I'm preparing to (hopefully) enter the property market and been reading up on the house buying process and there is something that is causing me a bit of confusion. Looking at the steps involved after exchanging contracts there appears to be a "down payment" deposit needed, upto 10% of the selling price, paid to the seller. This appears to be different to the deposit needed when getting a mortgage from a lender.
Can someone tell me what the difference is between the two deposits and am I going to have to almost double the amount of money I have to save up if I want to buy a house?
Well yes, perhaps - but don't forget that you'll usually still find that the contract requires a full 10% 'penalty' if you don't "complete" for whatever reason. If you pull out between "exchange of contracts" (having paid the 5% deposit then) and "completion", you'll owe the seller *another* 5% until you can pay him/her off!!
That's my cue to chip in and point out that the very idea of paying a deposit to the vendor at exchange is absurd. The whole sum, no less, should be paid at completion, no sooner, no later.
The "penalty" for failing to complete should be paid by whichever party is responsible for that failure. Let's not forget that this is not necessarily the purchaser, it can be the vendor. The basis for calculating the size of the penalty payment (more correctly compensation for damages arising from breach of contract) should be as it is with all contracts.
If the buyer pulls out, and the vendor can only sell to another party at a lower price, the vendor should be compensated for the difference (plus interest and cost of additional fees if any). There is no good reason why this compensation amount should be as much as 10% of the originally agreed price, or indeed as little.
Likewise, if the seller pulls out, the buyer must be compensated for the cost of acquiring an equivalent alternative house, etc, plus cost of temporary accommodation.
If a sale did fall through, at the fault of the seller (rather than purchaser), then wouldn't the purchaser still have recourse to the courts for compensation, as you point out?
I should jolly well hope that the contract makes that clear. What is bad about the deposit practice is that in addition to pre-determining the size of damages in the case of the sale falling through through the fault of the buyer (which is fair enough though weird), lodging a deposit in this amount pre-supposes a certain likelihood of this scenario. In other words the contract is fundamentally based on inequality and mistrust (and inequality *of* mistrust).
The last one I saw just said something like " 'penalty' is 75 towards extra solicitors fee's" - not too sure whether it expressly said, or just implied, that other damages could be sought - but certainly nothing concrete. Anyway, it did seem very unfair to me at the time (and I was doing the selling!).
In circles outside house purchase, the normal thing is that the Contract becomes "effective" on payment of the agreed initial payment. Until that time there is no contract. If it was a new house being built, there might be a number of stage payments along the way, to reflect progress, and the final payment on take-over, possibly with a retention until the end of the guarantee period.
The actual percentages depend on the contract wording, as agreed between the parties. It could be, for example, that the initial payment secured the land, and so might be a considerable proportion of the contract price. After that there could be stage payments at completion of foundations, completion of the roof, completion of piped and wired services and their commissioning, and final completion.
I would think that the real point is that the vendor doesn't want to get to the point where the removal men pull up outside and then find that everything has fallen apart, damages or no damages. Paying a deposit a week or two early gives rather more confidence that it will happen, and it isn't particularly onerous for the buyer (although it's clearly got worse as prices have risen). Actually in my case no-one really seemed to be that bothered whether I paid a deposit or not.
In any case there's no general reason why a contract can't stipulate that part of the payment will come early, or indeed late, if that's what the contracting parties agree to.
Is it? Once the ink is dry on the contract, the vendor is assured of his money, with ructions if necessary.
It certainly is onerous for buyers who need 100% mortgages, unless they can persuade their lenders to cough up an advance.
See?
Quite true, but finding a mug of a buyer to agree to something as daft as that may be sufficiently difficult to risk no-one ever buying the damned house.
We had an experience on one occasion, when moving into a newly built house, where we discovered on arrival, with van and furniture in train, that the building society had decided that they would not release all of their funds until certain works had been completed.
The developers agreed to give us a free licence to occupy until the building society released their retention.
We had an experience on one occasion, when moving into a newly built house, where we discovered on arrival, with van and furniture in train, that the building society had decided that they would not release all of their funds until certain works had been completed.
The developers agreed to give us a free licence to occupy until the building society released their retention.
