Why Are Experts Saying This About Token Money? What Should You Do?
If you don’t know what token money is, you had better stall before entering real estate transactions. It is a small amount that you initially transfer to the seller’s account. But it’s in no way the same as a credit note.
It is an amount the buyer pays, unlike a credit note, where the seller adjusts invoice mistakes by issuing a credit slip/credit note.
Did you know that sharing token money is not a mandate per law? But we still do that is a sign of confidence. It is a generic practice that prevails in the real estate arena.
Almost all transactions in real estate include a token money agreement. If you’re eager to know more about token money or want to know if you should pay token money at all, read the full article.
What is Token Money?
A.K.A booking amount or as earned money, token money is an asset appreciation amount. Sharing token money is analogous to the microcredit system, which is common in finance. But how much is token money for a transaction?
Many people don’t know this, and they end up paying more than needed for the deal.
But how much is token money in real life? It is technically a part or, better, a percentage of the sale price of the property being dealt. Now the question is, why do we pay token money?
It’s simple. As I said before, you have to pay an asset appreciation amount to ensure that you have a genuine interest in the property. Once you share a refundable token money, it implies that your deal is almost confirmed.
Later, if you dont go with the deal, you will have to forego your token amount. But you can claim back the amount if the deal is called off because of any fault of the seller.
How Does Token Money Work?
Token money is a petty sum in comparison to the actual amount of money involved in the transaction that is to be. But it indeed orchestrates the whole transaction by sealing it with faith. How?
When you share token money, the dealer develops faith that you are not dealing with anyone else in the same market. That’s why the token money is considered non-refundable.
If you plan to forfeit your deal after paying the token amount, you can forget that sum for good.
Secondly, token money is negotiable. It always depends on the kind of agreement and the nature of the property in question. In the US, the proportion of token money is 1 to 5% of the total value of the property. But you may not get capital receipts against your token payment.
But don’t think of the token money as an additive amount. It is instead a part of the property’s net value that will be paid at the end of the transaction. When you pay for the real estate after the deal is finalized, the token money is deducted from that value.
Advantages of Paying Token Money
There are many benefits of paying token advance. Both the dealer and the buyer enjoy some benefits from it. However, the more essential part of the deal is that the seller will close the deal for the time being after you have paid the token amount.
That is beneficial for both the people involved in the transaction. In the same vein, there are other advantages that I must discuss here:
- Securing the property is one of its main benefits. After you pay the token money the seller cannot sell it to someone else, even if he bid a higher value.
- On the buyer’s part, giving out token money means that they are showing serious intent.
- Often you pay token money to initiate legal proceedings regarding the deal, like drafting the sale agreement.
- After you pay the token money often the sellers are ready to believe that you have a bank loan in real.
- Locking the Price During Negotiations is something that goes without saying.
- Preventing Price Escalation or Competition is a benefit of the same. Once a buyer hears that someone else has paid token money for the property, they will not charge further; They won’t bid any more significant amount in pursuit of the priority.
- Strengthening the Transaction Commitment: the seller is also committed to helping the buyer by providing more time to arrange the funds for the transaction.
Risks and Challenges of Token Money
Well, token money sharing is neither a legal seal on the property sales nor is it holding and constant if someone cites that he paid token money to buy the property. Baring that there are other risks that I am going to discuss below:
- You can’t ask for a refund of the token money
- Your token cash is gone for good even if the sales transaction fails.
- Legal Disputes Over Token Money are common in the US.
- Often, scammers and fraud dealers sway people into giving token money. They show fake properties and claim to be dealers of such properties.
- Identifying Genuine Sellers and Agreements becomes challenging in a market that runs on the culture of sharing token money.
Do’s and Don’ts When Paying Token Money
You can genuinely observe that there are some struct rules that you need to follow while dealing with token money matters. So here is a checklist of do’s and dont’s for a transaction I’ve made for readers:
Do’s
- Verify the Credibility of the Seller
- Draft a Proper Agreement with Clear Terms
- Keep Proof of Payment (Receipts or Bank Transfers)
Dont’s
- Avoid Making Large Payments Without Verification
- Don’t Skip Legal Documentation
- Avoid Cash Payments When Possible
Refund Policies for Token Money
Is token money refundable? C’mon, we know that token money is non-refundable. So, what’s the value of understanding refund policies?
You may have forgotten that there is one condition against which you may get a full refund of the token money you’ve shared with the seller. That is when the deal is called off due to any fault or non-commitment of the dealer or the seller.
When there is hope, let’s understand the refund policies. These are the instances where you can expect a refund of the token money:
- Seller’s Inability to Meet Agreed Conditions ✔️
- Buyer Withdrawing Due to Valid Reasons ✔️
- Breach of Agreement by the Buyer X
- Seller’s Clauses in the Contract citing that the buyer can withdraw ✔️
- Legal Aspects of Token Money nullified by the court ✔️
Token Money vs. Advance Payments
Token money and advance payment are not the same. But token money is a kind of advance payment for sure. You know what a stipend is. Maybe tone money and advances are akin to stipends.
However, there is a big difference in use cases. Token money is used in retail and often in real estate. Meanwhile, we make advance payments for real estate purchases mainly.
Wait! That’s not all. Let’s compare both to the skin:
| Token money | Advance Payments |
|---|---|
| A payment made by the seller/buyer to show purchasing/repurchasing intent | A token money agreement for property shows genuine purchase intent. |
| Generally, an advance to buy or book a product/asset | It is a percentage of the net contract value |
| It can be used miscellaneously | Mostly needed when the buyer has a background of non-payments |
Conclusion: Understanding Token Money in Financial Transactions
Token money is indispensable in the financial transactions of real estate deals. Most importantly, the exchange of token money earmarks the product/asset against your name.
The person who paid the token would clear the remaining amount and take possession. Nobody else would be bidding or inquiring about it.
However, dealing in token money might be risky. You must be meticulous. Most importantly, ensure that both parties understand the clause and conform to the same.
This guide has all the instructions to follow while paying or taking token money. In connection to home loans, token money holds a grave position. If you’ve spent the token money, banks consider you a genuine contender for asset purchase and consider your case seriously.
For stress free and smooth property purchase, I suggest paying a token money upfront. It’s not only lucrative but grants you more time for fund allocation. For any further queries or doubts before paying token money, contact us. Post your comments in the section below! And keep an eye out for the following postings from The Finance Team.
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