Fidlers Blog

Moving house – the ultimate first time buyers guide

I’ve seen a few guides for first time buyers knocking about but I’m not sure that any of them really hit the mark – they tend to just cover the bit that the person writing it is involved in – so if written by a solicitor they just cover the legal bit, if by an estate agent then just the property selling bit. I thought I’d have a go at doing something a bit wider (and hopefully more useful) than that – and here it is.

This guide is meant to cover buying a house or flat in England, Wales or Northern Ireland – note that Scotland has a different legal system in relation to buying a property. Also during the guide I’ll often talk about buying a house, but exactly the same applies if you’re buying a flat.

There’s a lot here! Because of that I’ve decided to split the guide into 3 parts – I’ll be doing the second part next week and the final part the week after.

Part 1 deals with your research – before you start looking round houses
Part 2 deals with the process of looking round houses – what to look out for and so on
Part 3 covers what happens when you strike a deal – the process from then until you move into your new home

Research – before you actually start
You can’t just jump in there and start the process off – you need to do a bit of research first, starting with…

1. What can you afford?
Good question – and it’s probably the most important one to answer before you start. Unless you’ve got a shedload of cash hidden away then the likelihood is that you’ll need to get a mortgage. The bad news is that even with a mortgage you’ll probably still need to have a small shedload of cash available.

What exactly is a mortgage?
It’s a loan, normally over a longer period of time than most loans – often over 25 or even 30 years. The other difference to ‘normal’ loans is that a mortgage will be fixed onto the title deeds of your house (they actually just write details of the mortgage onto the title deeds). That means whenever the house is sold then the mortgage must be paid off. It also means that if you stopped paying the mortgage then they could repossess the house and sell it to clear off the loan.

Can I get a mortgage?
In deciding whether to give you a mortgage the bank or building society will basically look at 2 things
1. Can you afford to pay the mortgage?
2. The value of the house

Deciding whether you can pay the mortgage involves looking at your income – they normally use a multiplier on your salary here – so for example they may lend you up to 5 times your annual salary as a mortgage (this multiplier in turn is affected by your credit rating). If there are two of you then they usually have a slightly different formula (e.g. 4 times the joint salary). So if you’re earning £20K a year they’d lend you a maximum of £100K as a mortgage. Don’t take these figures as gospel – they are just examples.

The value of the house is important to the mortgage company because it affects the amount of ‘security’ in the house – they need to be sure that if it ever came down to selling the house to get their money back, that the house would be worth enough to cover the debt. They link this in to the percentage that they are lending.

So for example if they lent £50,000 on a house worth £100,000 then if they eventually had to repossess they wouldn’t have a problem – even if they took a price reduction for a quick sale and sold if to £90,000 then they would get all their money back.

If however they lent the full 100K, and later had to repossess then there is more of a risk of them being out of pocket – they will have legal costs in repossessing the property and also will want to get back the interest they should have been paid. So from the lender’s point of view a 100% mortgage is risky

It’s a bit difficult to advise properly here because I’m writing this in August 2009. The mortgage market has been on a massive roller coaster for the last year, and it’s hard to see how things are going to be going forward.

What’s changed then?
Well if you go back to mid 2008 and earlier – for the previous 30 years or so it was not too hard to get a 100% mortgage. Although 100% mortgages are more risky for the lender, prices have risen so consistently over the last 30 years that if there was a problem, then by the time the property was being repossessed it had gone up in value and there was plenty of money for the mortgage company to be paid from.

During the credit crunch/recession/bank collapse mortgage lenders came under a lot of pressure not to take any risks. Because of this and a whole host of reasons that I don’t fully understand (but about which everyone seems to have an opinion) it’s not as easy to get a mortgage now as it used to be. At the time of writing 100% mortgages have only just started to come back onto the market. Anything I write here any what deals you can and can’t get will be out of date, so the best thing is to get yourself a broker to let you know what you can actually borrow.

An excellent source of information on mortgages generally is www.moneysavingexpert.com – they have quite a big section on mortgages. When I remortgaged a while ago I followed a recommendation on their site for a broker that looks at the whole of the market – I used London & Country (www.lcplc.co.uk) – I phoned someone up and they gave me examples of what I could borrow. I get no incentive for recommending these sites – I just think they’re good.

