Reserving Your Property & Preventing Gazumping

The Reservation Process

Once you have made an offer on a property and it has been accepted by the seller, it is extremely important to reserve the property.

This is because owners generally do not take their properties off the market until a reservation deposit is received, so any other buyers can place a deposit before you.

Unfortunately, the reality is that on any given property there are often undecided buyers, who, once they hear that the property may be sold, are motivated to try and buy it.

This is known as gazumping in the UK and is quite a common practice that is very frustrating for buyers.

In Spain, fortunately, we have a system in place to help prevent this that is quite effective, whereby the buyers and sellers agree on a reservation contract and a deposit is placed to secure the property.

The Reservation Contract

There are several features of the contract that are important to point out:

Amount of the Reservation Contract

The reservation deposit is generally 6’000 Euros on a normal apartment: however, this can be more on a luxury property or villa.

Subject to Due Diligence

The above said, the deposit should be placed subject to due diligence, so if there are issues regarding the property, such as the property does not have the correct planning permission, the deposit is refundable.

Other conditions can also be included in the reservation deposit.

Commitments of the Parties

Reservation contracts can go from a simple contract drawn up by the real estate agents where, in reality,  the deposit is little more than a sign of intent and there is a margin to withdraw from the contract by both parties, to contracts where the conditions are far more defined.

The classic contract is one that protects both parties whereby, if the buyers pull out without reason they lose the deposit, whereas if the sellers pull out the deposit is refunded plus the sellers are obliged to pay a further penalty equivalent to the amount of the deposit.

However, contracts can be structured so that default by either of the parties is breach of contract.

The reality is that, once an offer is accepted, both parties will start to incur costs and this system compensates the aggrieved party should the other party pull-out.

The key, once the reservation contract has been agreed is to move to sign a formal purchase contract as soon as possible, when 10% of the sale price is paid. It is at this stage that generally it is accepted that both parties are locked in.

Agency Contracts

Generally, I would advise that lawyers are used to draw up the the contracts and pay the deposit; however, sometimes there are several bidders on a property and it is really the first to sign a contract is the first to reserve. In these cases sometimes a reservation contract is drawn up by the real estate agent and the deposit is paid to their client account.

Whether the buyer should sign an agency reservation agreement and pay the deposit to an agency is a personal decision:

Subject to Mortgage

The reservation can be placed subject to mortgage, so if the buyer cannot get a mortgage the deposit is refunded.

Unfortunately many sellers are not willing to accept this condition as it does not provide them with a guarantee that the sale will go through. It could be 4 to 6 weeks before a buyer obtains a binding offer from the bank, and during this time the property is off the market; if the mortgage is denied the sellers may have lost other potential buyers during that period. Some sellers do agree to this condition but only for a limited period of time, say a couple of weeks, enough time to get an in principle agreement from a bank.

The Importance of Not Delaying

The important issue is, from the buyers’ side, not to delay longer than necessary to agreeing on the contract as, the longer the delay, the more chance another buyer can step in

It is for the above reason that I recommend that buyers should not feel pressured into making an offer but, when they do, I highly recommend that they already have a lawyer in place  in order to be able to move quickly if their offer is accepted.

The Next Step

The reservation deposit is only the preliminary step in the purchase to allow the buyers’ lawyers to perform the necessary due diligence. In my experience most sellers honour the contract and do not allow viewings; however, it is important to proceed to the next step, the private purchase contract, once the due diligence is completed, which normally takes 10 – 15 days.

To read more about the others steps in the click on the links below:

• The reservation contract
• The private purchase contract
• Completing the sale

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Note: The above is for general guidance and no substitute for professional legal advise that I would advise buyers to take before entering into any contract.