Between Offer and Exchange
After your Offer is accepted you inform your solicitor, mortgage company, surveyor and get them involved and performing all they need to do so that you can be confident you are buying a property which represents what was advertised. Once they confirm all their results to you and you are happy the ‘Exchange of Contracts’ usually just known as ‘Exchange’ takes place.
This usually takes 4 to 6 weeks. If you need the exchange to happen much quicker (maybe the seller specifies this as a condition, this is often the case with property developers who ask for exchange within 28 days) then you must ask this of your solicitor before instructing them to take on the job and in return, they should confirm in writing that they guarantee they will perform as such.
At this point the buyers commitment to purchase and the sellers commitment to sell for the amount agreed is set in stone by law. This involves each solicitor (yours and the sellers) exchanging a legal document (contract) outlining the sale, the sale price, what is to be included and the date the final exchange of money for the legal title of the property (known as Completion) will take place. With the Exchange, the first payment of monies, known as the deposit, is paid across. This is commonly 20%, but can be anything you agree (there is no point giving more at this stage as you either lose interest on what could be in your bank for another few weeks or start paying interest on your loan before you occupy your new property).
Special Tip: if you didn’t go through these checks before making an offer on the property (if you did, well done!), make sure you go through our Property Checks right now.
We would always hope this process is smooth and hassle free, yet this isn’t always the case. Below we show you what can come up.
Once a seller agrees to your offer you would hope that you were both bound to honour that deal (as long as the property is as it was advertised). Unfortunately, some estate agents may continue showing the property or forward offers from other buyers, after yours has been accepted. Sometimes buyers approach a seller directly, asking what price they accepted and then offering a little more to steal the deal. Whilst this is very unprofessional and immoral, it’s totally legal.
You may have paid out thousands of pounds in solicitors fees, survey fees and the like and this can happen just days before Exchange. Usually when it does happen it is early on (literally in the few days after your offer is accepted), as sellers feel more obliged once solicitors and surveys are involved. If they do go with a higher offer though, you lose the money you paid out in legal and survey fees… ouch!
This is why you want the Agent to make the property look ‘sold’ when it is under offer, by removing sale boards and website listings. Realistically if the seller does accept a higher offer, after they had already accepted your (you have been ‘Gazumped), the only thing you can do is to appeal to their moral side and perhaps have the estate agent convince them (or go direct if the other buyer came through the same agent) that you are a better ‘quality’ of buyer and the other person could mess them around, after all, they are already using sneaky tactics.
If nothing else works, raising your price to meet the new offer price is all you are left with. Only do this as a last resort if you believe the property is still the right price (and you are not over-stretching). Most times the seller will revert back to you as their greed for the higher price is matched by their rationale that you are the ‘fairest’ and perhaps most deserving buyer.
Turning the tables on Gazumping, Gazundering is where You, the Buyer does the dirty! Before exchange (often the same day or a few days before) the Buyer reduces their offer. So, say you agreed to pay £800,000. On the day of exchange you may turn around and say you are only prepared to go through with the purchase if they sell to you at £780,000. This tactic is to be avoided completely.
Most times the seller will tell the buyer to ‘get lost’ as they still hold the power. This would mean you lose your legal and survey fees and quite possibly the property you were after. Where buyers have taken a chance and done this, the seller often pulls out completely, punishing the buyers tactics by refusing to sell to them at any price. Tactics like this are often used by property developers, especially in sealed bid situations where they make a high Offer to win the property, then once the competition has gone, try and haggle lower. Unless the seller is desperate and you are the only interested buyer this rarely works.
If you make an offer then decide you have over-stretched or over-valued the property, tell the Agent and seller within 48hours. They will appreciate the honesty and may entertain a lower price. If the Bank decide the property is not worth as much as you are paying for it and offer to lend you less (or require a bigger deposit) you may involuntarily be in a position where you can no longer afford the sale price. Come clean immediately and state the facts – it’s your best chance of keeping the sale.