Personally I’ve found a lot of the online stuff so confusing (i.e. with so many conditions, and exceptions) that it was easier to speak to a human being and let them tell you what deals they can get you.

One last point on this – Don’t believe the hype. Don’t listen to what you hear in the press – their role is not to tell you whether or not you can get a mortgage, their role is to sell newspapers – nothing more, nothing less. So don’t be put off by press speculation about mortgage availability – speak to someone who knows and find you what you can actually borrow.

So from all that, you should have an idea of what sort of money you can borrow on a mortgage and how much money you will have to chip in towards the purchase price yourself. It’s also a good idea to work out what other costs you’ll have to fork out when you buy a house (e.g. conveyancing, stamp duty etc – if you can’t wait then click here for an instant conveyancing quote) but I’ll come back to that later – this talk of mortgages is practically sending me to sleep – lets get onto the house itself!

2. Finding the property of your dreams
The good news over the last 10 years is that with the help of the internet it’s got a lot easier to search for properties – you can search within a given area, London borough, price range, whatever. Perhaps the best known of the property portals is www.rightmove.co.uk but there are a fair number of others out there too such as www.primelocation.com and www.home.co.uk

Using these sites helps you check out a whole area quite quickly. However it’s still worth taking a drive around areas you’re interested in – you sometimes get a feel (good or bad) for an area that doesn’t come across on the websites – there could be a scary-looking pub at the bottom of the street – or a wonderful park. It’s also worth driving or walking through at different times of the day (and night).

On the question of where you should buy – although it’s corny it’s still true – the 3 most important factors are Location, Location, and Location. Buying in a good location will make it easier when you come to sell. However if a property’s in an excellent location then of course you’ll pay more for it, and it’s sod’s law that the one you really like is just too expensive. You may therefore have to compromise to get a property that contains all you need and in an area you can afford.

There’s so much out there!
I know whenever I’ve started to look for a property, I’ve found that I get very excited by that massive number of properties available – once you start looking it seems there are loads and loads – you must be able to find something in this lot!

There’s nothing out there!
However when you start looking through you start to realise that this one’s too small, that one’s next to a pub. This one’s got a pokey kitchen, that one smelled funny, and so on. It’s not long before you do an about-face and decide that there’s nothing out there after all. What you’re doing here is narrowing things down – which is very important unless you just want to be viewing properties every day for the next year.

Stuff you might want to take into account to help narrow down the choice includes
- How many bedrooms
- Does it have central heating? If so – is it fairly recently installed?
- Does it have double glazing?
- What’s the kitchen like?
- What’s the bathroom like?
- How big is the garden?
- Is there a garage/off street parking?

Now it may be that because of your price range and where you want to buy some of these things are non-starters. But things like the number of bedrooms is pretty crucial and should help you to weed out a lot of properties quite quickly.

What sort of property should you look for?
Most first time buyers will be buying a smaller, cheaper property. If you’re in London this will almost certainly be a flat, (most of London is divided into flats) and if you’re in other parts of the country flats will still be something to consider because they are generally cheaper than houses. Most first time buyers will either be buying a new or newish flat, maisonette, or town house, or an older mid-terrace property or flat.

New properties
A number of builders have gone into the market of selling starter homes – building developments of flats, town-houses and maisonettes. These can often look very attractive as you can normally move in with no work to do.

Pro’s and cons of a newer property:-
- extras are often thrown into the price such as dishwasher, washing machines. Whilst these are useful they can sometimes be used as justification for a slightly higher price. The only reason I mention this is that if you have to sell the property again quite quickly then it might not fetch what you thought – when you’re coming to sell yourself then things like the washing machines etc will generally be ignored
- Don’t forget you’re buying from someone whose job it is to sell you the property (as opposed to buying from a private seller – an ‘amateur’. That’s not necessarily a problem – just bear it in mind)
- You will normally get a 10 year guarantee on the property from the date they are built
- The rooms in newer properties can be smaller than on older properties
- Insulation in newer properties can be a lot better than on older properties
- You usually have no work to do – you can just move in
- The property has no ‘character’
- People generally love them or hate them

Older properties
As a starter home you’re probably usually looking at mid terraced properties – from around 100 years ago. Usually solidly built but at that time builders paid little attention paid to damp proofing so this has often been a problem over the years. However an injection damp proof course usually sorts sorts this out and most mid terraces should have one.

