Chapter 17: The Property Buying Process in Theory

This is an extract from the ebook How to Really Buy a Property.

Before you can know what really happens, it is essential to understand what is supposed to happen because sometimes it does! If you are dealing with an Estate Agent, Solicitor or Vendor who is new to the business this chapter is the set of events that they believe should occur.

Arching over all of this is the essential concept that the longer it takes to move from Offer Agreed to Exchange of Contracts, the more likely it is that the purchase will fail. To understand this specifically see Chapter 19: Time Costs Deals.

Once your offer has been agreed with the agent (or directly with the vendor if you are buying privately) there should be no need to have any contact with the agent or the vendor. Each party has a specific number of actions that they must take and theoretically this should all occur via the solicitors. Some solicitors feel so strongly about this that they refuse to accept calls from estate agents! It is how these actions are undertaken and their results that cause disagreement because there is no definitive protocol for buying and selling.

It is because of this that there are regular arguments between solicitors so it is often useful to have a second line of communication. This is either via the agent or, in the case of a private sale, directly with the vendor. Nothing that is spoken about in these secondary lines is binding until both solicitors are aware of it and it has been written into the contract but such discussions can be faster and more accurate as questions and answers are passed through fewer parties. It is worth knowing that:

• Agreed offers through agents tend to have a better chance of success because small queries need only be passed via one party for answers. When emotions become heated the agent is the filter who can remove the obscenities and act as an objective go between. A good agent will also remove any comments you make that he feels may be misinterpreted by the vendor before passing messages or queries on.
• Privately agreed offers are more likely to fail for exactly the reason explained above. The buyer talks to the vendor and says things they may not truly mean or makes small comments that are taken out of context (and vice versa). You may tell a vendor, for example, that you can't wait to move in and add a fantastic conservatory. The vendor realises he only accepted your offer because he thought it was the top of your budget. Now he knows you have extra cash he begins to think he has undersold the property and pulls out of the transaction. Innocent comments, profound results.

The parties officially involved after a sale price is agreed are:

• You, the buyer
• The vendor
• Your solicitor
• The vendor's solicitor

and the theory of what each party should do is covered in this chapter. In each section there is an explanation of what the parties do along with some of the most common events that cause things to go wrong. How to get round these is covered in later chapters.

You, The Buyer in a Property Purchase

As a buyer your responsibilities are to:

• Instruct a solicitor to act on your behalf
• Specify an exchange and completion date that can be agreed with the vendor
• Raise the finances to purchase the property
• Organise for professionals to inspect the property
• Sign the contract
• Give your solicitor funds to exchange and complete

Instructing a Solicitor

Once your offer is agreed you will need a solicitor to act on your behalf. This solicitor will need to do two things:

• Check that the paperwork related to the property is satisfactory for the lender if you are applying for a mortgage
• Check there is nothing unusual in the paperwork that should be drawn to your attention

Their exact role is explained in Your Solicitor below.

Finding a good solicitor who can handle the local market is not easy so it is worth taking the advice of your lender (who may have someone in the area that they work with regularly) or the Estate Agent (who knows efficient solicitors that they have a good relationships with). Do not ask friends or family unless their recommended solicitor passes certain tests (see Chapter 12: Choosing a Solicitor or Conveyancer)

Once a solicitor has agreed to represent you they will send you a form to fill in. This is the official instruction. It includes questions on who your lender is and, if you have already chosen a property to buy, what you understand it to consist of (e.g. a private garden, parking space, two bedrooms, kitchen with cooker, etc.) which helps them verify that this is actually what you are getting.

What Can Go Wrong

• You leave it until after having an offer agreed to find a solicitor and have to choose an unsuitable one in a panic
• You choose a solicitor based outside the area you are buying who does not understand what you are buying and asks irrelevant questions
• You choose a solicitor who is incredibly cheap, but then turns out to be incredibly slow because they are incredibly overworked
• You choose a solicitor who uses the conveyor-belt method (see Chapter 12: Choosing a Solicitor or Conveyancer)
• You choose a solicitor who is a "one-man-band". He then falls ill or goes on holiday

Specifying Exchange and Completion Dates

It seems obvious to agree a date for the Exchange of Contracts. This is the moment that you agree to definitely buy the property and the vendor agrees to definitely sell it. Up to this point the sale is only agreed subject to contract, and often subject to survey.

