We’ve been writing about how to choose a house to buy, how to spot a great neighbourhood and whether it is better to rent or to own your house on The Money Principle.
Recently I had a conversation with our niece who is looking to buy a house that made me realise that most first time buyers know very little about how the process works.
It is not only that they know little; because buying a house is complex and straddles different kinds of organisations people find it difficult to find a comprehensive guide on buying a house. A guide that will take them from deciding whether they really need to move to completing the process and putting the treasured key in the new lock.
Today, we offer our readers a fifteen steps list to buying a house. This list is a comprehensive guide that can lift much uncertainty, reduce the stress that buying a house entails and help you stay focused and collected.
Step 1: Do you really need to move?
Moving is an expensive process. Not only does it take a lot of time to find the right house, organise all the legal niceties, the physical moving and paying for the property, but there are taxes to be considered which, in the UK, can be up to 7% of the purchase value (15% if you are a non-resident buying via a Company!).
When you find the right property, there is the inevitable customisation, redecoration and repairs to be made because it is never to your liking. This costs a lot of time and money, is inconvenient and often reveals unexpected problems.
In addition there is the disturbance to your life – new schools, finding your way around, keeping in touch with (now) distant friends etc.
So think very hard whether you actually need to move – is it worth it? It may be that an extension will fit the bill.
Of course you may have a new job, don’t like your present neighbourhood or just want a larger house. In which case, read on….
Step 2: Select an area
Recently we shared five unorthodox ways to spot an up-and-coming neighbourhood.
Apart from that, avoid areas where there is the risk of local flooding and other geographic or geological issues like cliffs. While you can engineer round some of these (building a house on stilts for example), they have costs and can make insurance very expensive or impossible.
Be wary too of transit towns where there is no real community, main roads which are noisy and polluted, and the possibility of unwelcome development nearby. It makes it difficult for people in those areas to sell and you can always take a risk as the prices will be lower. It’s up to you whether you want to buy a house near Heathrow Airport.
You can do all this from the comfort of your home. Isn’t the internet great?
Step 3: Money
Next up is the question of money.
Houses are expensive and most of us require a mortgage to buy one. If you don’t, lucky you and skip to the next section.
In the UK there have been quite a few developments following the 2008 financial crash when house prices dropped and the market pretty nearly stopped – people don’t sell their houses unless they have to if the price has dived.
Prices – and the market – have more or less recovered now. But Funding for Lending and two Help to Buy schemes have pumped up the housing market, aided by overseas buyers in London. Funding for Lending was withdrawn for mortgages last year and there is a lot of pressure to limit the Help to Buy schemes.
The Mortgage Market Review rules may make it difficult for many people to get a mortgage unless they have impeccable financial credentials. So maybe the market will slow down.
You will need to find out just how much you can afford to pay for the mortgage and therefore know how much are your expenses – for this we developed a useful budgeting tool! Use it (and other tools available) to get a clear picture of your budget and then work out how much you can afford.
Don’t forget it is likely that interest rates will rise at some time next year although I doubt they will return to 5% or so for some time yet.
Again, all this can be done at home.
Step 4: Provisional Mortgage
Having got all the figures ready, you can then approach a mortgage provider to get an Agreement in Principle. This will tell you how much the provider is prepared to lend in principle on a property, even if you haven’t found it yet. This provisional offer will strengthen your hand when it comes to negotiation as well.
Under the new rules, it may be quite difficult to find a mortgage but don’t give up – maybe a mortgage broker will be able to help. We do regard some of these rules as petty and invasive – it is really a case of shutting the banking door after the house has bolted.
Step 5: Refine your search
Once you know roughly where you would like to live and how much you can spend, you can take further time at home (again) searching the internet on one or more of the property websites – there are dozens of them. Most properties are advertised by estate agents and include a brief description, some photographs and a list of the local amenities. This is all very helpful and will enable you to focus on particular areas.