Pros and cons of an older property:-
- You’re more likely to have to do stuff to an older property (again though the previous owner may have sorted all this out)
- They can have character
- Insulation etc will not normally be very good (but can be remedied quite cheaply)
- Double glazing – they won’t necessarily have this
- Again people love them or hate them

Finally in terms of the value of houses on the same street, a good piece of advice is to try and buy the worst house on the street – it will be pulled up in value by the better houses; conversely a spanking house on a shabby street will never achieve it’s potential value.

What about a fixer-upper?
Usually when you’re looking round you’ll find something that would normally be out of your price range because it ‘requires modernisation’ – a fixer-upper. Now you don’t need me to tell you whether it’s within your abilities to do DIY work on a house – personally it’s something I really enjoy, but if you’re taking on something like this:-
- Go in with your eyes open – get estimates for all the work required
- This WILL cause hassle with your mortgage – especially if you’re having a high percentage mortgage – they will often make a retention (hold back part of the mortgage money) until key works have been done – you’ll then have to come to an arrangement with the seller on getting some of the work done between exchange of contracts and completion OR borrow extra money to tide you over until the work has been done
- If you’re planning on doing the work yourself you need to make sure you can comply with any statutory requirements (planning regulations, building regulations etc), but also make sure you’ll have the time – fixing up a property yourself is rewarding but knackering. It’s no use having a lovely house and a broken marriage!
- If you have the patience, skill and time, it can mean that you get into a nicer property than you thought you could

3. Is it the right time to buy?
It’s stick my neck out time! I would say that YES! this is about as good a time as you’re going to get to buy a property. Prices are on the rise once again. Interest rates are at an all time low. Although mortgage deals are nowhere near as good as they used to be when compared to the bank of England base rate, in terms of the actual rate you’d be paying they’re still pretty good.

As an example a couple of years ago the bank of England base rate was 5.75% At that time you could get mortgages with special introductory periods of below the base rate – Cheltenham & Gloucester were doing a 2-year tracker deal at 4.74%

Currently the bank of England base rate is 0.5% One of the best trackers you can get (today) is from RBS/NatWest – at 2.89% which is 2.39% over base.

Now if you focus on comparison with the base rate it looks awful – you used to get a deal below base and now the best you can get is way over base. However what actually matters to you is the amount you’re paying out. 2 years ago you’d have been paying out 4.74% – now you’d be paying out 2.89% – that’s about £150 a month less!

So even if the banks aren’t offering great deals when compared to the base rate, the actual rates you can get now are actually pretty damn good!

In terms of house prices we’ve seen house price increases in all the statistics for the last few months. As conveyancers we’ve noticed this in terms of the volumes of people moving house. The low point for us was the 6 months leading up to January 2009 – from February the number of people moving has gradually risen.

It’s impossible to say how quickly prices will rise from here on in, but I do believe they are only going one way now for the foreseeable future and that is upwards.

4. Cost of buying a house (legal fees stamp duty etc)
Part of working out what property you can afford is working out the total costs of buying. Here are some of the things you should take into account:-
- Mortgage administration fee – many mortgage companies charge this – it’s basically a fee for saying yes. They charge it because they can. It can be anywhere from a few hundred pounds to a few thousand but should be made clear to you at the outset of arranging your mortgage
- Mortgage valuation fee – This is the mortgage company getting a valuation on the property – you have to pay for this – it’s normally a few hundred pounds. See note below on Surveys
- Conveyancing fees – this is where we come in – Click here for an instant conveyancing quote. This quote will also include things we need to pay to other people on your behalf (such as Stamp Duty, Land Registry Fees, and additional searches)
- Moving costs – are you going to use a removal company, hire a van, or borrow your dad’s car?

5. HIPs and Energy Performance Certificates
Every house being sold now should have a Home Information Pack (usually called a HIP) prepared on it and available for you to look at. It’s worth checking this out now as any HIP prepared after the 6th April 2009 will include a questionnaire filled out by the sellers – useful to read through this before you look round the house as it can give you a bit of background information. The HIP will also include an energy performance certificate (known as an EPC) – this basically produces an energy rating for the house.

