One idea to make the process smoother and encourage commitment is to introduce reservation agreements. Currently under development, a reservation agreement is a contract between the buyer and seller where both parties pay a small deposit which they could lose if they pull out of the transaction.
This week Mortgage Solutions is asking: Do you think reservation agreements will be beneficial or hamper the buying process?
Personally, I like the concept, but I would need to read the full terms and conditions within the agreement to understand the full implications.
For example, what if mid-transaction, the buyer loses their job and cannot complete? Or, indeed, the vendor loses their job so can no longer buy their new house? Or the buyer cannot get a mortgage for some reason? Protecting people from bad behaviour is one thing, but penalising those who have an unfortunate life event would be wrong.
While the proposed fees for the pilot are unlikely to change affordability upfront, it would impact affordability if they withdraw from an agreement and look to purchase a new property.
The pilot aims to stop gazumping ultimately and buyers pulling out at the last minute, making the buying and selling process more efficient and reducing drop-out rates.
While I don’t see a high level of gazumping in the transactions I deal with, I would imagine that many in the market will welcome this pilot as a step in the right direction. Many will, however, share my sentiment around how it will protect the more genuine reasons why people are unable to proceed.
Unless the scheme is rolled out clearly with defined rules, I feel that it may deter buyers rather than give them the confidence that the pilot intends to provide.
Miles Robinson, head of mortgages at Trussle
It’s uncertain exactly how it’s going to work at the moment; it would be a disadvantage, if it is a non-refundable fee.
It would be good if the cost could be saved in other areas. It could go a long way.
It could be used for stamp duty or valuation fees, legal costs, removals, maintenance repairs so the money would still be lost but the greater gain would be more committed people. We wouldn’t have a situation where either party can pull out without warning or rationale.
If I compare it to new-build properties, most of them already have a £1,000 reservation agreement. What the government sometimes does however, especially in cases of Help to Buy purchases, is reduce that fee to £500 to motivate people – especially the large number of them who will be first-time buyers.
It means it’s a lesser amount to lose if for whatever reason the transaction doesn’t go through.
Ultimately, I think there is a lot of scope for something like this coming in. Each year, millions of pounds are lost due to sales falling through and gazumping is probably causing a significant chunk of that. Reservation agreements will mitigate some of that.
It will ultimately result in fewer “fall throughs” which will be the main benefit and it just means sellers and buyers will be more committed when putting an offer through or accepting one.
The exact parameters of the reservation agreements have yet to be agreed, but the current feeling is should be in-line with the average cost of a house sale falling through – which is around £1,000 each – and should come off the final property price.
A fee at this level would ensure a firmer commitment is made that is not prohibitively expensive and shouldn’t have an impact on lender affordability assessments.
Reservation agreements should be beneficial to both buyers and sellers, at least in the vast majority of cases.
The UK housing market is extremely competitive; the average number of properties available to buy as a percentage of the overall housing stock is just two per cent. And, getting an initial offer accepted is no guarantee of a sale, with one in five house sales in England falling through in 2018 – that’s thousands of people suffering the stress of being gazumped or gazundered and incurring personal costs and loss of time every year.
Of course, there are many reasons why property sales don’t go ahead, and these agreements won’t completely get rid of the instances of failed sales.
However, this competitiveness is something we’re acutely aware of and reservation agreements would provide much-needed certainty between both parties and bring more speed to the market.