The Property Buying Process Comprehensively Explained
The Framework of a Transaction:
There are two stages to the sale or purchase of land (which encompasses the property built on it) in England and Wales. The first is an exchange of contracts and the second is completion.
On exchange of contracts a legally binding agreement comes into being. It's worthwhile noting that before contracts are exchanged either party can withdraw without obligation to the other.
At exchange of contracts the buyer pays to the seller (via solicitors) a deposit of ten percent of the price. This shows the buyer's good intentions and allows the seller to keep this sum if the buyer breaches the contract. Occasionally, a seller will accept a sum less than ten percent of the price if, for example, the buyer is having a mortgage in excess of ninety percent of the price. However, the buyer remains liable to pay the full 10% if he fails to complete.
On completion, the balance of the money is paid and in return the deeds and keys are handed over. This is the day that the seller must have moved out and the buyer can move in.
The Time Scale of a Transaction:
There is no set time scale and each case has to be dealt with on its merits. However there are averages. This is often six weeks to effect an exchange and a further two weeks to complete. It is possible to deal with cases in days but there must be very special circumstances to permit such a short time scale, e.g. the purchase of a repossessed property from a building society via an auction.
Similarly, some cases have taken many months. Delays are caused by the chain of people involved and by problems that arise such as the searches, mortgage or insurance requirements or sometimes difficulty with issues raised on the title to the land.
Surveying the Property:
A Homebuyer's Survey and Valuation
Carefully consider having a survey carried out. Your solicitor should be able recommend a surveyor but you can also contact the Royal Institution of Chartered Surveyors (RICS) www.rics.org/uk who will be able to give you details of local surveyors who you can contact.
Should there be anything wrong with the property it is for the buyer, to find out and not for the seller to disclose it. This rule is known as 'caveat emptor' and means buyer beware. Once contracts have been exchanged it will almost certainly be too late to complain about a defect.
There are three types of survey that can be arranged. The lowest level is not a survey for the buyer but a valuation for the mortgage lender only. Often if there is nothing out of the norm about the property the surveyor will only drive past the property to confirm that it exists. This is know and a 'drive by' and is not to be confused with the popular murder method of the same name! Sometimes these drive by surveys are shown to buyers but they are of little significance for them.
The middle type of survey is known as a Homebuyer's Survey. The main objectives of the Homebuyer's Survey is to give professional advice to assist the buyer to:
- Make a reasoned and informed judgement on whether or not to proceed with the purchase;
- Assess whether or not the property is a reasonable purchase at the agreed price;
- Be clear what decisions and actions should be taken before contracts are exchanged.
The report focuses on what the surveyor judges to be 'urgent' or 'significant'.
Significant matters are those that typically, in negotiation over price, would be reflected in the amount finally agreed.
Urgent matters are defects judged to be an actual or developing threat either to the fabric of the building or to personal safety.
The above type of survey is still really an economy package. It is less detailed than a full structural survey, which is much more detailed. In all honesty the Homebuyer's Survey is really only appropriate for use on conventional houses, flats, bungalows and so on in an apparently reasonable condition.
If issues of concern are highlighted in the Hombuyer's Surver (or a buyer wishes to receive advice on matters normally outside the scope of this kind of survey) then a full Structural Survey should be obtained. This would normally be recommended as necessary by the valuer or surveyor carrying out the Homebuyer's Report if they thought something was amiss. Obviously it should take place prior to the purchase proceeding.
Financial Arrangements:
If you need a mortgage to buy the property you should ensure you have made arrangements for an application to be considered by a lender. Otherwise you should ensure that you have made accurate calculations and that you will have accessible funds from some other source to buy the property. In particular ensure that funds are available from their place of investment and in the case that you are receiving gifts from family or friends that you have the money in your name and under your control prior to exchange of contracts.
You should be aware that some mortgage lenders will only accept gifted deposits with very strict criteria, such as being only from immediate family members, not being used for the purchase of buy to let properties and so on.
Generally all mortgage lenders will require confirmation (usually by the signing of a deed) that the person giving the gift is not going to acquire an interest in the property and that the deposit is a genuine gift – i.e. that they don't expect it to be paid back at some point in the future. The reasons for this seeming nosiness are straightforward: If the borrower has to make repayments to pay back a loan as well as their mortgage payments then this needs factoring in to their affordability calculations (and it may make the mortgage unaffordable!) If the person giving the deposit is doing so with the intention of receiving an interest in the property then the mortgage lender will not lend as they require first charge on the property, which means they have priority over all other claims against the property if the borrower defaults on their repayments.