At the time I’m writing this (August 2009) this information is largely irrelevant – other than that if the house is inefficient it will cost more to heat than one that is more efficient. However, in view of the importance of all green issues politically, I think it can only be a matter of time before we start to see tax implications for inefficient houses – so for example if your house is very inefficient you may pay more in local government tax. It’s not relevant yet, but it may become a factor in the future. Having said that, even if your house is inefficient you will be able to take steps to help it (such as more insulation, energy-efficient light bulbs and so on).

If you want a quote for providing you with a HIP, then click here for a free HIP quote.

That’s it for now. Next time we’ll deal with the process of looking round houses, and making an offer to buy one.

To go to Part 2 of the ultimate first time buyers guide click here

Cheers

Mark

Moving house is one of those things that causes incredible upheaval in your life. If you’re thinking of moving it’s a good idea to get it clear in your mind – before you start – what you’re going to have to do, and in what order. This can help to reduce some of the stress later on.

We sometimes get calls from clients who’ve seen a house they’ve fallen in love with and want to go ahead and buy it when they haven’t sold their own house and they can’t afford to do this. These people sometimes talk about taking on bridging loans (to allow them to own two properties at once) – this is very risky, very stressful, and can all too easily end in tears.

So this guide is designed to give you an overview of what you should do and in what order. These ‘Sladey top tips’ are aimed at people who are selling and buying – for first time buyers I’ll do a separate guide.

Overview

Here’s an overview of the order in which ideally you should be doing things

Step 1 – What can you afford?

Step 2 – Do you want to Move? (and some cautious looking around)

Step 3 – Sell your house

Step 4 – Look for one to buy

Step 1 – What can you afford?
So you’re thinking of moving house – what next? Well the first thing is to find out what you can afford – there’s no point in looking at Madonna’s old place when you won’t even be able to afford the heating bills.

Generally, what you can afford, will be made up of the following:-

1. How much money you’ve got in your existing house (so if you sell it and pay off the mortgage, how much money you’ve got left over) – this is known as the equity in your house
2. How much money you’ve got saved up – if you want to use those savings on the new house
3. How much money you are going to borrow on a mortgage.

There are two main unknowns here – firstly how much money you’ve got in your existing house (because you don’t know how much your house is worth), and secondly how much money you can borrow on the mortgage (because you don’t know how much a bank or building society will lend to you).

1. How much money you’ve got in your existing house
The best way to find this out is to get a valuation of your house carried out by an estate agent. They will still generally give you a free market appraisal type valuation – i.e. what they think you’ll be able to get if you sell your house now. Obviously this is only their opinion but they should have a better idea than most of how much your house will sell.

If you don’t feel like getting an Estate Agent into your house then you can also do your homework yourself online – there are a number of sites where you can tell how much properties sold for. Two I’ve used are http://www.nethouseprices.com/ and http://www.houseprices.co.uk/ – they both get their data directly from the Land Registry (the amount that people paid for their property is now public information that anyone can look at). Don’t forget if you’re looking at these sites it’s just raw information – you have to look at the actual properties sold as well and decide if they are worth more or less than your home. You also have to consider when they were sold – property prices were on the rise for so many years, but fell back during 2008. In our experience they’ve now bottomed out, so it’s a very good time to buy, as chances are they’ll never be this cheap again.

Knowing how much your house is worth is only part of the equation – most people have a mortgage on their property and you need to take into account how much it will cost to pay this off. You should try and get hold of your most recent annual statement from your mortgage company (they send this to you each year and it shows how much you owe on the mortgage). You also need to bear in mind if you’re still in any ‘special rate’ periods. This normally affects you if you’ve had a mortgage in the past on a special rate – e.g. 1% over base or a fixed rate. In order to give you this special deal the mortgage company usually stick in a penalty clause – so that if you pay the mortgage off within a certain period of time you’ll have to pay a penalty. The details of how much you have to pay will be on the original loan documents that you signed when you took the mortgage out (if you can’t find these then you might be able to get a copy from the solicitor who acted when you mortgaged, or by contacting the mortgage company themselves).

These penalty payments can be a nasty surprise if you’ve forgotten about them – they usually run into the thousands. If you’re near the end of the penalty period it’s usually worth waiting until it’s run out before you pay the mortgage off – in such cases paying your mortgage off just one day early can cost you thousands of pounds.

