauses if by chance a refund has to be done. There are chances that a buyer or a seller absconds after paying or taking the token money. In such cases, a legal route should be explored and a registered agreement supports.

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