The process of house buying is notoriously expensive for all involved, hence the reason that so many people only consider a move every 5-10 years, if at all. As the market continues to be increasingly competitive, ever escalating property values are certainly making this process even more costly.
Bearing this in mind, contractors looking at making a foray into the market should note that in some areas of the UK, estate agents are now offering a new scheme which has the potential to increase property prices, and shift more costs onto the shoulders of the purchaser. The practice, known as sale by tender, has become popular in London over the past 12 months, as it favours the estate agent to the point where there is the potential for an agency to be paid by both the buyer and vendor.
In the traditional process of house buying, the estate agent will receive a percentage fee from the vendor, based on the eventual sale price of the property. As an example, these fees usually fluctuate between 1-2%, so on the sale of a £200,000 home this would equate to anywhere from £2000-4000 before VAT being paid for the agents services. An integral part of the transaction from the vendor’s perspective is that the agent will only receive a fee if a sale actually completes.
The motivation for an agent is clear; no sale, no commission. As a standard this process will be the main stay for all estate agencies through-out the UK in a market for buyers. However, at present it is clear the demand for property is largely outstripping the supply of quality homes coming to market. As competition is at such a point, it is not surprising that estate agents have taken the opportunity to capitalise on the present conditions.
Sale by tender has steadily increased in popularity for agents looking to beat opposition to head of the queue for any prospective vendor. The incentive for a seller is that the agent will charge a minimal fee to manage the process, such as the £150 plus VAT charged by Douglas Allen, one estate agent in the Kent region offering the service. While this does not look like a profitable enterprise for the agent, it should be noted that the second part of the transaction involves the agent charging the buyer a finder’s fee for handling the process of the purchase.
This can invariably involve a percentage of the sale price or in some cases a set fee from the outset to purchase the property, payable directly to the agent. Haart estate agents in London advertise many properties with confirmation that a fee will be payable, in addition to the value of the property. In some cases, these fees can escalate past the 1-2% fee of the sale value.
Mark Hayward, managing director of the National Association of Estate Agents, believes that in any purchase, agents need to be clear on the use of the charging structure: “In whatever instance a fee is levied, however, our code of conduct is clear that all agents must be upfront and transparent about the fee being charged.”
Other than the fees involved, the process is comparable with another popular option of agents, in that it is similar to the sealed bids process. Most agents will market the property via an open day, where other buyers are encouraged to view a property with several other prospective buyers to further stimulate competition. A deadline will be set for bids, at which point the vendor is asked to select which of the offered amounts they are willing to accept, with no expectation of accepting any of the offers if these are deemed to be too low.
There does appear to be very little downside for a seller under the process, as the largest cost of employing the agent is passed onto the buyer. But it should be noted that what this can encourage is a determination on the part of the buyer to drive down the price, in an attempt to reduce the final fee payable to the agent.
For a buyer, there are several issues to contend with. Clearly the fee to the agent escalates the costs of the purchase exponentially, but it doesn’t necessarily stop there. Dale Parry of contractor mortgage specialist, Contractor Mortgages Made Easy, said: “On a recent transaction in London, where the sale by tender process was being used, a solicitor came back at the point of exchange to say that as the fee was now payable by the buyer, this cost had to legally be factored into the purchase value.”
Parry continued: “Consequently, this had to be cleared with the mortgage lender, but in addition the stamp duty payable would now increase, due to the higher purchase value. In both instances, the buyer was penalised because of the increased costs.”
Article By: Simon Butler, Senior Mortgage Consultant at Contractor Mortgages Made Easy
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