A group of agents and conveyancers has called for a legally binding preliminary contract to reduce the risk of fall-throughs.
The E-Homebuying Forum, a group set up to improve the house buying and selling process, is now to work on the development of such a contract.
At a round table hosted by Sir Bryan Carsberg, former head of the Office of Fair Trading and current president of the Forum, representatives from estate agents and legal firms debated the merits of introducing preliminary contracts as a standard procedure.
Attenders agreed that a legally binding preliminary contract could markedly change the way properties are purchased in England by introducing greater certainty at an early stage in the process.
The contract would require both parties (buyer and seller) to commit to the house sale at the agreed price, subject to certain conditions that had been agreed from the outset.
That way, if the property market changed and the buyer wanted to purchase the house at a lower price or if the seller wanted to take a higher offer, the contract would hold firm and ensure that withdrawal would attract penalties.
Currently, 31% of house transactions in England fall through, with high-price and mid-price properties being particularly affected.
Round table participants noted that failure to complete purchases can be a particular problem with international buyers that have limited time to purchase a property, and therefore place speculative offers on a number of houses.
Sir Bryan Carsberg said: “Gazundering and gazumping can be avoided if the buyer and the seller reach a preliminary agreement, and if one party refuses to enter such an agreement, the other is informed that there is no firm commitment.
“We believe a legally binding preliminary contract, requiring, for example, a 5-10% deposit, would give a serious indication of the intent to purchase or sell a house, therefore helping to identify timewasters and speculative sellers from the market.
“However, we recognise that any preliminary contract shouldn’t punish home buyers and sellers that pull out of sales for genuine reasons. For example, if the property proved to be suffering from subsidence or the buyer couldn’t secure sufficient finance, the contract would become void.
“There is still some way to go before the preliminary contract becomes a reality, but we recognise there are real benefits to introducing such a contract for consumers and industry alike. We will be working with industry members to develop a standard form of voluntary agreement in the coming months.”
Ian Floyed, CEO of MyHomeMove and a member of the Forum, who attended the round table, said: “This isn’t a case of reinventing the wheel, especially as we’ve seen how preliminary contracts work so well in other countries, including Australia and France.
“The English property market can be quite dysfunctional, yet this is something that could give consumers a greater degree of certainty as they make one of the most important and costly purchases during their lifetime. If we can bring to the market a product that makes the whole process quicker and more efficient, I’m sure the industry will be right behind it.”
Pre-contracts are already used in most other countries, including Australia, the US, New Zealand and Canada, to gain commitment by both parties to continue exclusively with the house sale at the agreed price, subject to certain conditions. Buyers are typically required to put down a deposit of between 5% and 10% as surety.
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Comments
When I moved to the South of England in the 80s, I was stunned to learn that private individuals wandered around making absolutely worthless offers, legally speaking, to buy properties 6 months hence. Sellers would take their houses off the market only to have 1 in 3 offers (as is pointed out) fall through.
In Scotland, only the buyer's solicitor is allowed to make an offer to the seller's solicitor, and if' it's accepted, the contract is drawn up within 48 hours. When I moved from there to England, the elapse tine from newspaper advertisement to legally completed transaction was 6 days.
Some posters here say something like this will kill the English property market, but the Scottish market has been at least as buoyant for decades.
Fall-throughs are like hen's teeth, and you simply don't see the periodic peaks and troughs hysteria experienced in England since the 70s.
If you want to kill the property market stone dead, go ahead with this daft idea.
Personnally, when I buy a house, I need to know that if I lose my job between offer and exchange, I can pull out without it costing me 20 grand.
And, the vast majority of people don't have a pot to urinate in. Where are they going to get a deposit from? As it is solicitors often have to ask permission for the money paid as a deposit to them to be used as part of their clients deposit at exchange.
And lots of chains build from the top or middle down. How many times have you half-heartedly accepted an offer from someone not in a position to proceed (because there are no other offers on the table) who then goes on to buy the property in due course. Quite often. And someone who hasn't sold theirs yet is in no position to enter a binding pre-contract.
