How much earnest money is needed when buying in Portugal?

When you find a home and agree to an offer, you may want the seller to withdraw the property from the market. There are two stages to this process, both of which could be considered earnest money. 

Understanding earnest money 

Reservation deposit 

Similar to countries like the UK and the United States, the reservation deposit in Portugal acts in much the same way. It is a gesture of goodwill to demonstrate your seriousness about buying a home, whilst allowing you time to complete due diligence and await inspection reports. 

Our advice 

When buying a property in high demand, it is recommended that a reservation deposit is completed to compel the seller to remove the property from the market and to refuse further offers. 

Promissory down payment 

A down payment is required at the time of signing a purchase agreement, often referred to as a promissory contract or CPCV. At this point how this money is handled changes. 

On signing a promissory contract, you as the buyer are required to make a payment directly to the seller.  In most cases, the sum deposited at reservation contributes to your deposit amount paid on signing your promissory contract. 

Our Advice 

Always aim to complete any finance approval, inspections and due diligence ahead of signing a promissory contract. 

How much earnest money should a homebuyer pay? 

At Reservation 

This amount is nominally and is normally set at around 5000€ for resale properties. However, it can run up to anywhere between 10,000€ - 20,000€ if you are buying a new build construction directly from a developer.

At Promissory Signing 

In the case of a resale, this is generally 10% of the final agreed price, however, negotiations at the offer stage could see you deposit up to 30%. With new build construction, this could range anywhere from 20-40% of the final price.

Paying earnest money

At Reservation 

As with other countries, these funds are generally deposited within a lawyer's client account and held in the same way as an escrow. 

At Promissory Signing 

The funds at this stage must be transferred directly to the seller and will not be held in escrow until you close. 

However, there is a legal framework in place in Portugal to protect both parties in the event that the sale doesn’t conclude. 

The sum deposited will be clearly written within the promissory contract, which both the seller and the buyer will have signed defining the conditions. 

Conditions for earnest deposit refunds

Contrary to popular belief, homebuyers don’t always forfeit their earnest money to the seller if a deal fails. 

At Reservation 

The funds are fully refundable and you may choose to have them returned to you or held by your lawyer for a future transaction 

At Promissory Signing

In the event you as the buyer should withdraw from the sale after signing a promissory contract you will forfeit any deposit paid to the seller unless a contingency inside the contract otherwise states it. 

Yet, if the seller should withdraw, they are legally obligated to refund all deposit monies paid and compensate the buyer to the exact same amount as the deposit paid. Meaning you receive double what you deposited.  

Contingencies 

If the reason for the cancellation of the contract is outlined as a contingency within your promissory contract, then you will be able to reclaim the money you deposited. Examples of known real estate contingencies are: 

• When a home inspection reveals a severe housing defect 
• If the appraisal amount came in lower than the sales price of the home and negotiation cannot be reached to lower the price. 

Reasons you can lose earnest deposit 

There are occasions when homebuyers will lose their earnest money after a sale agreement is broken. 

At Reservation 

It is very rare to lose a reservation deposit and there are really only two scenarios 

• You paid it directly to the seller instead of depositing it to your client's lawyers account and didn’t get a signed reservation agreement that clearly stated it was refundable 
• You agreed to a non-refundable reservation fee with a developer 

At Promissory Signing 

This is the most common time in which you may forfeit your deposit. The main reasons are:

• You failed to add financing and/or inspection contingencies to protect you in the event a mortgage didn’t get approved or the house was in serious need of repair. 
• You failed to maintain the timelines defined within the promissory contract you signed, meaning you breached the contract and the seller has the right to terminate the sale. 

What if I change my mind? 

At Reservation 

If you decide to not move forward with the sale at this point, you are free to walk away without any commitment. If you have carried out an inspection and due diligence as we recommend ahead of a promissory contract then you may be out of pocket for these costs. However, you are not legally bound to continue the sale. 

At Promissory Signing

Property buyers can get their earnest money back if the deal goes wrong for reasons concerned within the contingencies outlined in the contract. Otherwise, if it's just a case of having changed your mind you will be out of luck and there will be little to no chance of receiving a refund. 

How can I protect my earnest money?

If you are concerned about the risk of losing your earnest money then the following measures can help protect you against fraud or unjustifiable forfeiture:

Put everything in writing.  If you have contingencies in place make sure they are clearly written into your contract and that it defines exactly what amounts to cancelling the sale. This way you don’t forfeit your earnest money for a reason you shouldn’t.

Keep your reservation deposit with your lawyer. Whilst you will have to transfer earnest money with the signing of a promissory contract, it is not legally required on a reservation deposit so attempt to have this held with your lawyer in their client account if possible. 

Do your due diligence first.  If you want an inspection or need an appraisal for a mortgage, aim to complete these things ahead of signing a promissory contract. It’s the safest way to know you will not forfeit the earnest money in the event something ugly should raise its head. 

Understand the contingencies. If you are unable to complete all due diligence ahead of signing a promissory contract then ensure that contingencies that protect your interests are in the promissory contract.

Meet your responsibilities. Real estate promissory contracts usually set deadlines to protect the sellers. Be sure to respond to everything in a timely manner for things such as an inspection, appraisal and most importantly the closing date to avoid breaching the contract.

Buying a home is a big purchase. You want to make the best offer and protect yourself in the process. Earnest money allows you to communicate your seriousness and ensure your seller is committed. If you would like to understand more about buying a home in Portugal, then book a free buyers consultation to learn more about the ins and outs of the buying process.