Most solicitors will want to receive the mortgage advance at least one working day before completion so as to avoid difficulties on the day you are looking to move. This will often mean that the lender will charge you interest from that date of completion.
Location, Location, Location:
The position of a property is one of the most important aspects to be considered when making a purchase. You should check the area to ensure you will feel happy living there and that there are no unpleasant surprises awaiting you - for example, moving in and finding out that every Friday and Saturday night at 2am a group of drunken revellers from a nearby nightclub trample local gardens and vandalise properties.
The local search that solicitors carry out deals with the property itself and not the locality. Actually there is one exception and that relates to plans for road schemes within a 200 meter radius of the property. Otherwise solicitors will not establish whether there are plans to build on land nearby - which which could affect your decision to buy. If you think that this be an issue for you then you will need to make enquiry with the Local Authority's planing department to put your mind at ease.
A product that you might find useful at this stage is a Planning and Neighbourhood report prepared by Searchflow, a national search provider. This will give background information on services within the locality, planning application details for properties within 250 metres of the property you are looking to purchase and high resolution aerial photographs of the property.
You can access the information at https://www.searchflowuk.co.uk/searches-resident/planning-neighbourhood/
IMPORTANT: If your prospective property is in a Church of England Parish with a church built in mediaeval times or earlier (15th Century or older) and it has a Vicar (not a Rector) you may be liable to contribute towards the cost of repairs to the Chancel.
Establishing whether you might incur such liability is not easy. Records held at the Public Records Office are not complete and an investigation of those records has to be undertaken in person. It would be a fairly costly exercise.
Your choices are simply to accept that there may be a liability, or to buy some protection by way of an insurance policy.
Breaches of Covenants, Planning Permission and Building Regulations:
It is common to find that properties have covenants which affect their use. A covenant is a legal term for a promise. For example a covenant to use the land for a private dwelling only (which would exclude business use) or not to put up any extensions or make alterations without someone's consent. It is important that you establish if any such covenants have been breached. If they have, you would inherit the breach with all the problems that can arise. Not good!
We would recommend that you should personally inspect the property and if - upon seeing the title documents that your solicitors will copy to you - you believe there is a possible breach of a covenant, you must let your solicitor know right away. They will ask relevant questions of the seller and consider the estate agent's details and surveyor's report, if there is one. Sometimes mistake or design may omit important information. This is where your inspection becomes important.
For example, look out for extensions and conservatories (garages and summerhouses may also be a breach) or business use.
If there has been a breach of covenant you might be required to return the property to the way it was before, pay damages, or seek retrospective approval (which will take time and could be costly). If such a situation exists with your new property you will need to reconsider the time scale for the transaction. Retrospective approval can add another four weeks (or possibly more) to the transaction time scale. The purchase of indemnity insurance may be advisable. As each case depends on its merits you should seek advice from your solicitor, who will need to consider the matter and after making due enquiry should be able to give you an approximate idea of costs and delay. Obviously your solicitor's fees will increase depending on the extra time involved and complexity of the matter. There would also be the cost of any insurance premium. If the covenant was in a lease there is the added threat of your lease being forfeited.
If there is a breach of Planning Regulations you may also be required to put the property back to the way it was. There are unpleasant sanctions for offenders. If there is a breach of Building Regulations you will be required to effect such remedial or additional work necessary. This would add further expenditure to your budget.
There is now set out below some information for you to consider so far as it may be relevant to your particular transaction:
1. Correspondence
You should not correspond directly with the other party or their solicitor but should make all representations in writing through your own solicitor. This does not prevent you discussing the matter with the other party but prevents you unwittingly binding yourself to the sale/purchase, or other agreement.
You should return anything your solicitor requires as quickly as possible as otherwise delays or extra costs can be incurred - this is particularly the case after completion. Believe it or not there is still a substantial amount of legal work to be done after you move in. Time is crucial otherwise you can incur penalties from the Inland Revenue, Land Registry or a landlord.
