BEFORE YOU PAY 20%

Client: Juan, how do bank-financed purchases work? Do I have to pay the seller 20% upfront? What if something goes wrong—do I get my money back?

JPRE: For bank-financed purchases, the buyer pays the equity portion, usually around 20% of the purchase price, while the bank finances the remaining 80%.

The bank does not release the 80% immediately. Instead, it issues a Letter of Guarantee—essentially a promise to pay the seller once the title is transferred to the buyer's (your) name. Only after this is completed will the bank release the loan proceeds to the seller.

Problems can arise during the title transfer process. For example, the BIR may assess a different set of taxes than expected (such as VAT and income tax instead of capital gains tax). If the seller refuses to shoulder these taxes, the transaction can stall.

When that happens:

• The title cannot be transferred

• The bank will not release the loan proceeds

• The buyer’s 20% equity will not be refunded

I’ve also seen a case where the transfer process stalled because the seller’s bank account was frozen after the seller was implicated in the flood control mess.

This is why proper due diligence is critical before paying any money. One important part of this is confirming whether the bank will approve your loan. Banks evaluate both your ability to pay and the quality of the property being used as collateral.

Client: You do due diligence even before paying earnest money?

JPRE: Yes. This goes against what many brokers recommend, but I prefer completing basic due diligence first. I’ve lost deals because of this, but that’s fine.

Imagine paying earnest money and later discovering that the bank refuses to accept the property as collateral. If the loan is denied, I doubt you'll recover your earnest money.

Client: But if I don’t pay earnest money, someone else might buy the property.

JPRE: That’s the trade-off. A cash buyer could step in and close the deal while you’re still securing loan approval.

A practical compromise is to limit the earnest money to an amount you’re willing to lose, such as Php25K–Php50K, while you complete your due diligence and secure loan approval.