How well do you really know the UK property purchase process? For many, a property purchase (whether for owner-occupation or buy-to-let purposes) represents the single largest purchase a vast majority of Britons will ever make in their lives. The five- to six-figure sum needed to buy a home in this day and age is a huge investment in one fell swoop, so you would think that potential buyers would conduct extensive research into the market prior to purchase.
However, shocking revelations have recently been unveiled thanks to law firm Slater and Gordon’s survey of 2,000 aspiring property owners, outlining just how unaware the UK population are in regards to the act of acquiring property.
Overall, research found an overwhelming 73% of people admitting they know very little or nothing about the legalities of buying and selling a home, whilst a further 1 in 6 have no idea about their rights and obligations when buying a home.
Even more worryingly, respondents showed a distinct lack of understanding of some of the most important elements of the property purchase process. 45% of aspiring homeowners admitted they are ‘not sure’ what a conveyancer does, 1 in 6 were confused about the process of exchanging contracts, and a massive 59% are not aware at what point the sale
becomes legally binding.
With this in mind, Knight Knox will answer the top 10 misconceptions that many aspiring homeowners and landlords have in regards to the property purchase process:
1. 73% admit they know very little or nothing about the legalities of buying or selling a home
The legalities of buying or selling a home can be split into three distinct sections. The first describes the initial tentative process of sourcing and making an offer on a home, which can involve gaining a ‘mortgage in principle’ agreement from a lender if funding your property via a mortgage. This document, although not legally binding and could be subject to change, outlines a figure up to the value of which the lender could be willing to lend to a buyer, so that you can be sure of your budget from the outset.
The next stage is, once you have an offer agreed with the seller, the process of entering into the contract, whereby you instruct your solicitor/conveyancer, who then begins the legal process of transferring ownership of the property. This involves ironing out all the conditions of sale, fixing the purchase price and setting a date for completion of the purchase, before official documents are signed and exchanged to this effect.
The final stage is completion, whereby the seller’s solicitor releases both the deposit and remaining funds to the seller, and the buyer receives the keys to their new home.
2. 75% of Brits don’t know what a conveyancer does
In short, the conveyancing process is the legal act of transferring the deeds of homeownership from the previous owner (seller) to the new owner (buyer).
Therefore, the buyer of the property is obliged to ‘instruct’ a qualified conveyancer (or in some cases a solicitor) to conduct this process on their behalf, which will legally transfer the deeds to the property from one party to another.
3. 77% don’t know when they are required to pay the deposit on a home
The dreaded homeowner deposit, a substantial fee that makes up a percentage of the property’s value (generally anywhere between 10-40%), is payable in most circumstances upon exchange of contracts, but you may be asked by the buyer once you have had your offer accepted to provide a small holding deposit to the estate agent to secure the property, showing the buyer your intentions regarding proceeding with the sale. Once the deposit has been paid on exchange and signing of contracts, the seller’s solicitor keeps the deposit until the date of completion, where the deposit and remaining purchase price are duly paid to the seller.
4. 59% don’t know when a sale is legally binding
The sale of a property becomes legally binding at the point of exchange—that is, when legal contracts are exchanged between both the buyers’ and the sellers’ solicitors and signed by the relevant parties.
5. 38% don’t know the difference between leasehold and freehold property
Freehold properties, generally the most common on the UK market, means that the freeholder (that is, the legal owner of the property) owns both the property and the land it is built on outright. However, if you own a leasehold property, you are not the legal owner of the land. While this means you are not responsible for the maintenance and running of the building (this is down to the landlord or managing agent), this does mean you are liable to pay service charges to help pay for said maintenance on the property. In addition, as a
leaseholder rather than a freeholder, you are also liable to pay ground rent on the property (see below).
The concept (and realities) of buying leasehold and freehold properties are very different, so be sure you know which property type you are buying from the outset.