You can arrange a viewing, contact the owner and even make an offer.
But don’t. Your imagination is not your friend. A good copywriter and photographer can make the gloomiest dungeon look like a palace. Beware of clichés!
Off to Google Earth or Street View to see what the property looks like – what is opposite or round the corner. But bear in mind that these photos are always a few years old and taken on bright sunny days.
If the agent’s photographs are only of the interior, expect a rubbish dump behind or the exterior to be in poor repair and vice versa. A wide angle lens can make the pokiest of apartments look good and while you dream of the settee from the TV advert in the corner, don’t forget that most adverts are made in warehouses and the furniture won’t even get into an ordinary house, let alone fit in the front room. Did you know that there are manufacturers who specialise in making small things for show houses? It’s all an illusion!
Be a sceptic, expect something to be falling down or the decoration to be in dire need of repair.
Step 6: Boots on the ground
There is no substitute for boots on the ground. Check the address first and walk up and down past the house. Compare with your Google views.
Do this at different times of day – you don’t want to end up in a road that acts as a car park for local office workers, the local school or be a thoroughfare for drunks at night.
Step 7: Estate agents
If, as is likely, your target house does not live up to expectations, don’t despair – look out for estate agent adverts in the area. If you see a property that looks ideal from the outside, you don’t need to wait for an appointment – knock on the door. If you are at all presentable (reading this blog means you probably are), the owner may be willing to let you have a look round.
If the house still looks suitable, you may even make an offer or come to some arrangement there and then, or swap phone numbers so you can get back to the owner.
Estate agents hate it but hey, that’s life.
And if you are particularly keen on an area, don’t wait for the estate agents to get in on the act – print out some simple leaflets that ask owners if they are considering selling their house to give you a call.
Emphasise that you are not an agent and are looking for your family (2 kids, dog and fish sounds good). Give some idea of the price range and other characteristics that you are looking for. Don’t expect an immediate response but you never know. And the more leaflets you put out, the better the chance of finding that house that is about to be sold but not yet on the market.
People who like their homes, and probably their neighbours, generally want to sell to nice people. If they don’t like their home, don’t buy it.
Step 8: Renting
You may already be renting – if so, then skip to the next section but otherwise there is a lot to be said for selling your old house first and renting for 6 months or so.
Renting has three major attractions:
- you will know exactly how much cash you have,
- you will have a bigger choice of houses, not just those on the market when you are selling, and
- you avoid the stress of selling and buying simultaneously – chains fall through etc.
Buying and selling a house at the same time ranks right up there with divorce as a source of stress. Avoid it if at all possible.
You will probably need to put some furniture in store and that will be a bit more expensive but the opportunity to find the house of your dreams is well worth it. You can be patient and know that if you settle for buying in a rush, and your dream house comes up four months down the line, it would be very annoying.
Don’t go mad! I spotted a short-term 5 bedroom house near the All England Tennis Club (Wimbledon) at the knock down price of (wait for it, are you sitting down?) £65,000 a month! Yes, £15k a week. For a year’s rental you can buy a small house even in London and a substantial property elsewhere. It did have a gym and stuff but for a few months, even a movie star or footballer can rough it.
Step 9: Check whether the house structure is sound
Once you have found your ideal house, you will want to get on with it but wait a moment. You need some advice first unless you are a builder – you need a friend or someone to play Devil’s Advocate and try to dissuade you from buying.
But is it worth ultimately depending on an informal judgement? Sure, your best friend can advise you and knows your taste and idiosyncrasies. And a builder should know the ins and outs of any house but they will not be covered by any insurance and is it worth putting your friendships at risk if the house falls down after you buy it in their say-so?
This is where you start to need some professional help. If you are in the capital, contact Kutner surveyors at http://www.kutner.co.uk. They will be able to work very quickly and provide a Homebuyers (full structural) Survey probably within a day or so.
