The pitfalls of buying off plan and using the ‘recommended solicitor’

The pitfalls of buying off plan and using the ‘recommended solicitor’.

The BBC recently reported about homebuyers who lost thousands when they paid a deposit and exchanged on a new build before it was built.

There you are looking at a new home that has been beautifully decorated to entice you to live the dream, the sales representatives will usually tell you that you need to act fast to get your plot, there is a limited time discount. You take the plunge and pay a holding deposit, and you are aware you have to exchange contracts within a limited time period.

The sales representatives kindly offers to help you find a solicitor who is familiar with the development. You instruct the recommended solicitors who then exchange contracts, and you pay a 10% deposit.  The exchange of contracts makes you legally bound to complete the purchase upon notice from the developer once the property is built.

There are delays with the build and eventually you are given notice, you rush around to get a mortgage offer only to discover you can’t as the property has gone down in value.  This can due to general economic reason, because you exchanged when the market was on a peak or because the lenders valuers feel that the type of property you are buying is likely to fall and reflets predicted values. 

What does this mean? – usually you will lose all of your deposit and the property, unless family can help you.

Our Advice

Seek advice form a solicitor you chose, if you are being recommended by a sales representative it is because their company is receiving a referral fee and the sales representative commission can be linked to legal referrals. Some Estate Agents also work like this.

Remember if the solicitor is paying a referral fee, the fees will be taken from the monies you pay them, so there will be less money when they are trying to provide a service to you.

Your solicitor should explain the contract, and should advice you to seek a mortgage offer which covers the period of the property build, you should never exchange contracts without a mortgage offer in place to enable you to complete the purchase.

Do not feel pressured to agree to purchase from plan if the property will not be built within 6 months. This limits your exposure to property market fluctuations and hopefully will enable you to have a mortgage offer that is valid for 6 months. 

What needs to change?

The above is an industry problem, as developers want to sell from plan, and lenders want to limit the time they set aside funds for mortgages, as they don’t start earning from those funds until you start paying your mortgage.

Industry changes, or government intervention is needed if developers won't self regulate.

Developers should act responsibly and should only exchange of plots when the property is expected to be built within 6 months, Lenders can and have retracted mortgage offers because of market fluctuations eve after they have been told that the buyer has exchanged contracts. Lenders should not be able to retract the mortgage offer once a buyer exchanges contract. 

The law should ban referral fees as they have for other areas of law, so the customer gets freedom of choice and can ensure they get free unfettered advice, as firms linked to a developer may be more concerned about losing an income stream.

Original Article: https://www.bbc.co.uk/news/articles/c0kgr0y6e10o