Subject to contract means you agree to buy the property only if what you have been led to believe is true. In other words you may think that the garden belongs to the flat because the agent told you that but in fact it is shared with the property upstairs. When you discover this in the contract you decide not to purchase the property.

Subject to survey means you agree to buy the property in the physical state any layman inspecting the property would believe it to be in. If, once it has been surveyed, you find it needs a vast amount of unexpected and expensive work you may decide not to proceed.

Oddly enough even though a sale may be agreed subject to contract you can still decide at any point before exchange not to purchase for any reason you wish. It can have nothing to do with the contract or the survey but could simply be because you don't feel like it. As such the wording is slightly misleading.

Exchange of Contracts is not the date at which you take possession of the property. It is the date which you agree Completion. Completion is the date when the vendor must be out and you can move in, the property legally becomes yours. Completion can take place on the same day as exchange or months afterwards.

What Can Go Wrong
It seems strange then that someone who agrees to buy something from another person should do so without actually agreeing when they want to do it but this is often the case when purchasing a property. Agreeing exchange and completion dates are often sidelined because:

• Both parties believe it is "obvious". The vendor may, for example, have chosen a solicitor in Wales. His solicitor has told him that it normally takes about twelve weeks to move from agreed offer to exchange. In the meantime your solicitor in London tells you there should be an exchange within three weeks. Both you and the vendor sensibly expect that your respective solicitors will have said the same thing and plan your lives accordingly. Fireworks will occur later!
• Neither party actually wants to talk about it. You may be concerned that if you express a wish to exchange quickly the vendor will perceive you as a desperate buyer in absolute love with their property. This could lead to them being slow or lazy in providing paperwork, relaxed that you are not going anywhere. The vendor may not want to tell you that he wants a rapid exchange because he does not want to appear desperate. He may believe that this will encourage you to attempt a renegotiation of the price before exchange.
• One party is scared to upset the other. This often happens in a market where the 'Balance of Power' is not even (see Chapter 18 by the same title). You may be desperately in love with the property or prices may be rising quickly. As such you do not want to upset the vendor by rushing him and so you tip toe round the issue waiting for a sign.

Raising the Finances

There are two ways to buy a property. You can purchase for cash or by borrowing. Either way you will need to put down a deposit when contracts exchange and pay the balance on completion. The deposit is normally between five and ten percent of the agreed price although it is possible to exchange with anything from zero to one hundred percent.

The deposit is seen as a way of tying the buyer in and insuring the vendor will have some compensation should you disappear. Zero percent deposits are therefore usually only acceptable if you are carrying out a simultaneous exchange and completion. This is often the case with one hundred percent mortgages or where the property is empty and the buyer wants to get in fast.

If you are raising the funds by applying for a mortgage you will need to find a lender that thinks it is a good idea to loan you the money. The lender is essentially interested in four things:

• Are you a good borrower?
• Is the property worth the money?
• Is the property legally sound?
• Is it really a good idea?

Are You a Good Borrower?

In the first instance the lender will give you an Agreement in Principle (AIP). This is a superficial agreement which basically says, "If what you have told us about yourself is true and the property you choose is worth what you plan to pay for it, we will lend you a specified amount". You can get such an agreement without specifying a property and lenders issue these more as a guide to what you can afford than anything else.

Once you have found the property the lender will go into more depth, not only to find out about the property, but also to dig thoroughly around your financial past.

When a lender looks at you they are really looking at your earnings (that you can afford to pay the loan back on a month by month basis) and your credit history. Your credit history is a track record of previous debts. Every time you pay a credit card or loan on time you get points. The points go to make up your credit score. Every time you apply for credit such as a loan for a car, and every time you are late making a payment, you loose points.

This system has some unwelcome side effects. If you apply for a few store cards in a month you may suddenly find it difficult to get a mortgage. This is because your credit history shows you are looking to borrow a lot of money and that might mean you are in financial difficulties. The result is that your credit score goes down and lenders don't want to go near you.