So from getting a value on your house and working out how much to pay off your mortgage you’ll be able to work out the equity you’ve got in your house (i.e. how much money you’ve got tied up in it)

2. Money you’ve got saved up
You presumably know this already – if you don’t then maybe you’ve got a bit too much!

3. Money you can borrow on a mortgage
Again this is something you’re not going to know off the top of your head. The mortgage market has been in massive turmoil since the start of the banking crisis and it’s a completely different world to just a couple of years ago. However, contrary to what the papers might say, the banks and building societies ARE lending mortgages – they’ve got to as it’s a major source of income for them. The important thing here is not to listen to the newspapers or the people down the pub – check out the reality for yourself.

For this I’d recommend you speak to an Independent Financial Adviser who checks the whole of the market (i.e. not tied to any one lender) – they should be able to tell you how much you can borrow, and on what terms. With the interest rates at an all time low at the moment money has never been so cheap to borrow. People have moaned that the banks are no longer being so competitive over the rates they offer compared to the bank of England base rate, but the actual rate you’ll pay at the moment is generally the cheapest it’s ever been. For which IFA to choose (and more financial information) I’d recommend checking out Martin Lewis website www.moneysavingexpert.com – we’ve no affiliation to him at all but there’s good advice on the site.

After speaking to an IFA you should have a good idea of how much money you’d be able to borrow.

The amount you can borrow is normally linked to how much you’re earning, and how big a percentage of the purchase price you want to borrow – usually the better deals are saved for people who are borrowing now more than 75% of the purchase price. You can get mortgages up to 95% now – they might not be on such a good deal, but don’t forget this will probably still be a lot cheaper than it was 2 years ago – just because the Bank of England base rate is so low.

After you’ve done all this homework you should have a clear idea of what you can afford.

Step 2 – Do you really want to move house?
This might seem a daft question to ask but it’s important to give it some consideration at this stage. We have had clients who get up to the final stages and pull out because actually they didn’t really want to move. This causes headaches for everyone involved.

This used to be made worse because Estate Agents often used to run a ‘no sale no fee’ policy, partly with the aim of encouraging people to put their properties on the market which then encourages them to move when people start making offers! This really encouraged speculative sellers who are sort of swept up into selling their properties on the basis of “what do they have to lose?” However these are often the sort of people who would pull out at the last minute when they realise it’s not actually what they want.

This has all changed with the introduction of HIPs – Home Information Packs. It’s now the law that before you put your house on the market you have to have a HIP in place. HIPs generally cost between £300 and £500, and do not operate on a ‘no sale, no fee’ basis – you’re going to have to pay for the HIP even if you take your property off the market.

So if you’re selling you’ll have to put your hand in your pocket and pay for the HIP (there may be an option to pay over a period of time but sooner or later you’ll have to pay for it). The upside is that when you’re buying you’ll be buying off people who are serious about it (so less likely to pull out at later in the transaction), and also that they will have done a couple of the searches that you need to have done (the Local Authority and Water searches) – so you won’t have to pay for them again.

To help you decide if you want to move it might be an idea to look round and see what’s out there. This is a bit of a double-edged sword though – it’s sod’s law that if you look now you find the house of your dreams, and you can’t go ahead and buy it. Just looking around though might make you appreciate that there are a number of houses out there that would suit you – it can help you make that decision to move.

Step 3 – Sell Your House
So if you are serious about selling your house then the next thing to do would be to put it on the market. For this I would recommend using an Estate Agent. Estate Agents may not have a great public image, but in the UK I think they do provide a valuable service. I moved house in 2004, and the advice of my agent was really useful. I already knew what the house was worth but my agent advised I advertise it at a slightly lower price, stating that I wanted ‘offers over’ this amount. This created a bidding war which meant I got quite a bit more for the house than I was expecting. I would never have thought of this myself. This isn’t appropriate in some markets (the market’s nothing like 2004 at the moment so it’s probably not appropriate), but they should be able to give you good advice which could save you money.

The other thing is that British people tend not to be comfortable haggling – and this is another area where the Estate Agent comes in handy – as a go-between. If you’re buying though make sure you remember the Estate Agent is acting for the seller – not you. If you’re selling make sure your Agent is looking after you.

How to choose an Estate Agent? I would still say personal recommendation counts for a lot – try and speak to people who are selling and ask what sort of service they are getting. Also see who’s got a lot of boards up in your area – this could be an indication they’ve got a good name in the area.