2. Disputes or Occupiers
There has been a tendency for the law in recent years to create new rights over a property, which can, in some cases, bind an unsuspecting buyer. Therefore you must let your solicitor know if you should discover or suspect that there is anything unusual about the seller's circumstances. For example, if there is a dispute between them (perhaps a divorce) or other people who live at the property in addition to the seller. This is an important point as otherwise you could buy a property with someone living in it!
3. Alterations
If you believe any alterations have been carried out to the property let your solicitor know so that they can make enquiry to ensure the appropriate consents have been obtained, or - if they have not been obtained - identify ways to resolve the matter. See the previous section dealing with breaches of covenants, planning permissions and building regulations.
4. Trees
If the landscaping, including trees within the boundaries or near to the property, was part of your reason for choosing this property, please be aware that even though they may be the subject of a Tree Preservation Order, if they are diseased or dangerous they could be removed. A Tree Preservation Order could prevent your felling or pruning the trees without the formal consent of the Local Authority. Further, tree roots can grow to such an extent that they may interfere with services or the stability of the property. Certain types of trees (for example Willow) are notorious for the consumption of water. This can cause shrinkage to certain types of soil and can thus undermine support. If you are at all concerned it will be prudent to have advice from a surveyor or an arboriculturalist before exchange of contracts takes place.
Radon Gas:
Radon is a natural radioactive gas, which comes from decaying uranium occurring naturally in all rocks and soils and is given off at the surface of the ground. It is a gas that is breathed in by people all their lives. Out of doors it disperses in air so levels are very low. Radon seeps into enclosed spaces such as mines and into houses, schools and places of work. It can collect there and build up to high levels depending on the local geology, atmospheric conditions and the state of ventilation.
When radioactive particles from radon are inhaled, the particles expose the lungs to alpha radiation and can increase the risk of developing lung cancer. The risk rises with higher levels of radon and the longer the duration of exposure.
Certain areas of the country have higher radon gas readings than others. Also throughout a year there can be different recorded levels of radon from season to season. It also varies indoors from day to day. Whether or not your new home could be affected and to what extent can only be determined by a test. You may wish to have a test carried out prior to your exchanging contracts. At the time of writing you can get a test kit from the government for £49.80. Tests can take three months to assess. Quicker tests are available which will take about seven days but these will not necessarily give you a proper reading. Further information can be obtained from the Environmental Health Department of the Local Authority or the central government agency Public Health England: http://www.ukradon.org/ where there is an excellent interactive map showing Radon levels throughout the UK.
Grants:
If the property has within the last five years or so been improved or renovated with the aid of a grant then that grant may have to be repaid upon the sale of the property to you. In some cases it will not have to be repaid. You should therefore let your solicitor know if you are to be an owner-occupier or alternatively whether you intend to let out the property to tenants.
Deposit:
Contracts generally provide for a deposit to be paid by the buyer to the seller in the sum of 10% of the price. This will not be possible if the buyer's mortgages in excess of 90% of the property's sale price. Unless you inform them otherwise your solicitor is likely to assume that you will send them funds to pay the 10% deposit at exchange of contracts.
The contract will normally provide that the deposit may be used by the seller as a deposit on any linked transaction. This is on the basis that ultimately it is held by a solicitor as stakeholder. This means it is kept by the solicitor in the client account of his firm's practice.
Finance Generally:
A buyer's solicitor will endeavour to prepare a statement of account showing the financial side of the transaction as soon as possible but for many reasons this may not be until shortly before the completion date. It is for buyer's to be sure that they have the funds to proceed and that they are easily accessible. Please bear in mind charges that are made by your lender (such as indemnity guarantee premiums and re-inspection fees).
Life Assurance:
This can be an important part of your financial considerations. You should speak with an independent financial adviser about your requirements.
Fittings Furnishings and Central Heating Systems:
It is for buyers to check the condition of any items being left or for which they are to pay in addition to the price of the property. Caveat emptor (buyer beware) is the principle that applies.
Sewers:
It is probably the case that your prospective property is connected into a mains sewer maintained by the regional water company. The usual rule is that the length of pipe between the mains and the boundary of the property is the responsibility of the water company. Any pipes within the boundaries are the owner's responsibility. If pipes within your boundary are shared with a neighbour then they are jointly liable for the pipes, with you.
Buildings insurance policies normally cover repairs for pipes. You will obviously need to check the provisions of each individual policy for fuller information.
