What is the difference: an advance or a deposit when buying an apartment

Why pay an advance or deposit?

Content

An advance or deposit in the form of a deposit when selling an apartment is transferred to the seller by the buyer in several cases:

The apartment is purchased with a mortgage, and in order to confirm the intention to conclude the main DPA, the parties draw up a preliminary DPA with a deposit. With a mortgage, it takes time for the bank to approve the transaction, and you often have to wait several weeks. To be sure that the transaction will go through, the buyer can give the seller a deposit.
The seller has debts and they need to be paid off. For example, if an apartment is pledged to a bank under a mortgage, the buyer can transfer to the seller an amount equal to the balance of the debt so that he deposits them into a bank account, and the bank removes the encumbrance. After this, Rosreestr will register the transfer of ownership.
The buyer only has part of the price for the apartment, but he needs the seller to hold it for him. The pre-contract upon transfer specifies the period within which the main contract must be concluded.

Important! Most transactions are carried out with a deposit or advance payment. The first part of the amount is transferred to the seller on the day the contract is concluded and documents are submitted for registration, the remaining part is transferred after registration of the transfer of ownership.

What is an advance

Let's move on to specific categories of prepayment. They are all generally similar, but have some fundamental differences. An advance is a sum of money that is transferred to the other party to fulfill obligations under the contract. He will not guarantee full fulfillment of obligations, but the first step has already been taken.

As a rule, a small amount (up to 10%) of the total amount of the contract is paid. Especially for large transactions. Is the advance refunded or not in case of termination of the contract? It's safe to say yes. Moreover, it doesn’t matter which side initiated the break.

ATTENTION! An advance payment does not guarantee compensation if the deal fails. This can be entered as the first item, in contrast to an advance payment and a deposit.

When is this type of prepayment used? These are, as a rule, cases when the parties have reached an agreement, but the documents are not yet ready or some nuances have not been agreed upon. This is especially true for large transactions. The buyer, by paying an advance, confirms his serious intentions. Or he doesn’t have the entire amount on hand.

He makes a small advance, and the seller removes, for example, the apartment from sale. Next, the property owner waits until all the nuances are resolved and receives the full amount .

Deposit and advance: what is the difference

An advance under a contract is a payment that is legally equivalent to an advance payment. According to Art. 487 of the Civil Code of the Russian Federation, if the seller refuses the transaction, the advance payment is returned in full. If the buyer refuses to conclude a contract, he will also receive the money back.

The deposit for an apartment is an amount given to the seller as part of the cost of the purchased property. It serves as security for obligations under the contract. When paying in advance, such obligations are not imposed.

What happens to the deposit if the deal fails:

If the homeowner is at fault, it is returned twice as much to the buyer (Article 381 of the Civil Code of the Russian Federation).
Due to the fault of the buyer, it remains with the seller.
If the obligations under the contract are unfulfillable due to force majeure circumstances for which neither party is responsible, the deposit is returned to the buyer (Article 416 of the Civil Code of the Russian Federation).

Note! The participant in the transaction responsible for its failure is obliged to compensate the other party for the losses caused by this, unless otherwise provided by the contract.

In general terms, the difference between an advance and a deposit looks like this:

Prepaid expense	Deposit
Contributed only towards payment of part of the cost of housing	Obliges the parties to complete the transaction and is transferred to the seller as part of the housing price
If the seller fails to fulfill obligations, it is returned to the buyer in a single amount.	If the deal falls through due to the fault of the seller, the buyer receives a double deposit
If the deal fails due to the buyer’s fault, the money is returned to him	If the buyer is at fault for canceling the transaction, the deposit remains with the seller

The amount of the deposit or prepayment depends on the agreement of the parties. On average, 50,000-100,000 rubles are transferred under the contract. If the seller needs to pay off debts, the amount may be higher.

What is the difference between an advance and a deposit?

The key difference between an advance and an earnest money deposit in any transaction is the role that the advance payment plays.

In the case of an advance , this is only a payment that will be taken into account only in subsequent settlements between the parties.
In the case of a deposit , this is also a penalty.

