Token Money in Property Purchase: Meaning & Its Importance

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Token Money: Meaning, Importance and Key Factors

What is Token Money?

When buying a new house, the buyer pays the token money as a good-faith gesture. By paying this small percentage of the property’s total cost, both parties are bound by an agreement that outlines the transaction's terms and conditions. The buyer pays the token amount to the seller, signifying their intention to buy the property. However, if the buyer does not make the full payment before a pre-determined date, the seller forfeits the token advance as compensation for their lost opportunities and time.

When is the Token Money Paid?

Now that token money meaning is clear, it’s important to understand when it is paid. Depending on the acceptable terms between the parties, the buyer may pay the token money at different times during the transaction. The most common times to pay the amount include the following:

At the time of the Agreement
When the parties agree upon the cost and terms of the transaction, the buyer typically pays the token amount at this stage. It binds both parties with an agreement and indicates the buyer’s intention to purchase the property.
At the time of Accepting the Offer
If the seller accepts the buyer’s offer, the buyer pays a token advance to show their good faith and intention to complete the transaction. The seller receives the payment and holds a lawyer or third-party escrow agent until the transaction is complete.
After understanding what is token money, one must also know the following terms and conditions about it:
- Amount: The amount varies according to the parties’ convenience. Usually, it ranges from 1 to 5% of the property’s total agreed price.
- Refund: The token payment can be refundable or non-refundable, depending on the agreement. If the buyer cannot complete the transaction for a reason specified in the agreement, they may receive their money back. This may be due to an unsatisfactory property inspection or loan rejection. Otherwise, the amount will apply towards the property’s price at the time of closing.

How Much Money is to be Paid as a Token Amount?

Since token payment is not mandatory in India, the token amount is not fixed for all transactions. It varies based on several factors, such as the property type, nature of the transaction, local customs, parties' acceptance, etc.

Although the amount is not fixed, it is usually a small percentage of the property’s price, ranging from 1 to 5%. It is negotiable between the parties based on market conditions, local practices, the property's value, and growing trends in the area. For instance, if the property’s price is ₹ 1 Crore and the seller demands at least 5% of its price as token money, the buyer must pay ₹ 5 Lakh as a token to book the property.

Key Factors to Consider Before Paying Token Money

After understanding the token money meaning, here are a few points to consider when paying the amount:

Preserve Evidence: Always have a MOU or receipt when making the payment. It states that the buyer has paid, and the seller has received the amount. Ensure that the information about the buyer, seller, property and payment is accurate. Pay attention to the termination clause and timeline.
Bring a Witness: Always pay the token in front of a witness. It helps avoid a dispute between the parties and ensures the deal’s authenticity.
Avoid Paying in Cash: To mitigate risk, always pay the token advance through cheque or online.
Know Your Rights: After receiving the token for a property, the seller cannot sell it to another buyer even if they get a better price. In the case of either party’s demise, their legal heir receives the property rights as applicable.

Information to Protect a Buyer’s Interests

The details in the agreement may vary based on various laws of the area. This information ensures a secure process. These include the following:

Terms of the Purchase Agreement: The agreement should clearly mention the terms of the token refund.
Conditions under the Seller’s Default: The agreement should mention the token refund conditions if the seller fails to meet the obligations.
Review the Agreement: Thoroughly read the agreement and understand its terms and conditions before signing. Pay due attention to details regarding property inspections, payment schedules, title verification, contingencies, etc.
Title and Ownership: The seller should have proper title documents and ownership rights. Review the title and verification papers to confirm legal status. Check its Khaitan n umber to evaluate its ownership records. A Khatian number is a unique identification number assigned to a plot
Payment Security: Understand the payment terms, including the escrow accounts and instalment plans. It safeguards the buyer’s financial interests and ensures timely payments.
Legal Remedies: The agreement should outline the legal remedies in case of a breach, dispute, or non-compliance. Proper dispute resolution systems protect both parties’ rights.

Conclusion

The buyer must arrange the required finance and pay it to the seller. If the buyer fails to make the full payment, they may lose the token amount they deposit.

In case the buyer requires a Home Loan, the seller can share the documents for Home Loan processing only after receiving the token advance. Once they have the required documents, the buyer can apply for a Home Loan with a reputable lending institution to finance their purchase.

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Frequently Asked Questions

How does token money impact financial transactions?

Token money is an important part of financial transactions involving properties, as it demonstrates a buyer’s intention to purchase a property. After receiving the token, the seller cannot sell the property to another buyer.

What are the potential risks associated with token money?

The potential risk of paying the token amount is that if the buyer fails to arrange the remaining funds, the seller forfeits the money to compensate for their time and loss of opportunities.

How is token money regulated and monitored?

Once the buyer pays the token money, they enter an agreement with the seller to complete the transaction within a pre-determined period. The agreement outlines all the terms and conditions related to the payment and refund.

Are there any legal regulations governing token money?

An agreement regulates the token money according to the parties' agreed-upon terms and conditions.

Can token money be refunded?

The buyer receives a refund only if the property fails in an inspection or the seller does not comply with the regulations.

Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.

Token Money: Meaning, Importance and Key Factors