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TWO Distinct of Financial deposit used in Real Estate trasactions:

30/09/2024

In Hungary, there are two distinct types of financial deposits used in real estate transactions: the earnest money (foglaló)and the advance payment (előleg). While both serve as part of the purchase price, there are important legal differences between the two, especially in terms of consequences.

1. Earnest Money (Foglaló)

  • Purpose: The earnest money is paid when the purchase contract is signed and serves as proof of the buyer's serious intent to proceed with the purchase.
  • Legal Consequences:
    • If the buyer backs out, they lose the earnest money, which remains with the seller.
    • If the seller backs out, they must return double the amount of the earnest money to the buyer.
    • The earnest money acts as a legal guarantee that both parties are committed to the deal.
  • Amount: It is typically around 10% of the total purchase price but can be agreed upon differently.

2. Advance Payment (Előleg)

  • Purpose: The advance payment is simply a portion of the purchase price paid by the buyer to the seller prior to the final contract. It is not tied to any specific legal consequences.
  • Legal Consequences:
    • If the buyer backs out, they are entitled to get the advance payment back, as it does not carry the same legal weight as the earnest money.
    • If the seller backs out, they must return the advance payment, but there is no obligation to repay double the amount.
  • Amount: The amount of the advance payment can vary and is usually agreed upon by both parties. It may be less than the earnest money.

Key Differences:

  1. In Case of Withdrawal:

    • With earnest money, if a party backs out, they either lose the amount or must return it in double.
    • With advance payment, the amount is simply returned to the buyer if the deal falls through.

  2. Guarantee:

    • Earnest money acts as a legal guarantee, with penalties for withdrawing.
    • Advance payment does not serve as a legal guarantee and carries no penalties.

  3. Purpose:

    • The earnest money shows the buyer's commitment to the deal and legally binds both parties.
    • The advance payment is just a prepayment of the purchase price without legal penalties attached.

In both cases, it is important that the nature of the payment is clearly defined in the contract to avoid misunderstandings and ensure that all parties are aware of the potential legal consequences.


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