Many foreign investors ask us about the rules and regulations for handling deposit in a real estate transaction. Often real estate agents ask the buyer, on behalf of the seller, for a deposit and keep it to secure the property. Theoretically, this is a valid transaction but recently there have been serious problems with this habit.

In Hungary, when you decide that you are definitely interested in a piece of property, you can put down a deposit to secure the place. The amount of the deposit is usually about 10%. This money is a guarantee towards the seller that you are in fact going to come back with the remaining 90% and pay for the property. It is also a guarantee towards the buyer that the seller will not sell the property to anyone else in the meantime.

The deposit is only meaningful if there is a binding time limit to it. This is usually the period of time either the seller or the buyer needs to complete the transaction. For example, the seller might need a month or so to vacate the place or to clear any mortgages or liabilities. Or the buyer needs a few weeks to come up with the entire amount.

After the expiration of the agreed time limit, if the buyer decides not to buy the real estate, he loses the deposit which will remain with the seller. If, on the other hand, the seller decides not to sell the property, he has to return the money to the buyer with an additional equal sum as compensation.

When the deal is conducted directly between a seller and a buyer without a real estate broker, the seller pays the deposit to the lawyer who prepares the transaction and countersigns the contract. Before the end of the agreed time limit, neither the seller nor the buyer has access to the money. If both parties still want to go along as planned, the deposit will form part of the purchase price, that is, the seller will only have to pay the remaining portion.

Theoretically, the same type of setup should work if a real estate broker is present. The money should be kept with a lawyer who will eventually give it to the rightful owner. However, recently there have been a number of cases where this did not happen. In fact, we also had an experience like this with one of the major real estate agencies.

What happened is that the agency simply took the money instead of depositing the money at a lawyer's bank account or safety box. Not only that, they made us (the sellers at the time) to sign a paper that we received the deposit. Needless to say, this is a complete violation of the law. Moreover, after we expressed our hesitancy over such a deal, they threatened us with legal actions because we already had signed a contract with them that they will act as our agents in selling the property. Although we were absolutely clear that the law was on our side, the agency is one the biggest in Budapest and we would have no chance against the high-paid lawyers in court. In fact, I am sure that they have dozens if not more cases like this going on at any moment.

So all we could do is to hope that things would turn out right. However, by the expiration of the agreed period, their client was still about 10% short of the money. At that point they summoned us to their attorney to sign the contract. The contract said that the money has been paid in full. They said that we should just sign it and they will transfer the rest of the money when it arrives from the client. This was the point where we simply refused to sign the contract. Our arguments that we were now entitled to the deposit and could sell the property to someone else were met with yet stronger threats.

All we could do is wait. It took an additional week for them to come up with the money and pay us in full. So eventually, we came out all right but the experience was surely hellish. We were wondering what happens to ordinary people who are inexperienced in real estate transactions. Or foreigners who have a much more limited knowledge of the Hungarian legal system and social customs. After all, it is all too easy for an agency to say, "Oh, this is how we normally do it here." Being threatened and bullied into things you don't want to do is not a comfortable way of doing business.

We are no beginners when it comes to Budapest real estate. However, there was nothing we could do but keep our fingers crossed. If the buyer decided not to buy the property, I am sure that we would not have seen a penny from the deposit.

As a matter of fact, I saw an article about a similar case in last week's newspaper. The real estate agency took the deposit and kept it after the deal was cancelled, saying that it was not their fault. So our case was not an isolated one and this happens quite often.

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