Will preliminary contracts when buying and selling a home work?

publication date: Apr 7, 2011
author/source: Kate Faulkner, Property Expert and Author of Which? Property Books

Will preliminary contracts when buying and selling a home work?

House Contracts

Currently, according to a government survey, around 31% of house transactions fall through after offers have been accepted. The effect of the credit crunch and recession on the property market is that holding sales together has proved harder than ever before.

Buyers and sellers are both losing confidence and pulling out of deals, or people are finding they have been approved for a mortgage in principle, and then the lender has pulled the mortgage. Some people are trying their luck at making offers, then trying to reduce them prior to exchange.

With HIPs now being dropped by the Coalition Government, leading members of the residential property industry are calling for the development of a legally binding preliminary contract to reduce the risk of house sales falling through in England.

According to the E-Homebuying Forum, “a roundtable event hosted by former head of the Office of Fair Trading and President of the Forum, Sir Bryan Carsberg last week, representatives from estate agents and firms of solicitors and conveyancers debated the merits of introducing preliminary contracts as a standard procedure in the home buying and selling process.”

The Forum goes on to say that “the contract would require both parties (buyer and seller) to commit to the house sale at the agreed price, subject to certain conditions that had been approved from the outset. That way, if the property market changed and the buyer wanted to purchase the house at a lower price or if the seller wanted to take a higher offer, the contract would hold firm and ensure that withdrawal would attract penalties.”

Sir Bryan Carsberg, President of the E-Homebuying Forum said:

“Gazundering and gazumping can be avoided if the buyer and the seller reach a preliminary agreement and if one party refuses to enter such an agreement, the other is informed that there is no firm commitment. We believe a legally binding preliminary contract, requiring, for example, a 5-10% deposit would give a serious indication of the intent to purchase or sell a house, therefore helping to identify timewasters and speculative sellers from the market.

The Forum have pointed out though if there is a problem with the property or a “genuine reason” why people pull out, for example a “if the property proved to be suffering from subsidence or the buyer couldn’t secure sufficient finance, the contract would become void.”

Kate Faulkner comments “the idea of a 'prelim contract' is a good one, as it does make buyers and sellers commit to the process, so it will help to get rid of ‘time wasters’ that exist in the process.”

“The main reasons that I have found for sales falling through after offer stage include though many of the things that the contract voids, for example a bad survey which often puts people off, despite the fact that most things are fixable. The second issue, especially since the credit crunch, is lending being withdrawn – even if they have a mortgage agreement in principle as deals can be withdrawn in a matter of days from originally offered.”

So in Kate’s view, “a preliminary contract would be a good idea, as it’s a step forward, but properties should also be assessed by a surveyor to begin with so that buyers know before they make an offer what work needs to be done on the property and how much this work will cost. It would also be an advantage to only accept offers from people who have a mortgage agreement in principle or evidence they definitely have the cash to purchase a property."


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