Ironically if you have not been in debt in the past you will also have a poor credit history and a low credit score. This is because there is no proof that you are any good at handling debt. It is the financial angels of life who have never had a credit card or taken a loan that can have the biggest problems securing a mortgage.

How important your credit score is also depends on how much of the property's value you want to borrow. This ratio is known to lenders as Loan To Value (LTV). As an example if the property is worth £100,000 and you want to borrow £95,000 your LTV is 95%. In the lenders eyes that's risky business. You are only putting in five percent and you want them to stump up the rest. In this situation you may have to provide much more proof of your financial stability than a buyer who is prepared to go halves with the lender.

Once the lender is happy that you are going to be a well behaved debtor, and only once this has been established, do they turn their attention to the property.

Is the Property Worth the Money?

If your LTV is very low, say twenty percent, the lender may agree to secure a mortgage on the property without even looking at it. In their opinion most of the risk is with you and the chances of you paying so much for a property that it is not even worth twenty percent of what you lay out are extremely unlikely. If your LTV is high (usually more than fifty percent LTV) they will organise a survey.

The way lenders organise surveys mean that they can be very fast of very slow. The steps are:

• The lender sends the request out to a panel of surveyors. This status is known as 'sent to panel'
• The panel may have an umbrella organisation that receives this request. This organisation sends a request to the surveyors they believe will be best suited. The status has now changed to 'survey requested'
• The surveyor who receives the request may be too busy. They send a message back rejecting the request.
• The umbrella organisation requests another surveyor until they find one who will accept the work. Once accepted this status is known as 'survey instructed'
• The surveyor calls the agent or vendor to organise access to the property. Once a time has been agreed the status becomes 'survey booked'

The surveyor may either have been instructed to go into the property or just to drive by and make sure it exists (known as a drive by survey). That someone has a trained eye for spotting problems in buildings.

The lender, to some extent, is not interested in this. They only want to know that, should you stop paying your mortgage, they can sell the property and recover the debt. They don't really care if every single window in the building needs replacing so long as, in its current condition, it will sell for the same or more than the amount they are lending you.

The result of the surveyors visit is a valuation. The surveyor will either agree or disagree with the sale price. The latter is known as a down valuation. Most buyers are unaware that, for this visit, the surveyor is not acting for them and can rightly refuse to tell them the result. He has been instructed by the lender (even though you may have paid the lender a fee for the survey) and only the lender can tell you the surveyor's conclusions.

It is worth noting that the surveyor will never say a property is worth more than the agreed sale price even if he believes it to be so. He is only instructed to find out if it is worth the same or less.

The surveyor may decide that the property is worth the money you are prepared to pay as long as he can be sure that a certain issue is not going to be a major problem. He may, for example, believe the roof is at the end of its natural life and will need to be replaced. This could cost over £10,000 and may affect the property value. He will therefore place a retention on the value. This may say, "I agree the property is worth £250,000 once the roof has been checked. Until this has been done I am not convinced the property is worth more than £230,000"

Is the Property Legally Sound?

The next hurdle is to persuade the lender that there is nothing legally wrong with the property that would affect its value or make it difficult to sell.

Every lender has a different set of things that they want to know. These requirements are collated by The Council of Mortgage Lenders. The result is the CLM Handbook and every solicitor has access to a copy. When your solicitor knows who you are going to be borrowing from they open up the handbook and see what they need to find out.

It is always worth remembering that most of what your solicitor does is actually not for you, but for the lender. The solicitor passes on what he finds to an underwriter who works for the lender. If they are concerned they can decide not to forward you the loan.

Is it Really a Good Idea?

For most buyers the assumption is that once all the checks above have been carried out, they are home-free on the financial side of the purchase. That is because in most cases they are. There is however one more step that often occurs without the buyer even realising it.

The mortgage application is sent to the lenders final underwriters. They will take one more look at the entire set of paperwork before issuing the offer. Every now and then they spot something that has been missed by the previous departments and what you thought was in the bag suddenly becomes dead in the water.