Housing Reservation Agreement: What it is, Types, and Advantages

When managing the sale and purchase of a property in Spain, various steps are taken to ensure a successful process, offering guarantees and security to both the seller and the buyer. This is where the concept of a housing reservation contract comes in. Let's see what it's all about.

What is a housing reservation contract?

A housing reservation contract is a legal agreement that assures both the buyer and the seller of a property that the real estate transaction will proceed once the conditions stipulated therein are met. This contract implies a bidirectional responsibility, where the buyer provides a sum of money to reserve the property in question, and the seller commits to delivering the property within the agreed timeframe.

The purpose of this housing reservation contract is to commit both parties to proceed with the sale and purchase management of the property.

Types of housing reservation contracts

Depending on when the contract is signed, there are two types of housing reservation contracts for properties under construction, namely:

Pre-sales phase reservation: This type of document is common in developments where the launch occurs before obtaining the building permit and guarantee policy. In the amount provided by the buyer VAT is not included; furthermore, these contracts establish the maximum validity period.

It is important to mention that it is not a binding reservation, so the interested client can withdraw and recover the amount paid if they decide not to proceed with the purchase.

Sales phase reservation: if the property's construction already has a building permit and guarantee policies, this type of housing reservation contract is generated; in this case, VAT is included in the amount provided by the buyer, and the maximum reservation period is 10 days. Here, the payment method and the site plan are included.

If the buyers are a couple, the percentage of the purchase for each party must be included. This type of contract is binding..

How does a home reservation contract work?

A real estate reservation is an individual contract, and it removes the property from the market, so that the home is no longer shown to other potential clients.

The document that will serve as a reservation must contain, like any contract, the buyer's personal details and information such as the date and location where the real estate reservation is made, the amount to be paid, and the property offered.

The first conditions that appear in the reservation contract for home automation systems are the offered price, the currency in which the transaction will be made, and the payment method, i.e., whether it will be a single payment or in installments and the amount of each. This is the central information to begin negotiations.

Next, the expenses related to the property purchase, such as taxes and commissions, must be indicated.

The expiration of the offer period must also appear in the home reservation contract, so that both parties are aware of the deadline to fulfill their obligations.

Differences between a reservation contract and an earnest money contract

These two types of contracts are very similar; both reflect the buyer's and seller's intention to finalize the sale of a home, and in both cases, the buyer makes a payment. Now, let's list the differences between them:

• In the case of a reservation contract, the document generally refers to reserving a new-build property; an earnest money contract is for existing properties.
• A reservation contract cannot be rescinded unless specific grounds for rescission are established in one of its clauses and those grounds are met. When canceling an earnest money contract, the corresponding compensation must be paid.
• The earnest money contract is regulated by the Civil Code, whereas the property reservation contract is supported by the regulation of Law 28/1998 on Installment Sales of Movable Goods, therefore, its legal certainty is lower.
• A property reservation contract is less formal, and the money paid by the buyer is merely a symbolic payment to show their interest; in contrast, an earnest money contract is much more formal, with more binding conditions and greater consequences in case of non-compliance.

How long does a property reservation contract last?

Since these types of contracts are generally signed with developers when purchasing properties under construction, the duration of the property reservation can range from a few days to several months, depending on the case. The parties, by mutual agreement, decide on the most convenient period for both. Following this arrangement, the promise to purchase agreement is signed.

What happens if there is a breach of a property reservation contract?

In case of contract breach, the procedure will depend on the content of what was signed by the parties.

If the potential buyer regrets making the reservation, breaching the contract after signing the document, they will lose the money paid, it will not be returned to them.

When it is the seller who breaches the contract, the reasons for withdrawing from the transaction must be evaluated. Normally, they must return the money received, and even double the amount. The buyer can claim compensation for damages.

The law outlines the procedures to follow in cases where a off-plan property and the developer never completes the construction. The buyer can terminate the contract and receive the amounts paid as an advance, plus annual interest.

In the event of any breach by the seller, it is advisable to consult a specialized professional who can advise on the steps to take, as each contract is unique and will need to be thoroughly examined to resolve the conflict.

Advantages of a Property Reservation Contract

In this process, both the client and the seller have several advantages, the first of which is that both parties ensure the purchase will go through.

By signing this document, it is confirmed that there will be no drastic change in the price of the property, so the buyer will have time to secure the funds and finalize the purchase (such as opting for a reverse mortgage).

Meanwhile, the seller will have ample time to carry out the necessary procedures and meet the delivery deadlines, having full assurance that they will receive the money stipulated in the document.

Sample Property Reservation Contract Template

There are different types of reservation agreements for social housing, but generally they all follow the same structure: personal details of those involved in the process, property address, offered price, payment method, currency of payment, payment type (such as number of installments), timeframe, additional expenses to be paid, and deadline. If you want to see a sample of this agreement, check here

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Conclusion 

Finally, it's important to note that real estate purchase and sale processes with a reservation agreement can vary depending on the circumstances and parties involved; for example, while in most cases the deposit for a home reservation typically corresponds to 3% of the property's price, it can increase to 5% if the period between one signing and the next is extended, or decrease to 1% when the transaction closes within weeks.