The last circumstance needs special attention. The fact is that if the deal falls through, then with the advance payment the seller returns only this amount and no more. But if an agreement on a deposit is concluded, then the consequences are as follows:

If the parties by mutual consent refused the transaction or the contract due to objective circumstances cannot be fulfilled (for example, the seller lost ownership of the apartment by a court decision), the deposit is returned to the buyer.
If the buyer breaks the deal, the seller keeps the deposit for himself.
If the seller is to blame for the failure, he must not only return the deposit, but also pay the buyer the same amount.

An agreement or contract providing for the use of a deposit must be in writing. A regular receipt is not suitable here - otherwise the payment will be considered not a deposit, but an advance (read about drawing up an advance agreement here).

How to make an advance when buying an apartment?

To make an advance payment when purchasing real estate, you need to draw up a preliminary or main DCT. The first option is relevant if documents will be submitted for registration after some time. If the parties are ready to submit to Rosreestr immediately, it is easier to issue the main DCT right away.

The advance can be paid in cash, but it is better to use a wire transfer, safe deposit box or letter of credit.

Contents and sample agreement

If a preliminary contract is drawn up, it must indicate the period within which the main contract must be drawn up, and also provide for liability for failure to fulfill obligations. Otherwise, the contents of the main and preliminary DCP are approximately the same:

Full name, passport details, registration addresses of the buyer and seller.
Property address, area, number of rooms, cadastral number.
The name and details of the document on the basis of which the seller acquired ownership rights.
Total cost of the apartment
The amount transferred as an advance payment.
Method and procedure of calculations.
Date of preparation and signature of the parties.

Sample contract

How to make a deposit when buying an apartment?

The deposit is usually transferred at the time of signing the main contract:

The parties negotiate the terms of the transaction and enter into a contractual agreement. At the same moment, the seller receives the deposit.
The seller and buyer submit documents to Rosreestr to re-register ownership.
The seller receives the rest of the money after registration.

If the parties applied to the MFC, registration will take 9, and to Rosreestr – 7 working days. Notarial transactions are registered within three working days.

Important! Like an advance, the deposit can be paid in any convenient way: cash, bank transfer, via a safe deposit box or letter of credit.

Contents and sample agreement

The deposit can be transferred under a pre-contract, main contract or deposit agreement. Most often, the main DCT is drawn up, where the transferred part of the money is indicated as a deposit.

What needs to be specified in the contract:

Information about the participants in the transaction and the real estate.
Features of the return of the deposit in case of failure to fulfill the obligations of one of the parties.
Settlement of disputes.
Cost of housing and amount of deposit.

Sample contract

Table

Prepaid expense	Pledge
Is the amount that is sent by one party to the transaction to the other as an advance payment under the contract	Is the amount that is transferred by one party to the transaction to the other as a guarantee of fulfillment of obligations under the contract
Returned in case of cancellation of the contract, upon return it can be reduced by the amount of goods already delivered and services provided	Returned if the contract is fulfilled by the parties (or if it is canceled by agreement between the partners), but remains in whole or in part with one of the parties to the transaction if his partner has not fulfilled the terms of the contract
Has an amount that is usually significantly less than the amount that reflects the obligations of any of the parties under the contract	Has an amount comparable to or equal to the amount of obligations of any of the parties under the contract

Do I need a receipt to receive money?

The buyer must take a receipt from the seller for receipt of money immediately after transfer. In the future, this may be necessary to confirm the fulfillment of obligations under the contract.

Note! The receipt is drawn up in simple written form; there are no separate requirements for it. It is important to indicate the amount and the fact that the seller received the money.

Sample receipt

Advance, deposit or pledge: there is a difference

Often, when concluding a contract, you may be asked to make a deposit, an advance payment, or leave a deposit. It may seem to you that they are simply asking for part of the payment under the contract. But it is not always the case. All the terms listed have different meanings. To avoid unpleasant surprises, you need to distinguish between them.

