There is one phrase guaranteed to strike fear into the heart of anyone trying to sell a house: the broken chain.
Put simply, a chain is a line of buyers and sellers involved simultaneously in property transactions that are linked to each other. If one transaction falls through or is delayed, the chain breaks and the effects are felt up and down the line.
For example, if you are waiting for a buyer to complete the purchase of your house before you complete the purchase of your new house, and your buyer pulls out, you may have to pull out, which could cause problems for the vendor of your new property. And so on. The result is a grim mix of financial and psychological angst.
It's a common problem. Government figures estimate one in three property transactions in England and Wales falls through, while a survey for trade event the Homebuyers Show found that 36% of people feared getting stuck in a chain more than any other aspect of moving house. It's an expensive problem too, given that the surveyor, estate agent and legal fees involved in buying property are non-refundable.
What breaks a chain?
Snarl-ups can happen for a variety of reasons.
- Most deals fail because of tight deadlines for paperwork being missed or finance falling through at the last minute.
- The buyer can simply withdraw his or her offer. Until contracts are exchanged, the buyer is under no legal obligation to buy the home and does not have to pay for any of the costs that you as the seller may have incurred.
- Another common reason is that the survey - currently undertaken late on in the process - reveals some previously unknown problem with the property.
- The gazunderer is back. Gazundering occurs where a potential buyer reduces their offer at the very last minute before contracts are exchanged.
The National Association of Estate Agents has warned that this phenomenon is rising as the UK housing market cools. Increased knowledge of property prices and a glut of properties for sale means buyers are more frequently springing a nasty shock on sellers and risking a lower offer.
Ironically, gazundering by first-time buyers whose ace card is that they have no chain behind them is also contributing to the increase. It is not illegal but it is unethical.
If this happens before contracts are exchanged it is up to the seller to decide whether or not to accept the lower offer. Once contracts have been exchanged the buyer is legally committed to paying the price stated in the contract. They can still pull out, but will forfeit the 10% deposit they paid when contracts were exchanged.
- The seller may accept an offer for their house and then inform the buyer that they have been offered a higher price by someone else. This is known as 'gazumping'.
There may be a delay in the lender making a formal mortgage offer to the buyer. Until the mortgage offer is made, contracts cannot be exchanged.
How can I avoid getting caught in a chain
There are a number of steps you can take to minimise the risk.
- Avoid chains in the first place. Find out the status of potential buyers and decline their offer if they are stuck in a chain. Find out the status of the people you are buying from too as chains can break either way.
- Make sure you have all your finance in place. To avoid becoming the weakest link yourself, have your mortgage offer in place before you start making offers.
- If necessary, arrange for a bridging loan. This is a short-term loan which
covers any financial shortfall and smooths the process. It can usually be
arranged very quickly and will typically charge interest of 1.5%-2% a month.
However, James Cotton at mortgage broker London and Country warns: 'If you really must buy before you sell, or vice-versa, there is the option of getting a bridging loan.
'This can provide the means to allow you to buy a new property before you have actually sold your existing one. It is an expensive way of borrowing money however, especially if you don't know exactly when you'll be paying it back.'
- It is standard procedure to ask to see the necessary paperwork for the buyer below you in the chain to rule out any chance of a chain break. On a more basic level, sellers should do all they can to make their home an attractive proposition to potential buyers. The property should be spotlessly clean and tidy. Any redecoration required should be done. For more information, read our guide to selling your home.
- Be prepared to lower your asking price. Most property is sold within three months of being put on the market. If your home is still for sale after this period, your asking price may have fallen out of line with local levels. Check the prices of as many comparable properties as you can and adjust accordingly.
James Cotton at mortgage broker London and Country says: 'Most people simply don't have the luxury of being able to buy a new home without selling their old one, so a chain is usually inevitable.
'The longer a chain is, the more links there are that could breakdown. As a first-time buyer, you will only have people above you in a chain, not below - so you should have a better chance of avoiding any problems.'
Miles Shipside, Commercial Director at online estate agent Rightmove, adds: 'The effects of breaking chains are twofold. Firstly, as a cash buyer you may have more negotiating power at the offer stage.
Secondly, you can reduce the amount of time involved in lengthy chains by shortening the time taken to complete.
Some sellers do this by selling their property and opting for rented accommodation whilst they search for their new home.
Keeping communication channels open between all parties in the chain can help ease things along, lower stress levels and reduce the risks of chains collapsing.'
Will Home Information Packs make a difference?
One of the central features of the Home Information Pack, which is being introduced in England in Wales in June 2007, is the Home Condition Report.
The HCR is a mid-level survey which is not as thorough as a buildings or homebuyer survey carried out by a RICS surveyor.
However, it does for the first time oblige prospective sellers to furnish buyers with an independent assessment of the general condition of the house inside and out.
It is hoped that the HCR will reduce drastically instances of buyers pulling out of a deal after they see the results of the full homebuyer survey.
As well as the HCR, the packs will provide both buyer and seller with detailed legal and search information at the early stage of the process, thus further reducing the potential for a sale to fall through.
Miles Shipside says: 'HIPs can play a significant role in reducing problems created within chains. Buyers and their solicitors will be able to see up-front any problems with a property before they agree to purchase.
'By having the information right at the start, buyers can undertake all the negotiating from the outset. Home movers will have the opportunity to speed up the home buying process, as they can commit to a purchase early and will be in a position to complete more quickly.'
James Cotton says: 'The idea behind HIPs is to provide buyers with detailed information on the house they are looking to buy, before an offer is made - this is intended to cut down on gazumping and to reduce the number of failed transactions due to problems or property defects being discovered further down the line.
'If HIPs are introduced, they will not get of rid chains. What they should do is reduce the time between offer and exchange, as much of the information required when buying a property will be provided upfront. So whilst chains will still be there, HIPs will hopefully reduce the chance of them breaking down.
'Unfortunately, there is still a lot of detail needed about HIPs (what they will contain, how much they will cost etc) before we can properly assess their impact.¢
Are there any other ways to fix a broken chain?
As a last resort, you could try a company specialising in repairing broken property chains. These companies co-ordinate reductions in price all the way down the line to try to get things moving.
If your buyer pulls out at the last minute, the company has your house valued by two surveyors, then offers you 90% of the asking price.
The company makes its money by remarketing the property. The 10% includes protection against a possible reduction in value. Vendor saves on the costs of remarketing and further estate agent fees.
This kind of service should be seen only as a last resort - the current high level of house prices means this is potentially a far more expensive way of moving through the gridlock than relisting or getting a bridging loan.