Reservation deposit when buying a house

An estate agent can often ask you to pay a reservation deposit to secure your offer. The most common transaction is a new build, but on very few occasions, a normal seller may ask for a reservation agreement to be signed.

Before paying a reservation deposit, read the Reservation Agreement. The agreement sets out:

• the circumstances under which the deposit is to be held;
• how it is refunded
• if and how it could be forfeited; known as a Non-Refundable Deposit;
• confirmation that it is used towards the purchase; and
• deposit amount and interest provisions.

The reservation agreement often sets a time limit for the buyer and seller to exchange contracts; normally 24 to 56 days.

How much is the reservation fee?

A reservation fee for a new build is normally £250 to £500; however could be as much as £1,000. It is rare to reserve based on a percentage of the purchase price.

The deposit is paid to the estate agent by card or bank transfer, and they hold onto the money until they transfer it to your solicitor. Do not pay any money to the seller.

Under the terms of the Property Ombudsman they state: "11c. Any client money held must by law be in a separate client account or accounts, as set out in the Estate Agents (Accounts) Regulations 1981. You must be able to account immediately for all money you are holding on behalf of a seller or buyer". Your estate agent will be aware of this process.

Does reservation fee come off deposit?

The reservation deposit is part of the contractual purchase price, so is deducted from this. On the exchange of contracts, you'll pay your deposit minus the reservation deposit.

For example: Jane paid a £250 reservation deposit on a £250,000 house. Once Jane gets to exchange contracts, she must pay a 10% deposit of £25,000. Jane has already paid £250, so she must only pay the balance of £24,750.

Is a reservation fee refundable?

This depends on the terms of the Reservation Agreement you have signed. Most reservation deposits are non-refundable so if the buyer chooses to pull out, the seller retains the reservation fee.

When buying a new build, if you run over the pre-agreed time then most developers don't enforce the time clause and keep the reservation deposit. As long as the case is progressing and you communicating to the estate agent then the time frame is enforced and you don't lose your reservation fee.