Of course where a survey throws up works that are needed which weren’t obvious to the buyer or made known by the seller, then a price renegotiation can take place on civil terms and we wouldn’t technically call this Gazundering.
Mortgage Survey Values Property much lower
Anyone lending you a cast sum of money will want some insurance against getting that money back. A mortgage lenders insurance is the property itself. They own ‘first title’ on the property which means until you have repaid their loan, if you stop paying the interest and capital repayments on the mortgage, they can legally seize the house and sell it to recover their loan amount and interest due.
As a result the mortgage provider needs to check you are paying a fair price for the property, so they can sell it at a similar price if need be. This is why they require you to have a survey (carried out by someone they employ and trust, known as a Chartered Surveyor). Of course you have to pay for this!
A few years ago mortgage surveyors were under instructions from the Banks and Building Societies that they wanted to lend as much money as possible. At the same time property prices were constantly climbing. So surveyors would place high values on properties, assuming there was little risk. Then the recession came and Banks and Building Societies lost alot of money when properties fell in value, loans defaulted (owners stopped paying the mortgage) and the mortgage providers took possession of homes worth less than the loan value outstanding on them.
Learning from their mistakes, mortgage providers responded by making loans much harder to obtain. At the same time they instructed their surveyors to be cautious in valuing properties and also to factor in that property prices in the UK could fall as much as 25% in the future (they hope they won’t and don’t expect them to, but have to build in a safety buffer).
So commonly, a flat in a hot central London location may have several people wanting to buy it a £1m. The buyer agrees an offer at the asking price, only for the mortgage providers surveyor to turn up and say the property is only worth £850,000. On one hand they are not looking at the crazy demand in the market (they know it can change quickly). They instead are trying to be rational. So what happens?
Well if the valuation is only a little lower (say 5%) than your agreed purchase price, the Bank probably overlook it. If the difference is 10% or more, they may offer to lend less or ask you to provide a bigger deposit. Lets say the buyer in this example was using a 20% deposit of£200,000 and borrowing £800,000. This would mean at a valuation of £800,000, if the value of properties falls, the mortgage company may not get back all their money if the property is forceably sold. So they will offer to lend you less money, say £700,000. Now you either find another £100,000 yourself, or have to reduce your offer price to £900,000.
If this happens, think carefully about whether paying that much money for the property is worthwhile. Sometimes it’s better to be cautious and wait for a cheaper or better value property. Don’t overstretch because you are emotionally attached to the property.
Survey turns up hidden problems
Depending on the type of survey you have, the surveyor will check everything from basic structural condition of the property (for any survey) to the operation of taps (for the most comprehensive survey). It’s likely the survey will turn up some issues, for no home is perfect. Once you have the final report (the surveyor often contacts you by phone and gives you an informal assessment) you can decide how to proceed.
If there is a major structural issue, or possibility of one, then the surveyor will tell you before the full report is sent to you. Issues such as subsidence which could lead to very large costs in the future, possibly not covered by insurance, mean you should walk away from the property. It’s not worth taking the risk, and it may be the reason the property is up for sale.
Large concerns such as a roof that needs replacing or if the wiring is so old that a complete re-wire is suggested should not automatically end your interest in the property. Ask the surveyor what they think the likely cost of remedying the issue is and ask them for some contacts who could visit the property and quote for the work to be done (always add 20% onto quotes for unforseen extras). With major works, you may already have known from the condition of the property that they were likely. If they are a complete surprise, or the extent of works is more than was indicated, it is fair to go back to the Agent and Seller and renegotiate. Keep your explanations simple and factual.
Start by asking for the property price to be reduced by the full value of the expected work cost. If the seller is reluctant, consider offering to pay upto 50% of the cost and have the property reduced by the remainder. If you really want the property and think someone else may step in and pay full price despite the problems, then be careful of holding the seller to an ultimatum. If the works go beyond your total budget, you do have to be sensible and ask for compromise or walk away.
Finalise Mortgage Details
It may have been weeks or months since your mortgage was agreed in principle. Since that time better offers may have come about so it’s worth checking the deals out there again on a website such as Money Saving Expert , Money Supermarket or Compare The Market . Click on any of the underlined links to goto their mortgage comparison pages.
