Today, when you undertake any activity or contract, payment of token money is part of the deal. It basically exists to give the seller of the property a degree of assurance that you are serious about the transaction. This is true of buying a home too.
For the seller of the apartment, be it a builder or developer, time is money and the longer the inventory stays with them, the higher is the cost. When a person commits to buying a property, they also want skin in the game, which is why they insist on token money. It’s like, when you agree to a property lease, even before you pay the deposit, you pay a token amount as expression of interest. The logic is the same even when you purchase a property.
What does the token money signify?
So, what is token money in a property transaction? Typically, the token money is part of the overall payment. For instance, if the property value is Rs1.25 crore and the funding from bank is to the tune of Rs1 crore, then the margin payable by the buyer of the property is around Rs25 lakhs. In such cases, the builder/seller will insist that you pay a small part of the margin as token money. For instance, in this case, the builder/seller may insist that you pay 10% of the margin money. You can convince the builder for a token payment of around Rs2 lakhs, which should convince the builder about skin in the game from your side.
There is nothing legal about token money, but it is a gentleman’s agreement with both of you agreeing to basic terms and conditions, as well as consequences if the deal does not go through. For your own safety, you can insist on token money agreement for property, to safeguard your interest.
Having seen what is token money and how much is normally paid, let us also understand when the token money is normally paid by the buyer. Normally, the token money is paid when the buyer and seller reach a verbal agreement to finalize the deal and before the legal paperwork begins. The token payment is more of an assurance so the builder does not look at other clients. The choice is yours; whether you want to keep the agreement purely verbal or put it down on paper. Generally, a token money agreement for property can avoid any differences and disappointments later on.
Keep these points in mind while paying token money
Token money is an advance payment and is normally done on good faith. Both parties have a reputation to protect, so they will stand by their word. However, in a volatile world, it is best to have some checks and balances in place.
- The basic rule is to keep evidence of the payment made. For that very matter, it is always best to insist on a receipt or MOU on the builder letterhead, so that the builder cannot back out at the last minute if the deal gets cancelled. Let the receipt be signed by a responsible officer of the builder with the relevant company seal.
- Like in most payments, it is always better to make payments in cheque rather than in cash. That way, you have a bank audit trail and that can be used as evidence that you have paid the money. You can also give a post-dated cheque to the builder for his comfort and that would get presented on signing the legal documents only.
- What if the seller insists on taking part of the money in cash? Remember, under the income tax rules, you cannot pay any amount in cash, beyond Rs20,000.
- Ideally, enter into an agreement and put down the rights and obligations of both parties. Normally, if the buyer walks out of the transaction, then the builder keeps the token money. However, if the seller opts out, then the entire token amount has to be paid back to the buyer. Either way, the token amount should be secured with an agreement.
At the end of the day, builders will insist on token money and there is no harm in paying it upfront, as long as the rights and obligations of the buyer and the seller are clearly laid out in the agreement. It must be clear that the seller cannot take the token money and then sell to another party just for a higher price. Once the clauses are clearly laid out, the token money can be paid as the first step.