~ Originally published in The Sunday Business Post, ‘Talking Property’ by Carol Tallon
Our current deposit system is a double edged sword for buyers and sellers
When the property market crashed, it brought an end to the way we thought about property, both as an investment and for our personal use. Our expectations changed. From the charred remains, a new era of transparency and sustainability was born. This is one of the few advantages of market decimation – the opportunity for rebirth, the opportunity to build a better system and, most importantly, the opportunity to learn from our past mistakes. With that in mind, it seems incredible that as the property market evolves our system of buying remains unchanged, unimproved.
Unlike in similar jurisdictions, Ireland continues to operate a dual deposit system when it comes to buying property. When buyers find their ideal home or investment and have their offer accepted, the next step is to secure the property by paying the first deposit, called a ‘booking deposit’. However, this is a bit of a misnomer as this booking deposit does not secure the purchase. In fact, this booking deposit has absolutely no legal effect whatsoever. It neither binds nor protects the buyer nor seller. So why do we have it? Anecdotally, the booking deposit was to cover the estate agent’s fees but as the money is held in trust, it does not event fulfill this function. From the sellers point of view, it can be taken as a signal of intent from a would-be buyer, but that is all, a signal of intent, it has no legally binding effect despite an offer in writing and a written receipt of instructions and money. From the buyers perspective, paying over the booking deposit, which is generally in the sum of €7,000 to €10,000, does not prohibit other competing offers being considered by the vendor. In fact, it does not even provide for the property being withdrawn from property sales websites. In most cases, the estate agents will continue to take the details of interested parties so that any delay in signing contracts can be quickly overcome by threatening to introduce new buyers to the transaction – in the current market, this is not just a threat; introducing a new buyer might prove more lucrative for the seller and by extension, the sellers agent. I have also heard of incidences where estate agents proceeded with an open viewing that had been scheduled prior to receipt of the booking deposit. This is outrageous, at a minimum, buyers ought to insist that from the moment they hand over the booking deposit, any further viewings are cancelled and the property in question is listed on sales websites as being sale-agreed.
Certainly, there are advantages for both buyers and sellers by having this ‘loose’ arrangement, however, the advantages for both are overtaken by the major disadvantages. The main disadvantage for the seller is that they lose other interested parties. Before an offer is accepted, there are usually competing buyers, when one is selected as the winning bidder, the underbidders usually look elsewhere for opportunities and are therefore not in a position to consider the property, if it comes back to the market two months later. Also, properties that have a sale fall through are perceived as having something wrong with them, particularly if more than one previous sale has fallen through. This ‘flawed’ effect does not just apply to the property, but also to the buyers. Bidders who sale agree a property then fail to proceed are very quickly discounted by estate agents as being tyre-kickers and such buyers are less likely to have further opportunities presented to them.
Earlier this week I spoke to a lady who was looking for a new family home in an area of high demand. Throughout the course of our conversation, she mentioned that she had, just this week, been the successful bidder on a house and was due to pay the booking deposit. However, the property that she had ‘secured’ was not necessarily of interest, she had gotten carried away with the bidding and was actively searching for an alternative. While this was happening, the estate agent was no doubt preparing the sales letter and informing unsuccessful bidders that the property was no longer available. Chances are, the sellers were, at that very moment, putting plans for their move in motion. Without a doubt, the lady I spoke with did not intend to cause such distress to so many people, in her head, she was being sensible, lining up a plan B. If we had a better system in place for property transactions, whereby just one deposit was due and that one deposit had legal effect of binding both parties, fall-through rates would decrease and genuine security could be provided to both the buyer and the seller in each transaction. After that experience, I asked two different estate agents if they had encountered such situations and both reported a marked rise in buyers walking away after paying the booking deposit. In fact, one of them told me that he had phoned a buyer to congratulate him on being the successful bidder on a house, only to be told by the winning bidder that another property was already under offer! The booking deposit is fully refundable is every instance and buyers have started to use this as a licence for buyers remorse. This type of behaviour is unfair and buyers, who have been calling for greater parity in the property transaction, must act in good faith.