The system described would be great if we lived in France or Scotland where (at least until recently) property sales were relatively rare - when someone died - and there are no chains.
Here, if you ever want to get back to a million sales or more a year - you want a free and easy market. If you want definite sales with binding pre-contracts - fine - as long as you're happy with just a few hundred thousand sales a year between you.
Chris- Great post and business model, its good to see something positive, rather than all this silly tittle-tattle over prices.
At last an agent who is leading change, unlike most other ideas, the weak will never be able copy you to follow that.
We have been operating non-refundable deposits from buyers for years now. They have a few options to cancel the sale, which include a down valuation, structural problems, serious adverse searches etc. but failing to find sufficient funds is not one of them! They sould do their homework before comitting to the sale. (AIP)
They also have the purchase price included in the contract to stop them trying to renegotiate later plus a sufficient number of weeks in which to exchange. (To stop them letting the sale drift on forever)
Also, our no-sale, no-fee contract with the vendor only applies if we can't find them a buyer, but once an offer is accepted from a proceedable buyer, our fees come into play and are usually settled on completion, but if the vendor kills the sale, our full fees need to be paid.
Estate Agents have every right to operate like this if they wish. Some agents ask for up-front fees, most do no-sale, no-fee and can lose everything unless an exchange of contracts take place! We have lost too many sales in the past like this and have decided to take matters into our own hands. Vendors don't like our contract, then don't use us, buyers don't like the deposit idea then either don't buy the house or buy it, but we won't take it off the market until exchange.
This is our industry, our money is being invested in marketing properties so lets shape it in the way that we want, instead of being told what to do all the time!
No one is going to sign anything without all the information being available for the property.
The "HIP" platform although flawed in so many ways provided the backbone for a much merited "pre-contract" solution!
The HIP should have been used to build a new future for the property industry, instead short sighted, short term gains have cost the UK property market years in evolution.
Well done Coalition Gov! At least with HIPs out of the way, the property market has bounced right back to the pre-HIP days and first time buyers are plenty! Phew!
Fair point Jonnie, if memory serves me right it took seven years from peak-to-trough during the last recession. I guess we can either view 08/09 as simply the first leg down or an anomaly now the govt have found a neat trick of disconnecting the UK property market from the wider economy.
Well done Paul,
Would you like a job? we knock off about 5:30
Well this has created a lot of comments - business must be quiet for you lot as you have obviously got nothing better to do, I am just going home now.
bring back HIPs
@PeeBee
You are quite right.
Many times lenders tend to 'dispose' of properties at any price for a quick sale to just get THEIR oustanding money back. Rarely do they give the property time to get eneough exposure to the market. Any shortfall is then held over the head of the borrower for years. They do it most of the time, although they are supposed to try to get the 'best price possible'. Disgraceful!
Sibley
I liked the 90’s a lot, the market was pretty good for some of us, yes prices were falling but they didn’t collapse / crash over night it took time so no one was ‘diving in’ and ive said this on here before there will be no sudden collapse now just a slow grind until it finds a level, although god knows where that is……………..but no one does do they?
Jonnie
"...and fuels the cries of the HPCers when they see these unashamed 'bargains' being given away, thinly disguised under the name of 'selling'."
I'm not quite sure what you mean by this?
I've seen this argument on here (and elsewhere) a number of times ie that if prices did crash then every man and his dog would pile in a drive prices back up. I'm not entirely convinced by this to be honest. From what i've heard (and you'll be able to refute/confirm this) during the 90s sentiment was so bad that property was seen as a sure-fire bad bet. If prices, for the sake of argument, did drop another 20 or 30% (or whatever) I would expect (as in the 90s) prices to remain stagnant for some time.
But, hey, no-one really knows what will happen.
In the short-term however, the good thing about repos (from a buyer's POV) is that they help set a lower benchmark for similiar properties in the area. So despite me missing out on a couple of repos (to live in) the wider effect will still be to my advantage.