Prepaid expense

The legislation does not contain a definition of an advance. In practice, it refers to the amount of money that you transfer to the other party to the contract as the first part of the main payment. The advance is left to the counterparty before he begins to fulfill his obligations under the contract. For example, before the transfer of things to you under a purchase and sale agreement, or the performance of any service under a service agreement.

If an advance is made and the transaction does not take place, you have the right to demand a refund. As a rule, it is returned in full <*>. The exception will be those cases when the contract is still partially fulfilled. In such cases, expenses incurred by the other party are deducted from it <*>.

Please note: We recommend that any transfer of money be made in writing. This may be a receipt or a corresponding mark on the contract. In the document, indicate: who transfers money to whom, in what amount and in what form (advance payment, deposit, etc.).

Deposit

Earnest money is the amount of money that you give to the other party to the transaction to cover the payments due from you. It confirms the fact of conclusion of the contract and ensures its execution <*>.

The key difference between a deposit and an advance is the consequences of failure of the transaction due to the fault of one party or another. So, if you entered into an agreement, transferred a deposit, and then due to your fault the transaction did not take place, the deposit will not be returned. If the transaction fails due to the fault of the party who received the deposit, it is obliged to pay double the amount of the deposit to the other party to the contract <*>.

Example: You entered into an agreement and paid a deposit of 100 rubles. If you decide to refuse the deal, and the other party is against it, then the deposit will not be returned to you. At the same time, if the other party refuses the transaction, he is obliged to return 200 rubles to you.

The fact that the money transferred to the other party is a deposit must be recorded in writing <*>. In particular, an agreement on a deposit may be drawn up or a corresponding condition may be stated in the contract.

Note! If you agree on a deposit orally, in the future there may be doubts and disagreements that the transferred amount is a deposit. In such a situation, the money will be considered an advance unless the interested party proves otherwise <*>.

There are cases that the deposit is simply returned. This is when <*>:

- the parties decided to abandon the contract before the start of its execution according to their agreement;

- the contract cannot be fulfilled and this is not the fault of either party.

Pledge

A pledge, like a deposit, is a way of ensuring the fulfillment of an obligation <*>. It is as follows. When concluding any transaction, you and the other party additionally sign a pledge agreement. Under this agreement, the other party (hereinafter referred to as the pledgee) receives the right, in the event of non-fulfillment or improper execution of the transaction by you, to satisfy its claims from the value of the pledged property preferentially before others <*>.

Note: The subject of the pledge can be any property, including things and property rights <*>. Exceptions to this rule include, in particular: - property withdrawn from circulation; - claims inextricably linked to the individual (claims for alimony, compensation for harm, etc.).

A pledge differs from a deposit and an advance in that the pledged property is not part of the payment under the contract. The pledge acts as a guarantee that contractual obligations will be fulfilled.

Example: You rented an apartment for a long time and paid a deposit of 500 rubles. in case of damage to furniture or plumbing. The rental agreement provides for the obligation of the tenant to take care of the property in the apartment and, upon eviction, to return it in good condition to the landlord (owner). The TV was broken during our stay. If it is not replaced, the owner will have the right to do so at the expense of the deposit.

The pledge agreement is concluded in writing <*>. If this rule is violated, the pledge will be considered invalid <*>. As a result, the pledgee will not have the right to satisfy his claims at the expense of the pledged property in the event of a violation of his rights.

When you fulfill your obligations under the transaction, the pledge ends <*>. If the property was in the possession of the mortgagee, he must return it to you.

Which is better: a deposit or an advance payment when buying an apartment?

A deposit is more convenient for a buyer if he is 100% sure that he wants to buy a specific apartment. Even if the deal falls through due to the fault of the seller, he will be “in the black”, because by law he must return double the amount.

An advance is convenient because any party can refuse to fulfill obligations. But in this case, the seller will “suffer”, because he will have to return the money to the buyer, regardless of the situation.

Legal advice: if there is no doubt about the purchase, it is better to transfer the money as a deposit. Prepayment, in contrast, does not guarantee fulfillment of obligations.