6. 32% don’t know that the owner of a leasehold property is required to pay ground rent to the freeholder
Only applicable to those purchasing leasehold properties, the ground rent is an annual fee payable to the freeholder (the owner of the land) as per the terms of lease for the property. In the majority of cases, the ground rent is fixed, but do bear in mind that some ground rents can escalate. All this information is provided in the terms of lease contract that is signed by both the leaseholder and the freeholder prior to the completion of the sale.
7. 18% don’t understand the terminology “exchange of contracts”
The exchange of contracts (the act of legally transferring of the deeds from seller to buyer) is a legal acknowledgement that both the buyer and seller are happy with the terms of the contract—including conditions of sale and selling price—which after this point cannot be changed. The buyer of the property is expected to pay the deposit upon exchange and sign the contract to confirm the transaction, after which the property now legally belongs to the buyer. If for any reason one of the parties pulls out at the point of exchange, the buyer stands to lose their deposit, whilst the seller can be sued.
8. 16% don’t know what “completion” means when it comes to buying or selling a home
The completion date refers to the date, as outlined in the exchange of contracts, in which the property becomes the legal property of the buyer. Generally, completion of a property purchase comes no more than a month after the exchanging of contracts. Completion is the point at which the seller’s solicitor releases the deposit and purchase price to the seller, whilst the buyer receives the keys to their new property.
9. 51% don’t know what is meant by the term ‘gazumping’, while 61% don’t know what is meant by the tem ‘gazundering’
‘Gazumping’ refers to a situation whereby the seller has accepted an oral offer from one potential buyer, but then accepted a higher offer from another buyer. Although this act of pricing one potential buyer out of the property even after accepting their offer may not be ethical, it is not illegal because the official purchase process has not yet begun and solicitors/conveyancers have not even been instructed at this stage. Since the offer was not recorded in charter (that is, not recorded on paper and not signed), the offer has no legal standing up until the point of exchange, and so the seller is within their rights to accept a higher offer right up to the physical act of exchanging contracts.
On the other end of the spectrum, ‘gazundering’ is the act of a buyer lowering the offer they have already agreed with the seller, typically just before the exchange of contracts. Now known as ‘chipping’ (aptly named to reflect ‘chipping’ money off the agreed asking price at the last minute), this act is a gamble for the buyer as their risk could backfire and could potentially lose the sale. However, many savvy homeowners do try their luck with this technique as a way to stonewall sellers into accepting a lower offer for risk of forcing them to restart the expensive and time-consuming process of finding another buyer.
However, to mitigate the risk of either party defaulting on the oral agreement of the sale before the process is considered legally binding; they can draw up a formal ‘lock-in’ agreement. This agreement should be made after an offer has been accepted but prior to exchange, whereby both the buyer and seller mutually agree to the terms of the sale, and both the buyer AND seller provides a small deposit (equivalent to a minor percentage of the purchase price) which the offending party should lose if they do not go through with the sale or change the conditions of sale without just cause. This would add a dimension of extra security for both parties, since this legally binding contract would confirm the conditions of sale and provide legal security right up until the point of exchange, by which point the process would then official.
10. 53% are not aware of the extra complexities and risks were they to buy an off-plan property
Off-plan refers to the act of purchasing a property that has not yet been built, or is still in its construction phase. Naturally, this comes with an element of risk as you are locking your money away in a home that you cannot move straight into (or otherwise gain immediate income from if you are an investor), but this is mitigated by the fact that off-plan properties are generally priced significantly lower than their market value will be once built. Such is the nature of off-plan property, there is an element of risk involved—what happens if my property doesn’t get built? What if there is a delay in construction?
What if the property is not built as advertised?—but off-plan (particularly for buy-to-let investors) offers a huge capacity for capital appreciation when the project is built because of its lower-than-market-value purchase price, so is often seen as well worth the risk.
Off-plan property offers the capacity for an excellent deal, but in order to mitigate these perceived risks, you should conduct due diligence before purchasing—research the company you are buying the property from, making sure they have a stellar track record of past and present developments that have been delivered on time and as promised.