And you? Yeah, you're a decent egg - for an ex-EA ;)
"Primarily (by virtue of being realistically priced) my search range on RM tends to include repos. Secondly, as there's no owner-occupier with a fixed notion of what it's worth I find they're more open to negotiating down."
Mate - I'm not asking you to then have a pop at YOU, okay!
What you have said is EXACTLY what I know to be the case (although you've added some HPC-ese to it...). Allow me to rephrase in actual speak: Repos are cheap because the lender just wants their money back! This is NOT a "distressed seller". Lenders are pretty much making their own marketplace, exactly the way they did in the early 90's - DESPITE the Mortgage Act being amended to stop the practice of recouping only their interest to the cost of the defaulting borrower. It is just as prevalent now as it was then - and fuels the cries of the HPCers when they see these unashamed 'bargains' being given away, thinly disguised under the name of 'selling'.
Do I blame you? Not at all. If I had the money, I'd bag a few myself and let my kids live in them for only the cost of the mortgage. But of course, that is what you are up against - investors who see these bargains for what they are and snap them up to live off the profits in the future.
WHICH is my argument as you know for the whole HPC failure. IF house price armageddon were to happen, just read the above, which would go along hand-in-hand. Resulting in prices rising once more - the whole cycle off again. OOPS...
Anyway - so I passed the test, did I? You're not saying what a 'pass' is...
Am I an axe-murderer or a saint? ;o)
It has taken a while for the E Home Buying Forum to make a move. I hope the development of this idea moves a bit quicker, as it seems to have some merit.
This idea has been muted many times before and the devil will be in the detail: For example how many of the 31% fall throughs might this stop? Will it work if voluntary? Who will explain and get the pre sale contracts signed, agent or conveyancer and when? Many parties in a chain have limited funds available to put down as a deposit, their money is usually tied up in the property transactions. Will the EHBF be working with other estate agent and conveyancing groups to ensure as much take up as possible?
This is a non-starter for the forseeable future.
Suggest most peoples energy is spent concentrating on doing business under the existing system during these difficult times.
Party Pooper
Wardy, that doesn't surprise me which ties into the whole cautious lending ethos.
Anon, I though that might also be the case (a la drive-by valuations) which backs up my point that a pre-sale agreement would have to include a clause in the event of remedial work.
I agree that this is a good plan, will stop some of the problems with repos, as long as the 'contracts' were done after the public notice, to still ensure getting the best price. I think repos will probably end up being exempt if they do bring this in though.
After 12 and April fools don't count.
I would have thought a lender's valuation wouldn't take into consideration structural (etc) problems that only an in-depth survey would reveal?
Very funny all the same. The only requirement for a mortgage valuation is that one sticks to the speed limit as one drives past.
Sibleys,
Up until recently this would have been fine. Lenders would hold retention based on the work that needed doing and take the surveyors word for it. Lately Lenders have been retaining the whole mortgage amount until additional surveys/ quotes are carried out. It would seem that buyers can no longer just take a view on it.
"ONLY if the agreed price is not upheld by the lenders valuation, surely? If the property is deemed worth the agreed price, but there are works required, then no liability should lie with the vendor."
You'll have more experience here than I (my sum experience being zero house purchases) but I would have thought a lender's valuation wouldn't take into consideration structural (etc) problems that only an in-depth survey would reveal?
"Sibley's...: Can I ask - why only bid on repos?"
Fair enough, although there's no particular agenda.
Primarily (by virtue of being realistically priced) my search range on RM tends to include repos. Secondly, as there's no owner-occupier with a fixed notion of what it's worth I find they're more open to negotiating down.
Of course, being cheaper they also attract more interest...
As to the psychometric testing; you'll be happy to hear you passed with flying colours!
Sorry, Sibley's..., that was me again! ;o)
Sibley's...: "Ie if a survey throws up 10k of work needed, that can be negotiated off the agreed price."
ONLY if the agreed price is not upheld by the lenders valuation, surely? If the property is deemed worth the agreed price, but there are works required, then no liability should lie with the vendor.