Arrange Buildings Insurance
When you buy a property, once the Exchange of Contracts takes place, you are legally obliged to buy the property. Say you have just paid a £300,000 deposit on a house, with £1,000,000 to follow on completion. If between Exchange and Completion the property burns down or is flooded, you are legally obliged to pay the full balance and purchase the property. Most buyers don’t realise this.
As a result you MUST have Buildings Insurance in place for Exchange of Contracts. Get several quotes while the legal work and surveys are ongoing. On the day of Exchange call the insurance company and get the property covered. If you are buying a flat, the buildings management company (this could be an actual Company or just a residents committee) will have the property insured. Your solicitor will check this is in place, for peace of mind, mention this to them so they double-check that you have no extra obligations on Exchange day.
For houses buildings insurance is broken down into ‘land value’ and ‘cost of rebuild.’ For a£750,000 house, the cost of rebuild is likely only £300,000. Ask your surveyor for estimated rebuild cost and land value as you will need this to get a policy.
During the conveyancing process your solicitor may discover that the property had works carried out where approval was not sought from the local Borough Council (e.g. change of windows, extensions) or where certificates were not obtained to guarantee the standard of work done (e.g. certifications for electrical work). As the new buyer you become responsible for anything that was previously undertaken.
Where there is a concern that you could be prosecuted or asked to reinstate the property to its original condition before works were done (e.g. remove UPVC double glazing and re-install traditional single glazed, wooden framed sash windows) an Indemnity Insurance contract can be taken out and will be suggested by your solicitor. The cost is usually low and the policy does not usually need renewing each year like other insurance. Try and pass this cost onto the seller who is responsible anyway.
In cases where large amounts of work were carried out without permission (a large extension or loft conversion) there may be no cover available or it may be very expensive. In this case your solicitor may advise against proceeding with a purchase.
One type of Indemnity you should ask your solicitor about (they often won’t think of it or mention it) is Tithe or Chancel insurance. Very old laws dictate that if the land upon which your property is situated once fell within certain boundaries of land owned by the local Parish (church) that they may pass on costs and charges to you when they deem this reasonable. In a few cases this has led to homeowners being hit with bills of tens of thousands of pounds. It is rare, yet this is no comfort if it happens to you. Better to check and if need be an insurance policy to protect against claims only costs £25 or so. Small price for peace of mind.
Get Your Money Ready!
You will have to transfer your deposit money to your solicitor in time for Exchange of Contracts. They send the money to the sellers solicitor (you never do this directly). As you will be transferring a large sum of money it is very important you have it ready in time as you may lose the property if you delay the Exchange. If money is coming from different sources (e.g. savings accounts, bonds, parents) start transferring it all to one account when it looks like the survey and legal checks are okay and you think it is likely you will proceed with the purchase.
Let your bank know what you are doing and they may set aside a special account for the funds, or at least advise on the best way to handle this as transfer methods for big sums of money can attract extra costs, delays and paperwork. Aim to have all monies ready in one account a week before the intended Exchange date. Check with your bank about how long transfer of this money to your solicitor will take. Always send the money so it arrives at least 2 working days before it is needed, so you have time to remedy any delays.
Take Out Protection
You may wish to consider mortgage payment protection policies which pay your mortgage should circumstances change so that you can’t. We have written about this on our Mortgages page. Also consider taking out life insurance policies if you haven’t already. If you buy a property and something happens to one of the contributors to the mortgage, it could mean the rest of the homes occupiers (often your family) can’t meet the mortgage payments. Life insurance policies are often taken out to offer peace of mind. Always shop around and don’t just take a policy from your mortgage provider because it’s convenient.
Special Tip: aim to Exchange on a Tuesday. Mondays are busy for solicitors and Fridays don’t leave you any time if something comes up that needs resolving. Tuesdays are a day when people are fresh and there is plenty of time to have issues resolved before the weekend.