Once you have the house on the market you’ll hopefully get viewings and offers on it. During this period it is a good idea to cautiously start looking to see where you want to move to. Again you can’t commit to any new house at this stage because you haven’t sold your own property. This is not unusual – most other people looking round will be in the same position. You may even find the house you want, and make an offer on it. Sometimes the seller will accept your offer – sometimes they’ll tell you to come back when you’ve sold your own. This is a fair thing to do because until you’ve sold your own house you really cannot go ahead with the new one (unless you get a ‘bridging loan’ which I would avoid like the plague).

I would recommend you instruct your solicitor on the sale at this point – before you’ve got a buyer. Your solicitor can then get a copy of the deeds ready, and get you to fill out property information forms so that when you do find a buyer you can move ahead quickly.

Eventually you’ll agree to sell your house. Again this should be to someone who is either a first time buyer or has a completed chain beneath them (i.e. everyone in the chain has definitely sold their property) – so none of them are still waiting to sell. A chain of transactions can only move at the pace of the slowest link in the chain – so if someone hasn’t sold yet then none of you can go ahead.

Step 4 – Look for a property to buy
So now you’ve sold your house – this is where things get exciting/stressful! If you’ve already found somewhere to buy you can now go to them and make a firm offer to them. You’re now in a stronger position, and may feel you want to negotiate more on the price (for example if you’ve dropped the price on your own to sell it, then you might want to recover this by reducing your offer on the one you’re buying).

If you haven’t found one yet then you need to get looking NOW! If you take too long to find one to buy then potentially your own buyer could pull out and go elsewhere (if it came down to this you could always move out into temporary accommodation and put your furniture into storage rather than lose the sale. This causes a lot of upheaval but at very slow times it can be a good idea).

The plus side is that now you’ve sold you are VERY attractive to people selling their house – this can allow you to negotiate harder on the price.

Once you’ve struck a deal then you should instruct your solicitor on the purchase as well. We’re then into conveyancing (I’ve put some beginners guides to conveyancing on the main website)

What’s the point of all this?
The hard thing about all this is tying everything together. You can find the house of your dreams, but not have sold your own; on the other hand you may sell yours really quickly but not be able to find somewhere else to buy. While you’re doing all this you’ll be meeting weird and wonderful people in all sorts of different situations who are moving for all sorts of different reasons.

If you do things in the order I’ve stated then I’m afraid it will probably still be a stressful experience, but it might be a bit less stressful than the alternatives. For example you find the house of your dreams and lose it because you haven’t even started to sell your own, or you can’t afford it because you haven’t done your sums, or you get way down the line and finally realise that what you really want is to stay where you are and buy a boat.

Reaction from others:-
Funnily enough when we last moved the thing that took me by surprise was the reaction of others. Telling people that you’re moving seemed to make people question whether they themselves should be moving, which in turn provoked some surprising reactions. A couple of people became quite defensive about the value we’d placed on our house saying it must be worth a lot more than that (translation= “if your house is only worth that much maybe mine isn’t worth as much as I thought”). Moving house is one of the great upheavals in life, and I can only assume that being presented with someone who’s going through it makes people question whether they should be thinking about it as well. Anyway, what do I know?

Hope this article is useful – please feel free to comment or ask questions below

Cheers

Mark

If I had to pick one area in conveyancing where people have wasted hours talking at cross-purposes then it would be about the word ‘Deposit’. When a buyer walks into a solicitors office they are absolutely clear what the word means. The solicitor in turn is also absolutely clear what the word means. The only problem is that they are each thinking different things. This guide is meant to de-mystify the word Deposit and hopefully avoid misunderstanding.

So there are 2 ways of looking at a Deposit – the ‘Normal’ way and the ‘Legal’ way. Here’s how they differ:-

The ‘Normal’ meaning of a conveyancing Deposit
If you’re purchasing a property and you are a human being (as opposed to a solicitor), then when you say the word ‘deposit’ in relation to purchasing a house you usually mean the amount of money you yourself are putting down (as opposed to the amount that you are borrowing on a mortgage). So if you’re borrowing 60% of the purchase price on a mortgage then you in turn are going to put down a deposit of 40%. That’s what most people mean when they first walk into an estate agents or solicitors office and people start having a conversation about deposits

The ‘Legal’ meaning of a conveyancing Deposit
OK here’s the science bit. As solicitors are involved you can trust us to do things a bit differently. In the conveyancing process there is a clear and definite meaning to the word deposit. To explain this you have to firstly know a bit about the house purchasing, or conveyancing, process. Conveyancing takes place in two main parts – before contracts have been exchanged, and after contracts have been exchanged.