Should you desire to build any other buildings or extensions you will need to consider if the sewers pose any problems. You should not look to be building an extension over (or within 3 meters of) a public drain running under your property (yes public sewers and drains frequently run under private land without making an application to the water company. Sometimes the water company will accept a proposal and sometimes they totally prohibit building within a certain distance of pipework.
Repossessions:
Repossessed properties have their benefits. They are often competitively priced and there are no chains. However, they often need expenditure. You should check, in particular, the wiring, plumbing and heating systems whenever possible. If you do not you buy with the risk that defects exist. They are normally sold with the water systems drained down so function can be difficult to check. You should reflect this in the offer price.
Empty Properties:
If properties are empty or have been unoccupied for over 30 days there will be no or limited insurance cover on them. As it is sometimes the case that buyers are to be responsible for insurance from exchange be aware that risks for which there would normally be insurance may not be covered and you would have to bear the cost of problems arising. To mitigate against possible cost you could for example arrange to have the property's water system drained-down, or get your solicitor to alter the arrangements so the property is at the seller's risk until completion.
New Build Properties:
When you agree to buy a newly built property it may be that the property has not actually been built when you make your offer. The contract will include a provision that the property must be built to all the appropriate standards but will not specify a date by which it will be completed.
Normally the developer will issue a notice when it believes the property is being finished and support this with a copy of the Cover Note issued by the National House Builder Council (NHBC) or similar. You will be required to complete within a specified time - normally 7 to 14 days after the notice. Estimated dates may be given to you, but are not binding. It's unfortunately possible that these estimated dates could be rescheduled many times causing much stress and anxiety. However you have no choice but to accept that position if you proceed with the transaction.
Development contracts usually state that you cannot delay completion because matters of a minor nature relating to the construction are outstanding. This includes the laying of paths, drives, turf and fencing for example. There is scope for disagreement on the meaning of 'minor'. Basically, if the items outstanding do not make the property uninhabitable they will probably be considered minor in nature.
Joint Ownership:
If there is more than one of you buying the property it may be held jointly by you in one of two ways i.e. as joint tenants or as tenants in common. Set out below are the principal differences between the two. Transfers will normally be drafted to provide that the buyers hold as joint tenants unless specified otherwise by the buyer.
Joint Tenants - hold the property in equal shares with provision that on the death of the first joint owner their share is automatically transferred to the survivor. This is the way in which matrimonial properties are generally held between husband and wife. On this basis, when the transfer has been signed the buyers will own the property both jointly and equally.
Tenants in Common - May similarly hold the property in equal shares although this is not always the case. Each tenant in common's share remains the property of his/her own estate following death and will pass under the terms of his/her will or by the intestacy rules if no will has been made. This situation is often used by people purchasing property jointly for commercial reasons, to mitigate inheritance tax liability, or where they contribute in unequal proportions towards the purchase price and agree that on the sale of the property the net proceeds should be distributed in accordance with their contribution.
If tenants in common have children by previous relationships they should consider the issue of joint ownership in greater detail, given the potentially divisive issues that can occur after death when dealing with inheritances and the matter of who gets what.
Persons Who 'Move In' or 'Live With' the Owner:
You should be aware that legal problems can arise when people start living together. For example, the status of the 'non-owning party': are they a lodger or a tenant? The difference can cause serious problems. Further, if the incomer contributes regularly towards the home owner's mortgage payments or pays for repairs or improvements to the property, a trust may be created or other legal rights acquired by them!
For such rights to exist there should be a clear intention to infer joint ownership with evidence that the claimant acted to their detriment in reliance on a belief that they were, or would become, entitled to a beneficial interest in the property.
It is important therefore that before the new property is bought you give careful consideration to such matters and if necessary seek further guidance from a solicitor. For example, it would be prudent for a home owner to have a person who comes to live with them execute a deed relinquishing any interest in the property. How many people do this? I would imagine not a lot, but not doing it could have a catastrophic effect on your finances later on
Chains:
Chains of transaction, i.e. a party is also buying another property at the time he is selling his current one, create difficulties because inevitably one party waits for another to be ready to exchange. However a much more serious possible problem if you find yourself in this position, is that you may be forced to breach your purchase contract if your buyer fails to complete with you on the dated set for completion in the exchanged contract. The only real safeguard is to separate your sale and purchase, not to synchronise them as is normally the case. This will obviously pose practical problems for most people, such as finding and paying for suitable temporary accommodation and storage for their possessions.