Not an April Fool (not funny enough). I checked. There should be something on the E-Homebuying Forum's website soon.
It's been a long-standing suggestion & has some merit if the potential problems can be resolved. But just suggesting a buyer could withdraw without penalty because "the property proved to be suffering from subsidence" (& that is presumably an actual quote) seems naive in the extreme. If, however, it potentially means a condition survey on almost every property marketed & legal issues investigated prior to offers being made, I'm all for that.
Hopefully there will be a decent debate on this but it seems initiatives by a body of this type is the route for any reform to take place - it certainly isn't going to happen through government involvement, thank goodness.
Sibley's...: Can I ask - why only bid on repos?
I know the answer - I just want you to confirm what I have been saying for years from the perspective of a potential buyer...
You never gave my my psychometric test results, by the way... ;o)
Exactly PeeBee, for every kite-flying vendor there's a tyre-kicking would-be-buyer with no idea as to their financial position. I've experienced this a couple of times bidding on repos; I invariably get outbid then a few weeks later EA phones me and says 'it's back on the market because he couldn't get a mortgage'. Assuming they're not all phantom bids it does make you question peoples' intelligence.
With regards to your first point, absolutely, although I think that should include any remedial work that need sundertaking subject to survey. Ie if a survey throws up 10k of work needed, that can be negotiated off the agreed price.
April Fool? Who knows - but not a bad one either way...
One bit needs looking at - "For example, if the property proved to be suffering from subsidence or the buyer couldn’t secure sufficient finance, the contract would become void." Yes to the first (subject to there being a caveat in place that the seller and buyer must agree to resolve by negotiation/repair) wherever possible; No to the second. If a buyer cannot raise capital, why should they simply be allowed to slink away without penalty? The property has been removed from the market; the vendor has relinquished the right to market the property and therefore lose potential buyers - so the buyer should not be let off on a technicality. THAT will further reduce fall-throughs, as buyers will be better qualified and more confident of their purchasing power.
Or am I wrong?
Otherwise - sounds okay to me for what it's worth.
THIS, Mr Hendry, is a "positive proposal". I respectfully suggest you learn from it!
We have already implemented a similar pre-contract as an option for clients of our current 43 Homebuyer Centres to use.
I don't agree with a 10% deposit as that may be difficult due to 'availability of funds' at pre-exchange stage. Our 3 page 'buyer offer document' lists buyers and seller's obligations, and involves the Conveyancor holding a small deposit as security. This helps create more certainty in the transaction for buyer and seller alike. Considering the amount of fall-throughs this can only be good for the industry.
I have been suggesting this for years, I hope it is true and I hope enough people get behind it to make it the industry norm
Even if it is an April fools, can someone pleas look into implementing this!
If there is a way of making this work then im all for it!
However, I feel that unless the pre contract is extremely thorough then any good solicitor will try to worm his client out of the transaction if the purchaser changes his mind. So there must be safe guards in place to protect this.
Also will this mean that the search needs to be carried out prior to the signing of the pre contract and what else will need to be in place?
If there is anyway of taking anything good from the HIP and implementing this in the pre contract then this could also be beneficial!
isn't this already standard procedure in Scotland (or a variation thereof)?
Assuming it's not an April's Fool; a bloody good idea.
i dearly hope this is not an april fools as its a great idea, as it will get rid of timewasters.
Sir Bryan Carsberg... April 1st..... No, it couldn't be, could it?
In previous years Sir Bryan has demonstrated his singular sense of humour with classics such as the "Carsberg Review of Residential Property" undertaken for RiCS and NFoPP.
Carsberg is clearly a fan of the late Bob Monkhouse who you may recall said "When I first said I wanted to be a comedian, everybody laughed. They're not laughing now."
Too true Sir Bryan, too true.
The French have had preliminary contracts for as long as I can remember and, provided there are legally binding penalties for not completing, there can be no last minute withdrawals by either party. Buyers have to be sure they will have to have funds in place to complete their purchase, so banks may have to be more helpful than hitherto.
I hope this isn't an April Fool