My wife and I are looking for a new house to buy. We have accepted an offer on our current property, but have not exchanged any contracts.
We found a new house that was perfect, but after we made our first offer, we got into a bidding war against an out-of-pocket buyer. It went to the best and last bids, so we went in with our strongest bid.
As our offer depends on the sale of our old house, the seller says he will only accept our offer if we pay a £10,000 deposit.
This is held by our attorneys and is considered partial payment of the 10 percent deposit due at the exchange of contracts.
Ultimatum: If our reader fails to make an exchange before July 15, the seller of the house has the right to back out of the deal and walk away with his £10,000
If we fail to make an exchange by July 15, the seller says he has the right to back out of the deal and walk away with our £10,000. We believe we can meet this deadline because our buyer pays in cash.
The money will only be refunded if there is a fundamental problem with the legal title or if our appraiser says there is a fundamental structural problem. The salesman says he and his lawyer will ultimately have the right to decide what is “fundamental.”
His lawyer is going to issue a document for us to sign stating that we agree to this.
Is this a strange request and should we agree or are we taking too much risk? Is it even legal? Via email
Ed Magnus of This is Money replies: This is definitely a niche request from the seller.
Deposit holdings are rare when buying a home, except when a new property is purchased off-plan and may not be completed for several years.
If you agree to the terms of this seller, there is significant risk involved as you have not yet exchanged any contracts on your own sale.
It’s also worth knowing that more than one in five sales are currently down, according to Rightmove.
I would imagine a lawyer would advise against this or at least suggest extending the deadline proposed by the seller.
It usually takes between eight and 12 weeks for you to agree on a sale and be in a position where contracts can be exchanged, but in some cases it can take much longer.
By only giving yourself a month, you’re taking a big gamble. Can’t afford any delays.
Requirements: The seller proposed a surety bond, which would be held by his lawyers
There are so many factors that can cause delay. Property searches, inconsistencies with the title deeds, issues with building permits such as attic or garage remodels not properly approved, as well as problems related to the mortgage application or investigation, can all delay the legal process.
The July 15 deadline is also quite tight. It may be worth looking into changing that to the end of August to account for any unforeseen issues that the survey or your attorneys may reveal.
It may also be worth seeing if the seller is willing to compromise on the basis that you immediately organize and pay for an investigation to show that you are committed.
But the seller may not be willing to change its terms. Therefore, if you really love the house, it may be a risk you have to take.
We decided to discuss the matter with Jeremy LeafNorth London estate agent and former Rics residential chairman, and Olivia Eggdell Pagepartner and head of the real estate division of Joseph A Jones & Co solicitors.
Is a security deposit normal when buying a house?
Jeremy Leaf replies: I fully understand the seller’s requirement that you make a financial commitment. He clearly doesn’t want to waste his time, or find out later in the process that you can’t move forward.
The problem of trying to tie buyers and sellers together as part of the transfer process has been around for many years.
Deposit systems do work in Scotland and other parts of Europe, but that means the market is rather fixed and doesn’t offer the flexibility that the system in England currently offers.
Olivia Egdell-Page replies: We are seeing greater acceptance of these ‘exclusivity’ or ‘reservation’ agreements, more akin to the agreements developers use when selling new construction homes.
The exclusivity agreement in this case gives the seller additional financial security and proof that the buyer has committed to the property before the transaction reaches the point of exchange of contracts.
While such an agreement is no guarantee of eventual completion, it does provide a degree of certainty and a financial incentive for both parties. That is why we see these agreements being used more and more.
That said, exclusivity agreements do not have a standard form and the terms are a matter of negotiation between the parties, which should involve your lawyer.
You need to consider the circumstances in which you are allowed to exit the transaction with your deposit, and I see the seller has already set out their proposed terms.
Don’t shop around: The seller wants to impose a fine if our buyer walks away
Are deposits legal?
Jeremy Leaf replies: I’m not sure if the £10,000 proposal is legal, so I would first suggest that you speak to your lawyer to check whether or not the suggestion is legal.
I am not comfortable with the premise that the seller and his attorney are playing judge and jury in their court and can determine what is “fundamental” and “reasonable” in these circumstances.
You also need assurance that the seller will take the property off the market and not offer it to anyone else if you enter into this agreement.
Olivia Egdell-Page replies: It is ‘legal’ to request a deposit prior to the exchange, but it should be approached with caution.
Any payment made must be accompanied by an exclusivity agreement, which must be carefully drafted and agreed between the parties to ensure that your respective interests are protected.
It’s not entirely reasonable for the seller and their attorney to decide in their sole discretion what is “fundamental,” and you should consider and clearly define what, if anything, would be enough to walk away from the property.
Much depends on how much you have fallen in love with the property and how badly you want it. And how likely is it that you will find a suitable alternative in the same location?
What would you advise?
Jeremy Leaf replies: Much depends on how much you have fallen in love with the property and how badly you want it. And how likely is it that you will find a suitable alternative in the same location?
You could perhaps try offering a lower deposit so you have some ‘skin in the game’ but not to the same extent.
If you’re not willing to potentially lose that amount, you can try to be as transparent as possible and run the purchase along with its sale so that they’re both at roughly the same stage.
For example, if you have a survey on his property, he has a survey on the property he’s buying, and so on. It’s all about building trust and being as open as possible.
As in all these situations, the market will prevail. And if supply and demand are such that this is a property you don’t want to miss out on, then you might be tempted to shell out the £10,000.
Otherwise, you should look for an alternative home that is available without such pressurized conditions.
How could they speed up this home purchase?
Ed Magnus replies: There isn’t much you can do to speed up this sale as you depend on a number of different people.
You have to be willing to pick up the phone and go after everything to give yourself the best chance.
Delayed searches are one aspect of a home purchase that a buyer and their carrier have little control over.
Instructing the carrier to start local searches once the offer has been accepted is an obvious way a buyer can speed up the process.
An alternative option is to contact the council to try to resolve the matter – although there is no guarantee that this will speed up the process.
If you are willing to pay an additional fee, you can also contact a personal search company, which will conduct its own investigation to speed up the process.
You can do this through the Council of Property Search Organizations websitelisting a range of companies that can help.
The nuclear option for buyers who can’t complete their searches on time is to go ahead with the sale anyway and purchase search liability insurance to cover any costs incurred as a result.
The caveat here is that this is subject to your mortgage lender’s approval – and many banks and building societies won’t accept it.
If you can get approval, insurance can cost as little as £20, according to the Alliance Homeowners.
It usually addresses some, but not all, of the issues that would otherwise have been revealed if a pre-completion search had been performed.
It allows buyers to go ahead with their home purchase with a little more certainty in the absence of local search results, at least financially.
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