Another solution is to arrange bridging finance. This is a loan that enables you to buy the new property pending your being able to resolve the difficulties on your sale (or to resell it). You will have to budget for the cost of setting up of the loan and its continuing interest (which will be high).
Damage to the Property between Exchange of Contracts and Completion:
Most Contracts provide that the Seller must transfer the property in the same physical state as it was at the date of the exchange of Contracts (except for fair wear and tear). This means the risk stays with the Seller until actual completion.
A Buyer can withdraw if at any time before completion the property is no longer usable in the same way that it was at the time the Contract was made.
However the Seller is not obliged to insure. It is a matter for him. Naturally it is prudent that he does so.
The Seller can also withdraw if the property has become unusable if the damage was such that he could not reasonably have insured against it or could not legally make good the damage occasioned.
Contamination:
Is the land you propose to buy contaminated? How would you know? The chances are that you would not. Parliament has enacted legislation as a result of environmental concerns , with the result that owners of land which is contaminated could be liable to pay the costs of its clean up. This could run into thousands of pounds. It all depends whether or not there is a harmful substance that poses a significant risk of injury to living organisms or property. Initially, the polluter must pay and clean it up. If the polluter cannot be found it will be the task of the owner.
You could have an analysis of the soil undertaken. This would be very expensive and possibly cost up to £1,000. Alternatively, you may know that the property has been used for agricultural purposes only and therefore feel fairly safe that there will be no contamination with which to contend. Certainly most of the country is not contaminated and the chances are that former agricultural or arable land will be safe. However no one could have a 100% guarantee.
Your solicitor will carry out an environmental search against the property and disclose this to you before exchange of contracts. This will provide you with a range of relevant information and useful telephone numbers to call to discuss concerns or seek further details. There may be information revealed which should be referred to your surveyor for comment before you exchange contracts. For example the property may be built on a former industrial site or in the vicinity of a landfill site. This may cause you concern from a health point of view. It may also concern you as to how a buyer might view things when you come to sell. It may be both a health and wealth issue!
Targeting a Completion Date:
If you have a preference for a particular completion date you should let your solicitor know. Whether or not the date is possible will depend on whether it is realistic in the situation, and of course what any other parties in the chain want. Because of the multifarious factors involved, insisting on a particular completion date is likely to cause you stress and probably not be successful.
Whilst it is usual to have 2 to 4 weeks between exchange and completion it is sometimes the case that contracts are exchanged just days before or even on the same day as completion. As it is only at exchange that one can have any certainty that completion will occur on the agreed date you might have very little time to make arrangements or find that you have to cancel them at the last minute.
Access:
The normal rule is that buyers cannot have access to the property until completion other than for
viewing. If you wish to have access for cleaning, fitting carpets, decorating etc. please note that
whilst a request can be made there is no guarantee that it will be granted. Solicitors generally advise their clients not to allow access as it is not worth the problems that can (albeit in the minority of cases) arise as a result.
Completion:
At completion the property should be in the same state as when contracts were exchanged. Where possible you should check the property very early on the day of completion to ensure that it is all satisfactory.
Will:
As you are buying a property it is prudent to make or review your will. If you are married with children you could leave this world with devastating consequences for your family as a result of dying intestate (without a will).
Tax:
It is possible that your transaction will involve taxation issues that could be very important to you and potentially costly. If you have an accountant or tax advisor it is important that you discuss the matter with them to receive appropriate guidance.
Below is some very basic tax advice that may be applicable to your transaction:
Capital Gains Tax:
If the property, the subject of the transaction, is your principal private dwelling house then no Capital Gains Tax need be paid if it is sold by you at a profit. If however the property has been bought by you to let, for some other non residential purpose or if you have owned more than one property at any one time, there may be Capital Gains Tax to pay. If these facts are pertinent to you, you will need to take appropriate advice.
Inheritance Tax:
Many properties are now valued over the Inheritance Tax threshold and are therefore likely to be subject to this tax on your death or the death of the survivor of you if you are a joint owner. The effect of his may be of great significance to your beneficiaries if you do not look to minimise its effect. You should speak with an accountant if this is likely to affect you.
Value Added Tax:
If the transaction involves a dwelling no value added tax should apply. In circumstances where the property is being sold in the course of a business or by a company or sole trader, the issue of VAT is pertinent and ought to be carefully considered.