After a number of property searches, house viewings and offers, you’ve finally found the property of your dreams – but what happens next?
Unfortunately, you haven’t seen the back of the financial and legal paperwork just yet. There are still a few things that you’ll need to work out with your solicitor before you are handed the keys to your new place.
In England and Wales, there is no legal obligation for a buyer or seller to proceed with the sale of a house after an offer has been made. The terms aren’t officially agreed upon until both parties have signed a contract and determined the details of the sale.
In this article, we’ll talk you through what it really means to exchange contracts and where it places you on your property journey.
What does exchange of contracts mean?
Exchange of contracts is when the solicitors of both parties (the buyer and seller) swap signed contracts. Both solicitors pass over the necessary legal documents for the contracted transaction and the buyer usually pays a deposit. After this exchange has taken place, the contract becomes legally binding.
Up until the exchange of contracts, either party can back out of an offer for whatever reason. However, once the buyer and seller sign and exchange contracts, they cannot back out of the deal without facing financial and legal ramifications.
What is the process of exchanging contracts?
A seller will make an offer to the buyer, which will start the ball rolling if the seller accepts. Once the buyer and seller have all of the required paperwork, such as a written mortgage offer, building insurance and a completed application to the land registry, the contracts can be exchanged.
The buyer and seller sign duplicate copies of the contract, after which the solicitors for both the buyer and seller swap documentation. The solicitors will usually do this over the telephone in a recorded phone call, where they will read out the contracts and then send the paperwork to each other on the same day.
The buyer’s solicitor at the bottom of the chain will begin the exchanging of contracts by confirming the purchase price and other legal information to the next solicitor on the chain. This will continue throughout the day until the final solicitor has been contacted and everything has been finalised.
After this, the exchanged contracts will be confirmed back down the chain within the set timeframe. If this process cannot be completed in a single day, it will start again on the following day.
Contracts will only be exchanged once everyone involved is happy. This means that if there is an issue at any stage of the process, such as the seller’s purchase of a new house falling through, the process of exchanging contracts may be delayed.
Deposits are given to the seller as they will usually need the contribution to pay for their own deposit towards their next property. The seller can also keep the deposit if the buyer backs out of the deal as compensation.
How can I prepare for the exchange of contracts?
There are several things that buyers and sellers should do to prepare for the process of exchanging contracts and to help everything run smoothly. One of the essential things to check is that you have the offer from your mortgage lender in writing. Most mortgage lenders require customers to have a solicitor before they agree upon an offer. It can be risky to put a purchase price offer in for a property as a cash buyer as any errors the buyer or seller makes could mean that they don’t have legal ownership of the house, even after completion day.
It’s also important to make sure everything that has been verbally agreed is written down in the contract, including any additional fees or extras that are included in the property sale. All of the information that is written in a legally binding contract must be upheld, or the offending party could face penalties.
Neither the buyer nor the seller is entitled to recover any costs if either party pulls out of the deal before the exchange of contracts has taken place as they aren’t legally bound to the arrangement.
How much is the exchange of contracts deposit?
Buyers are required to pay an exchange deposit to the seller of the property. The deposit is usually 10% of the overall property cost, although this amount can vary depending on how much you are paying for the mortgage deposit. For example, if you are already paying 95% of the mortgage, your solicitor may be able to lower the deposit for the exchange down to 5%.
Buyers who are purchasing a property with the Help to Buy Isa may also request a deposit negotiation because the Isa bonuses are only paid after the exchange has been completed.
Deposits that are larger than 10% may be paid in two parts, such as a 10% payment at the point of exchange and the remaining money after the competition date.
The exchange deposit’s main purpose is to prove to the seller that you intend to buy the property. Sellers can sue buyers for the deposit if they back out of the deal. The seller can also sue if the buyer pays less than 10% for the deposit, as well as compensation if they back out of the deal.
How long does the exchange process take?
There is no set timeline for the exchange process as it can vary from a few weeks to a number of months. The best way to make the process quicker and run more smoothly is to keep track of the documentation and deadlines.
Solicitors will arrange a completion date, which must be met otherwise the buyer or seller’s solicitor could get sued. This is a good incentive for the legal firms involved to keep to the set date.
What happens after the exchange of contracts?
Usually, completion dates are set for around two weeks after the exchange of contracts, although this isn’t a requirement. The process may be extended if one or more parties are having issues or aren’t in a rush to get the deal finalised. Leaving more time between the exchanged contracts and completion can give both the buyer and seller longer to sort out removal companies, pack up belongings and finalise details such as an address change.
The completion date may be longer if there are more houses in the property sale chain as this restricts the flexibility of all parties involved. Shorter chains mean that the buyers and sellers have more say over the process and when it will be completed. Those involved can sort out time off work, along with a transfer of services such as their broadband and landline.
There is more time to clean the property and move out furniture if there is a longer period of time between the contracts getting exchanged and the parties moving into their respected houses. The estate agent will give the buyer the keys to the new property once the seller has vacated the property.
Most completions occur on a Friday as the majority of people have the weekend off work and are able to move without it disrupting their working life too much. However, as the weekend is such a popular time to move, most removal companies are busy and require a minimum notice period. Many removal companies will guarantee a slot on a specified date once they have been paid a deposit.
The exchange of contracts is one of the final steps in the process of buying or selling a property. Solicitors swap the signed contracts to finalise the deal and legally bind both parties to the terms that are included in the document. Once the exchange of contracts has taken place it’s time to start thinking about packing up and getting everything ready to complete your move.