Before contracts have been exchanged:-
up until the nanosecond that contracts are exchanged, either party can pull out of the transaction, with no comeback. You can have been in negotiations for months and months, and be all ready to exchange contracts. You might even have agreed you’re going to move in the following week. Even thought everything is gearing up to it all moving ahead, at this stage, if the other party change their mind then there’s nothing you can do about it.

After contracts have been exchanged:-
Everything changes with exchange of contracts. From that moment on you are bound to buy the property, and the seller is bound to sell the property, at the price that is set out in the contract. This all has to happen on the date entered in the contract for completion (the completion date). Once contracts have been exchanged then if one party pulls out the other party can sue them for damages.

I told you the science bit was coming didn’t I, well here it is. When you exchange contract you have to hand over some money as an indication that you are serious about purchasing it. The money that you hand over is what solicitors call the deposit. Usually this is meant to be 10% of the purchase price. Over the last 25 years however it became normal for sellers to allow the buyers to pay over a reduced deposit (usually because the buyer was having a 95% or 100% mortgage – so they just didn’t have 10% lying around). Even if the seller agrees to accept a reduced deposit, if the buyer then pulls out of the transaction they are liable to lose the full 10%. So if they’ve only paid over 5% then they pull out the seller can keep that 5% and sue the buyer for the other 5%.

So imagine you’re purchasing a property for £100,000, and you’re having a £70,000 mortgage to help you. Your understanding of the deposit would be that it’s £30,000 – that’s the amount you’re putting down on the property. The solicitors understanding of the deposit is that it will probably be 10% of the purchase price (£10,000).

It might sound like I’m labouring a simple point here, but the problem often crops up because both the buyer and the solicitor walk to each other with a clear understanding with what they mean by the deposit – but both meanings are different.

What about a chain of transactions – what happens then?
So what happens if you have a chain of transactions – i.e. A is selling to B who’s selling to C who’s selling to D. In theory each buyer would take the deposit coming in on their sale and have to make it up to 10% before passing it over on their purchase. That is actually the correct situation and some sellers will insist on this (and they are perfectly entitled to). The normal course of events however is that whatever deposit is handed over at the bottom of the chain (i.e. by the first time buyer) is then passed up the chain, so the people in the middle of the chain don’t have to find anything extra for their deposit.

Holding deposits – paid to the Estate Agent
Sometimes Estate Agents may ask for a small deposit to ‘hold’ the property for you, or as an expression of goodwill. BEWARE! Handing over of a deposit at this stage does not bind the seller to sell to you at all. They can sell elsewhere and you can do nothing about it. Even though our advice would be not to do this, you may still want to do it (if it’s not a large amount) because you are wanting to keep the estate agent sweet. However it is generally only the estate agent who would benefit from this by having the holding deposit money in their bank account, earning them interest. You should be able to get your deposit money back from the estate agent if it all falls through, but if you haven’t handed it over in the first place then you won’t need to worry about getting it back will you?

Giving a ‘holding’ deposit direct to the seller
No no no no no no NO! We have had clients that have done this (years ago now) – they have fallen in love with a house and in an effort to convince the seller that they are deadly serious about it they have given them tens of thousands of pounds in cash. This is about as risky as you can get. The seller can take your money and spend it on a new car, and then sell the property to someone else. In these circumstances you could sue the seller for your money, but that’s never ever ever as good as holding onto the money in the first place. As an example the seller could clear off massive gambling debts with your money – when you sue them they own nothing and the house is in negative equity. You’ll get nothing, apart from a legal bill when you try and get your money back.

I’m painting a black picture here but it’s important that you understand the risks involved. NEVER give a deposit direct to the seller. As a final reason not to do it, handing a deposit direct to the seller is a recognised warning sign under money laundering regulations – which could in turn trigger you being reported for suspected money laundering.

I hope this clears a few things up – if you’ve got any questions about it then post a comment and I’ll try and answer it

Cheers

Mark