This is universal (at least in England!!) standard practice when purchasing new build property when the completion of your house takes place before the things like the roads etc., have been finished. It wasnt the b/socs fault, because their conditions should have been in the offer, more like your solicitor for not explaining it to you. But it didnt matter because your solicitor will have been holding back a similar amount from the vendor, so you were OK. Nothing special about it all.
But if this is just a 'consideration' thing then one pound would be enough. In any case I believe that the "obligation to pay" is a consideration.
Why not? Not all contracts contain an actual monetry item that a 'percentage of' can be exchanged when signed.
I think this is completely different. The 'exchange' will take place at or before the first payment. The further payments will 'complete' that part of the purchase.
Er, it's not late, and you shouldn't be tired. Run that by me again, because I don't see how it makes sense. The seller is the one with the house and no money, the buyer is the one with money and no house [except when his money is only conditional upon the sale of a house he still hasn't quite sold]. How does this indicate that the seller is in a better position position to pay compensation? He can't spend the equity in his house without selling it, so if he has to sell it to pay the buyer compensation, he might as well sell it to the buyer in the first place.
No, frankly, if the seller requires a deposit from the buyer, this is a fundamental indication of mistrust, of suspicion that the buyer might drop out *and* have no resources to compensate the would-be seller.
Mind you, the culture and tradition of the stupid way conveyancing works in England does tend to make buyer's drop-out rather more than a remote possibility. It's this daft idea of trying to get whole chains to complete concurrently, i.e. trying to achieve the impossible, that is to blame. We don't do that in Scotland, and so we don't need (and don't use) deposits.
He (probably) has some equity to put a charge against, or to borrow against. If the buyer defaults having paid no deposit he may have nothing that the seller can claim if (when) he wins compensation in court. I'm not saying that the positions are idea or exactly the same, I'm just saying that they are closer together
So the court will order specific performance then, but from the other party no amount of legal bits of paper will force compensatation out of a defaulted buyer, who has no money.
Yes, so what's the problem? If it were personal I can see that it might be a problem, but as every seller is placing the same condition on every buyer why is: "I don't know you, I don't trust you" wrong?
Not usually after exchange though.
I don't have a chain that I'm trying to complete at the same time. I still expect a deposit. And before you say it, no I don't trust the other party not to drop out at the last minute (having had this happen to me twice before in my six house 'career'). I don't know him from Adam, for all I know he could be this guy's brother
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- my house is less than a mile away!). Taking the deposit moves the risk from completion to exchange, yes I have the right to sue him if he does drop out between the two, but I don't want the aggro.
Yes, one would think so, especially with so short a gap. So why bother with the deposit rigmarole?
But I do, because I can't think of anything else to blame. I imagine it must be because of the impossibility of forging a whole chain that's solid everywhere. It will have weak links, which are deals which have not quite reached the exchange milestone, but everyone involved just opes for the best, and if they fall through they cause a sale which was assumed to be in the bag not to happen.
Well, you might think so, but in practice it doesn't happen like that. More opportunity, by itself, is not a reason for something to go wrong, you need real reasons for that, and there is something inherent in the Scottish system which eliminates, or at least minimises, such reasons.
The buyer must still have been a man of some means to have contemplated going through with a purchase to begin with. He must still have had funds to use as a deposit (in the other meaning of the word), unless he was a prospective FTB whose 100% loan fell through. But without a loan offer the deal would never have reached exchange, would it? That leaves the only other likely reason, namely a buyer *with* equity whose ability to complete vanished as a result of a down chain collapse. So he *will* have equity to put a charge against.
The problem is that fundamentally every contract is based on trust.
All the more reason not to require a deposit.
It's not your side of the chain that's the problem, it's his!
Sorry, but that's rubbish. It's asymmetric. If the vendor vanishes, the purchaser is stuffed and getting his *own* deposit back is hardly enough compensation. There is only one party with something in the "kitty".
I gather the French have a much fairer kitty system, in which
*both* buyer and seller pay something into a TTP kitty, and if the deal goes through sans problemes, they get their kitty money back, but if it fails, then whichever party whose fault it wasn't gets the whole kitty. - That's still dodgy if there is fault on both sides, but at least there is a symmetry of mistrust.
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