Pre-exchange of Contracts
- Your solicitor and the seller (vendor) will exchange details and other information. Your solicitor will receive a copy of the draft contract which will be sent to you. This outlines - The seller's and your details, details of prices, which specific fittings are included in the price, and details of the seller's title deeds.
- Your solicitor checks and negotiates the terms of the draft contract on your behalf, and applies for "standard searches" to be carried out. These are addressed to the Local Authority in order to check details, such as, upcoming changes to the locality that may affect the property, if it is in a conservation area, if the building is listed (protected), and any additional checks that need to be made to the Land Registry and the Water Authority.
- Your solicitor then addresses a number of standard inquiries to the seller's solicitor, such as, are there any ongoing disputes over the property? What are the exact boundaries of the property? Who is responsible for specific fences, hedges etc.? Does a public footpath or right of way cross the property? Do the deeds contain any restrictive covenants? Is the property under guarantee with an authority, e.g. National House-Building Council (NHBC)? Is the house under planning restrictions due to past extensions or for any other reasons? Are rights of way, road access and/or access to utilities shared by any neighbours? If the property is Leasehold, is ground rate up to date and who is the Freeholder?
- Your solicitor will send you a mortgage deed to sign and make the contract formal (not just a mortgage agreement in principle).
Before the next stage (exchange of contracts), a completion date must be decided upon by both parties. On this date you are free to move in. It can take up to two weeks from exchange of contract to completion, or it can be done on the same day. If you are both buying and selling, or if the sellers are making what is known as 'a chain', then this can take longer.
Exchange of Contracts
After contracts are exchanged, you are legally bound to purchase the property. We recommend that, before this stage, you consider the following checklist
- You have the deposit ready. Your mortgage offer is in place. The surveys are satisfactory. Life insurance and property insurance are set up. The contract terms have been revised by all parties. A completion date has been set. (transfer date)
- You pay the non-refundable deposit to the seller.
- Your solicitor prepares a transfer document which is sent to be signed by the buyer. This deed transfers the property to the buyer from the seller and, once it is agreed, it must be signed by both parties.
- Your solicitor finalises your mortgage arrangements, readying the money for transfer to the buyer upon completion.
- Final searches and inquiries are carried out by your solicitor.
- Land Registry fees must be paid along with Stamp Duty.
- On the date of completion, funds are sent by your solicitor to the seller and the sale of the house is completed.
- You receive the transfer deeds and title deeds.
- You receive the keys and your tenant may now move in; the buyer must have vacated at a pre-arranged time.
It's recommend that you use the time between Exchange and Completion of the contracts (once you know that everything is secured) to find your tenant via the recommended agents in the area.
A strange term and very unique to the UK - If you make an offer on a house, it is accepted, but you find yourself losing out to a higher offer... you have just been gazumped! It is not illegal but, if it ever happens, you will wish it were. The problem comes about during the conveyancing process after an offer has been accepted (which is not legally binding), but the exchange of contracts has still to be completed. Importantly, this is after a substantial amount of money has been paid out to conduct the survey(s), the various searches, solicitors fees and other administration charges, and, if this is lost due to gazumping, then it will have to be paid again next time.
You can minimise the chances of being gazumped by sticking to the following guidelines:
- Be efficient and well organised - The speed of the sale will minimise the window of opportunity during which higher offers could be made.
- Demand that the property is taken off the market.
Leasehold versus freehold
There is one more very important thing to consider when buying property. Is it being sold as leasehold or freehold?
Leasehold. This means that you have the property for the duration of the lease, it then returns to the owner of the Freehold. There may be specific obligation written into the lease that you need to be aware of, such as maintenance. You will also have to pay the freeholder ground rent, usually a small yearly sum.
Freehold. The owner of the Freehold has complete control over the property and land, subject only to planning and building regulations. This increases the value of the property.
Mortgage lenders will insist on a valuation of the property to ascertain the soundness of their investment. This is arranged by the lender, however, you must foot the bill. This is not to be confused with a detailed survey, which examines the structure and condition of the house. You may have the survey carried out by the same company taking care of the valuation or have it done separately.
Full Structural Survey - This is advisable if it is an old house or you suspect there could be potential problems.
House buyers report - Much cheaper than a structural survey, it checks the visible health of the house and can recommend specific further checks if necessary. Suitable for newer properties.
Typical legal and solicitors fees
When buying a new investment the Legal fees will typically include Stamp Duty, Solicitors Fees and Search Fees. These costs normally increase in line with property value, and can vary depending on the property location itself. The information below will help you identify some of the most common legal costs.
Stamp duties - (Transfer costs)
The figures are based on a house valued at £245,000 with a postcode of EX14. Stamp duty rates are currently 1% of property value above £125,000, 3% of property value from £250,000 to £500,000, 4% of property value above £500,000.
- Solicitors Fee £195.00 - £ 250.00
- Land Registry Fee £220.00
- Search Fees £130.00
- Telegraphic Transfer £23.00
- Stamp Duty £2,450.00
- TOTAL - £3,018.05 - £ 3,200 dependent on solicitor's costs
It is possible after 6-12 months to re-mortgage your investment, especially if you have purchased below market value right at the start. The banks will reassess value based on existing sales in the area, and allow a Buy To Let increase in mortgage based on 70% of the new value. This is generally called a re-mortgage (second bond) and costs incurred are generally:
- Solicitors Fee £132.38
- Land Registry Fee £50.00
- Search Fees £25.00
- Telegraphic Transfer £0.00
- Total £207.38
From April 2009, stamp duty was put on a "holiday" for property valued up to £250,000 for first time buyers, in order to boost the property market effective for 2 years. From April 2011 stamp duty rose to 5% for property valued over £1,000,000. There is talk that this holiday might happen again which will be good for investors below the first threshold.
Mortgage Lenders and banks will normally charge an arrangement fee, a booking fee and a valuation fee. It is not normally possible to indicate typical costs for these items as they vary considerably between lenders, and between mortgage products. Lenders often introduce incentives where these costs have been reduced, some lenders will also offer to pay an amount towards the legal costs of the purchase.
Lenders fees must be taken into account when purchasing or re-mortgaging to determine which product is the most competitive. It is therefore essential to consider the Annual Percentage Rate (APR) when selecting a suitable mortgage product not just the stated rate of interest. The APR will indicate the true cost of the loan taking into account both the mortgage rate and all associated costs.
For regulated mortgage products, it is now compulsory for brokers to indicate how they are paid, and how much they charge for their service. Typically brokers will charge an administration fee for processing each case, although again, this can vary considerably, and can increase with the size of the loan.