Rattling your chains: How to make sure the links don't break
In a desperate market, it's easy for deals to fall apart before you exchange contracts. But, discovers Laura Howard, there are ways to combat 'gazundering', negative equity fears and plummeting prices
Sunday 09 November 2008
Many of England's archaic traditions are lovable and charming but – in the quietest property market for 30 years – its house buying and selling process is not one of them.
According to a survey published last week by property website FindaProperty.com, more than a quarter (28 per cent) of property chains collapsed in the year to September 2008.
But this is hardly surprising news in the current fragile market, says Michael O'Flynn, the content editor of FindaProperty.com. "The main issue is that buyers are nervous in a falling market. There is a real anxiety about negative equity. But others are simply victims of the mortgage drought and find they can't fund the next purchase after all."
That chains are able to come undone in the first place is the result of a law almost unique to England and Wales. It states that a buyer or seller is only legally bound to the deal at the point of exchange – when solicitors swap contracts – as opposed to when an offer has been formally accepted as is the case in Scotland and most other countries around the world.
This law means that people have nothing to lose by reducing their offer half way through the process (known as gazundering) or even by pulling out altogether.
The past year however has seen the property market deteriorate almost beyond recognition. House prices have fallen by 15 per cent and the number of mortgages agreed is 59 per cent lower than last October, according to the Council of Mortgage Lenders. This makes buyers twitchy and more prone than ever to change their minds, says Dean Sanderson, the managing director at Sanderson James estate agents in Manchester.
"Market conditions have meant that the number of chains breaking has increased significantly this year, despite the fact the chains are shorter with often just two or three parties." But, he adds, regardless of conditions, it's "very bad form" to suddenly reduce the price or change your mind. "Nevertheless, I have known people to hold sellers to ransom literally up to 10 minutes before the point of exchange. This is a nightmare leading up to Christmas when people have made arrangements and are packed and ready to go."
But it's not always a case of contrived cold-hearted gazunderers taking full advantage of a buyers' market, says Andrew Montlake, a partner at broker Cobalt Capital. "Although a valuation is valid for either three or six months depending on the lender, property values are going down in this time. We are therefore seeing an increasing number of people simply not wanting to pay the original valuation. They offer £20,000 less for example and say, 'Take it or leave it'. It doesn't seem fair, but it might not be deliberate either."
Whatever your view of this notoriously grey area, breaking a chain before exchange is not illegal – and it can have a devastating effect on your move. So what measures can you take to ensure your property chain holds together for as long as you need it to?
With lenders increasingly drawing in their lending criteria and cherry-picking their borrowers, the first thing to do is have your new – or increased – mortgage agreed in principle (known as an AIP). "The days of finding a property and then worrying about financing it are gone," says Mr Montlake. "The first stage of the process should be to see if a lender will lend to you and then you can test whether the property is adequate security when you find one."
But, while an AIP might reassure sellers and estate agents, in reality it's not a passport to a move, warns David Hollingworth at broker London & Country. "Although an AIP shows that the lender has carried out credit checks and will lend in principle, it's not a formal mortgage offer. If you return to the lender four months later with your AIP you will still only be offered a deal from its current range. If this has changed, it's possible you may no longer qualify."
It's also crucial to be realistic about your selling price from the outset, which will minimise the chances of your buyer getting cold feet about the price as you near the point of exchange. And this means factoring in that property values are still on their way down.
For example, according to the latest housing market survey from the Royal Institution of Chartered Surveyors, the gap between asking and selling prices in September was 9 per cent. While October figures may reveal this gap is closing as people start to swallow the bitter pill, house prices have fallen further since then too – by 1.4 per cent in October, according to Nationwide Building Society.
You can also take the law into your own hands and insist that your buyer cough up a non-refundable deposit as soon as a price is agreed and an offer accepted. "This will need to be an additional and separate legal process but could be well worth the cost and time," says Mr Sanderson.
It's also a good idea to get to know each person in the chain. As well as understanding the situation of each party, people are more likely to be true to their word if they can put a face to a name. Staying in contact with solicitors, estate agents and buyers and sellers in the chain will also ensure minor problems are not causing major delays.
All members of the chain should also be prepared to be flexible. Trevor Kent, the managing director at Buckinghamshire-based estate agents Trevor Kent & Company, says that, in some cases, this can mean a wealthy link in the middle of a chain buying the entire property at the cheaper end.
"When you are talking about losing a £1m home and spending a further £200,000 to free up the bottom of the chain, I have known some entrepreneurial types to consider it worthwhile."
For most people, though, being flexible will mean being prepared to move into rented accommodation should your buyer be ready but not your seller. And if the problem lies with your buyer, you could also consider a bridging loan, which will enable you to proceed with buying the new property without selling your current one. But costing up to 2 per cent interest per month on the entire loan, this kind of finance is both expensive and risky – especially in an uncertain market.
The government's Home Information Packs (HIPs), which became required by law last year, were supposed to reduce the number of collapsed chains by providing all information about a property upfront. But according to the survey from FindaProperty.com, a staggering 92 per cent of respondents said the HIP had "no effect" on the outcome of their chain collapsing or staying together.
But Mr Kent said the problem of breaking chains is becoming more irrelevant. "In a buoyant market, chains of 10 are not uncommon but today things are so bad for agents they would be happier with just one sale that actually looks like it's going to happen. It's a simple case of 'a bird in the hand'."'The buyers were financed to the limit so the extra £6,000 caused stalemate'
Richard and Amy Murphy and their five-year old daughter, Kaiya, relocated from North London to their six-bedroom country home in Stow Longa, Cambridgeshire, nine months ago. Just last week they were joined by a new baby son, Joel.
The Murphys were in the middle of a chain of five which, just days away from exchange, was on the verge of collapsing entirely. The problem occurred when the second property in the chain suddenly demanded an extra £6,000 from their buyer (the first in the chain) as the valuation on their home had come out higher than the asking price.
"The buyers at the bottom of the chain were already financed to the limit and simply couldn't raise the extra money from anywhere – so this £6,000 extra resulted in a stalemate," says Richard, a marketing manager. For three days, the chain was teetering on the brink of collapse while the buyers in question attempted to pool together the extra cash. "But it was unbelievably stressful for all parties," says Richard. However, thanks to the quick-thinking and organisation of two "brilliant" estate agents – one dealing with the Murphy's purchase and one with their sale – the top three links in the chain were able to raise most of this shortfall while the second link took a hit for the remainder.
Having already reduced their own asking price from £600,000 to £570,000 and established a significant reduction on the home they were buying from £850,000 to £750,000, the Murphy's £750 contribution to the pot was worth every penny, said Richard.
"It's incredible how a relatively small amount of money can clog up an entire system – but the English law is just subject to these vagaries, as anyone who has bought and sold a house will testify," says Richard. "It also goes to show how Home Information Packs, which we all had, don't make any difference at all." But he adds: "Actually, we were the lucky ones. I think we were the last cart out of the property market."
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