Could this mean an end to the heartache and expense of a house sale falling through? A revolutionary new scheme that would require a homebuyer or seller who pulls out of a transaction without a very good reason to pay compensation is set to be trialled by the government early next year.
Between a quarter and a third of all house sales fall through, resulting in huge amounts of stress and wasting hundreds of millions of pounds a year.
The latest idea to try to make the housing market work better, is a new type of agreement that would “lock” people into the process a lot earlier and make it much harder to walk away or move the goalposts – for example, because they have changed their mind or decided to accept a higher offer.
The agreement would involve one or both parties putting down cash at the outset. You would get some money back if the other side later pulls out.
So what’s this scheme all about?
It’s called a “reservation agreement” and is designed not only to cut the number of house sales that fall through, but also to reduce the fear that something will go wrong. The government has been thinking about this for a while but is now moving closer to it becoming a reality.
This sort of agreement is already used by a few estate agents, while those buying new-builds are often asked to put down a reservation fee.
How would these agreements work?
Maybe like this: once a sale has been agreed, the buyer and seller would both be asked to put down some money, which would go into an “escrow account” probably held by lawyers, says Mark Hayward at estate agent body NAEA Propertymark.
Both parties would sign the agreement, which would last for a set period. If either side withdraws for a reason that is judged to be not acceptable, they will forfeit the deposit.
Perhaps the “wronged” party would simply have their costs covered, or maybe they would get the entire deposit as compensation.
Notably, the government’s recently updated online guides to buying and selling a house both refer to “reservation agreements” and explicitly talk about compensation.
However, it seems likely that different types will be trialled. For example, some might involve only the buyer putting down money.
What might be acceptable – and unacceptable – reasons for pulling out?
Acceptable reasons might include a bereavement, losing your job or an inability to obtain a mortgage. Presumably, a buyer would have to be able to pull out without penalty if the survey came back with serious structural problems or similar – but coming up with a workable definition of a bad survey could be a challenge.
Unacceptable reasons for a buyer to pull out are likely to include reducing an offer at the last minute, while for a seller they would presumably include accepting someone else’s higher offer.
How much is this going to cost?
There’s no clarity on that yet – it could be a small percentage of the purchase price or a flat fee and could depend on where in the country you are.
A news report this week on website Estate Agent Today suggested that some of the agreements tested may involve a non-returnable deposit of £500 put down by the buyer, some may require £1,000, and some may not involve any initial payment.
If the amount is set too low, a seller in a buoyant market, whose house is going up in value almost by the day, may decide to take the hit because they could get more by accepting a higher offer than they would lose by defaulting on the agreement.
But if the amount is set too high, it could be unaffordable for those such as first-time buyers who are already under pressure to amass a deposit and meet all the other costs.
Will I get my money back?
As outlined above, it may be that the deposit is non-returnable. Or it might be that you pay a non-refundable fee but get your deposit back if everything goes to plan.
So what about this trial?
The government commissioned consumer research and, assuming this comes back positive, a pilot scheme to trial the agreements will be launched in a number of areas across the UK. This could happen as early as the first quarter of next year.
“This research, which is still under way, will help inform our decision on whether to roll out reservation agreements as part of a trial, potentially as early as next year,” says the Ministry of Housing, Communities and Local Government, which seems to be trying to dial down the excitement on this.
Phil Spencer, who presents Channel 4’s Location, Location, Location and is co-founder of advice website Move iQ, believes the pilot “would be a welcome step forward”.
Does anything like this exist already?
Yes. Spencer promotes Gazeal, a property technology company that offers a reservation agreement allowing buyers and sellers to lock in their deal with a legally binding arrangement.
With this, there is no initial cost to the seller, while the buyer pays a non-refundable fee of 0.075% of the purchase price – eg, £150 on a £200,000 property.
Both parties sign, and if one breaks the terms of the agreement, they will have to pay the other 1% of the purchase price – ie, £2,000 in this example. “We’re getting some great success with it,” says Gazeal’s Bryan Mansell of its agreement, though he accepts that “it needs some explaining to people”.