What is better to choose - a deposit or an advance agreement?

Choosing a suitable prepayment method should first of all be based on your personal wishes. For example, if you are one hundred percent committed to a transaction and are pursuing the goal of establishing the responsibility of the parties, then choose a deposit that strictly regulates all rights and obligations.

If you are worried that the deal may fall through for some reason and do not want to lose money, then it is better to consider the option of an advance payment.

We have already found out what is the difference between a deposit and an advance. Let us just note once again that regardless of the prepayment method chosen, it is very important to record everything in the contract - specify the amount, termination procedure and other nuances.

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Security payment when purchasing an apartment

Recently, the number of transactions with security payments has increased in the real estate market. According to Art. 381.1 of the Civil Code of the Russian Federation, a security payment is recognized as a monetary obligation, as well as an obligation to compensate for losses in the event of non-fulfillment of the contract. In other words, if the transaction is rejected, the other party will be able to demand a penalty.

A security deposit is similar to a deposit, but when concluding an agreement, the seller and buyer can specify any conditions regarding the return.

Arbitrage practice

The deposit, security payment or advance payment is returned upon cancellation of the transaction by agreement of the parties. If the issue cannot be resolved amicably, the party entitled to receive the money may go to court for forced collection.

Here are some examples of decisions on real cases:

Decision No. 2-345/2014 of March 26, 2014 in case No. 2-345/2014.
Decision No. 2-1927/2014 2-1927/2014~M-1749/2014 M-1749/2014 dated August 20, 2014
Decision No. 2-554/2019 2-554/2019~M-475/2019 M-475/2019 dated August 15, 2020 in case No. 2-554/2019.

Lawyer's answers to private questions

What are the risks for the buyer when buying an apartment with a deposit?

The buyer risks only if he runs into scammers. The idea is simple: first the seller takes a deposit and enters into an agreement, then creates conditions in which the buyer would never agree to the deal. Accordingly, the buyer refuses it, and the money remains with the seller.

I am selling my child’s apartment, but in return I must find him another place to live, otherwise the guardianship will not approve the deal. What is better for me to pay when purchasing: an advance payment or a deposit?

A deposit is better. If you indicate an advance in the contract, guardianship may be wary of this, because in any case it is returned to the buyer.

What is returned: prepayment or deposit?

The advance payment is an advance payment, and it is this that is returned. You can get the deposit back only if the seller fails to fulfill obligations; the amount is returned in double amount.

Is it necessary to register an advance payment agreement when purchasing real estate?

No. Currently, contracts are not registered. Only the transfer of ownership under the main contract is registered. There is no need to submit a pre-contract or agreement to Rosreestr.

The buyer paid a large deposit so that I could pay off the mortgage. When will the bank remove the encumbrance?

The encumbrance is removed within three working days from the moment Rosreestr receives the application of the mortgagee - the bank (Article 25 of the Federal Law of July 16, 1998 No. 102-FZ).

About the deposit

A deposit involves an amount paid in advance to secure the fulfillment of an obligation. Externally, the deposit looks exactly the same as an advance: in this case, the buyer pays part of the cost of the apartment before its actual transfer takes place and the corresponding act is drawn up. However, from a legal point of view, the situation here is radically different.

The difference is due to the fact that if one of the parties refuses to fulfill its obligations under the contract and demands termination of the contract, the advance payment is simply returned back to the buyer in full. But for the deposit of Art. 380 and 381 of the Civil Code of the Russian Federation provide for other rules:

If both parties agree to withdraw from the contract, have no claims against each other and have signed an agreement to this effect, the deposit is simply returned.
If the contract fails due to the fault of the buyer, the deposit remains with the seller, he does not have to return a penny.
If the seller is to blame for breaking the agreement, he is obliged to return the deposit to the buyer in double amount.

Thus, the deposit acts not only as an advance payment (its size is taken into account in settlements between the parties), but also as a possible penalty if necessary.

You can learn about the rules and nuances of registering a deposit when buying and selling an apartment here.