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House buying made simple?

Posted: 13/11/2017


In its 2017 manifesto, the Government committed to making the home buying process cheaper and more efficient. Since the June General Election we have seen a succession of consultation papers looking at tackling the housing crisis. The latest one, 'Improving the home buying and selling process' (published on 23 October), looks at the perceived inefficiencies and asks what improvements can be made.

Criticisms of the current system

The general criticism of the system in England and Wales is that it is costly, slow and allows for underhand practices such as gazumping (sellers accepting a higher offer) and gazundering (buyers price chipping). This is a consequence of the parties not being legally bound until exchange, which occurs fairly late in the process. By this stage, as a result of the principle of caveat emptor (buyer beware), the buyer has already carried out its due diligence and incurred the bulk of its costs.

The consultation relies on market research of 2,000 buyers/sellers for the period to March 2015 and refers to ‘small-scale studies' that indicate that a quarter of transactions fail to exchange. It would be surprising if the true proportion is actually that high, and failed transactions do not result entirely from a faulty system. Transactions abort for a number of reasons: an adverse survey, a title defect or simply a change in the buyer/seller’s circumstances. Indeed, the paper states: ‘Nearly four in ten buyers reported that they withdrew their offer either because of personal or financial circumstances, or because they encountered issues with the home following a survey or problems with the leasehold.’

Of those surveyed, 40% blamed the other party’s solicitor/conveyancer for delays in the process. How fair is this? There are many reasons why delays occur, many outside a conveyancer’s control: sellers not ready with information, search results being awaited, people going on holiday, finance delayed, and so forth. Title can also be complicated, with documents missing or leases defective. The use of technology will not necessarily speed up these issues or get people to cooperate.

Furthermore, when you consider:

  • the 70 steps which solicitors must take under the Law Society’s National Conveyancing Protocol;
  • the difficulties sellers face in obtaining information to answer a buyer’s due diligence questions (particularly getting information from the freeholder/managing agent on leasehold properties);
  • the time lenders take to issue offers (and discharge existing mortgages); and
  • the number of parties in a chain of transactions (where no one can exchange until the slowest is ready),

it is no wonder that the ‘complex and multi-stage process’ of conveyancing is stressful, uncertain and potentially costly.

Improvements to the system

Sajid Javid, in his forward to the consultation, says: “We are not looking to rip up the existing system and start again… But that does not mean we shouldn’t make common sense improvements, or indeed look at more ambitious change where it is warranted.”

However, will changes such as accelerating the delivery of e-conveyancing services and local authority search results improve the consumer’s experience? Arguably not when there is mistrust between the parties until contracts are finally exchanged. Should we adopt the practice of other countries, including Scotland, where parties are bound on acceptance of the offer to buy?

The perceived high cost

Strangely, there is no mention in the paper as to why it is thought the process is ‘costly’ (save for abortive costs) when compared to other countries. Below are examples of the house buying process in the USA and in Denmark.

In the USA:

  • the buyer’s offer is binding when the offer is accepted;
  • buyers must deposit 1-3% of the purchase price into an escrow account;
  • buyers use title insurance rather than undertaking due diligence;
  • the seller pays estate agents 6% commission; and
  • buyers pay 5% in property transfer taxes and title insurance.

In Denmark:

  • estate agents act for the seller and prepare a sales report, building survey, electricity survey and energy report before marketing the property;
  • if there is no survey, sellers are responsible for defects for up to 20 years after sale;
  • accepted offers are binding subject to a six-day cooling off period, but if buyers withdraw in this period they pay up to 1% compensation to the sellers. Buyers also pay 5% deposit which is forfeit if they withdraw after the cooling-off period;
  • sellers pay 6% to the estate agent and buyers pay 0.6% to the estate agent.

Estate agents in this jurisdiction would be ecstatic to get a 6% commission (rather than current rates of 1-2%) and buyers would be delighted to pay less tax. But will buyers be prepared to pay for a speedier, more certain transaction? The paper notes that while 'in many other countries the home buying and selling process tends to be quicker and buyers and sellers have more certainty that the sale will go ahead… it is often much more expensive'.

Deadline

You have until 17 December 2017 to respond to the consultation. Everyone involved in the process will have a view and it will be up to the Government to take a holistic approach, since changing just a few ingredients in the mix will not necessarily make the cake easier to make or to swallow.

Do we abandon caveat emptor? Should sellers provide information early? Should we abolish due diligence and rely on title insurance? Should the parties enter into binding lock-out agreements/options to purchase on offer? Is the system really too costly or is it SDLT that is too high? Whatever your views, tell the Government before the consultation closes.

Click here to respond to the consultation.

This article was published in Estates Gazette in November 2017.


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