You will then know what needs to be done and go back to your builder to find out how much it will cost. It may be a case of returning to the vendor to try to reduce the price a little if any faults were not revealed – or known – by the vendor. This may be difficult in a buoyant market.
The mortgage company may also instruct a surveyor although they are only interested in a valuation to make sure that they are not lending too much money. It may be possible to use the same surveyor although you would usually not start the mortgage application until you know that the house is sound.
Be aware though that if any work is required, the mortgage company may put a retainer on the advance until the work has been completed. This will mean that you have to cover that shortfall and also may need to pay for a surveyor to come back and check the repairs.
Step 10: Buy to sell
Don’t forget that this is probably the largest deal you will ever make. What’s the exit strategy? How easily can you sell the house if you really have to?
Whenever you buy a house, this is one of the most important considerations. Houses are by definition highly illiquid. Please don’t think of your house as an asset – it is a liability that comes with continuous maintenance and other costs. You may make a ‘profit’ when you sell it but that is just on paper as you will need another house to live in.
You only cash up if you downsize or emigrate but if you do, it is irreversible.
So don’t be too rosy-eyed – houses are money sinks and the bigger the house, the more they cost. Ask us about it!
Step 11: Legalities
You may choose to do the legal work yourself but these days in the UK it really isn’t worth it – conveyancing now is much the same cost it was 20 years ago.
It is possible that a property has not been registered if it hasn’t been sold for many years. In this case, the legal work is rather more complex so the bill will be larger. And if the property is only Good Leasehold rather than Freehold or Absolute Leasehold, additional work may be necessary.
Otherwise the whole process is pretty automated so unless you want to understand the procedure, it really isn’t worthwhile. Now is the time to instruct your lawyer to start Enquiries before Contract – a formal procedure where your solicitor asks the vendor’s solicitor a series of questions and also enquiries are made at the Council and of the District Land Registry.
In many cases these reveal little although there is one issue to be aware of.
The time when a property is sold is an opportunity for the Council Tax to be reset. For overseas readers, Council Tax is an annual charge made by the local authority to help pay for public services. It is charged in bands. If the value of the property has increased substantially since it was last sold, this may mean moving to a more expensive band. It would be very rare for a house to move to a cheaper band but in theory this is possible.
Now that may seem fair enough – property taxes in the UK are very inexpensive by international standards, believe it or not, which is why some foreign buyers are piling into London property and leaving them empty.
But there is a sting in the tail. If the Valuation Officer considers that, perhaps as a result of an extension already built with planning permission etc., the house is de facto two houses, then it is possible for two Council Tax bills to arrive. This could happen if for example a granny flat had been added.
The council is under no obligation to tell the vendors this when their planning application was approved so it may come as a shock to them as well!
Anyway it is important to know exactly how much Council Tax you may have to pay, because this may affect the size of mortgage you can get.
Step 12: Exchange contracts
Once all legal issues are completed, and you have the mortgage approved and other funds available, you will be free to exchange contracts. In practice this will be done between solicitors over the phone or electronically. If there is a chain, you have to hope that all people in the chain are able to exchange so that there is no hold-up.
The Exchange of Contracts is a legal agreement with a date set for Completion. Included in this agreement is an interest rate (generally set as so many percent about the base rate of a high street bank) so that if you delay for any reason, it will cost you money on the purchase price. Similarly if the vendor delays, it will cost him or her money. At the same time you will need to pay a deposit (typically 10% of the purchase price).
There are penalties for not completing the purchase at all, which will be set in the Contract and will at least include forfeit of the deposit so it is important to be sure that you can complete. Your solicitor will ensure this anyway before contracts are exchanged.
Step 13: Planning the move
Having exchanged and knowing the completion date, you can plan the actual removal.
If you are young, fit and don’t have too much furniture, by all means try this yourself with a couple of friends, a white van or U-Haul trailer.
But my advice is always to use a removal company. Do your own legal work by all means but there are serious time issues to be considered. Being late for example because you were humping things yourself may mean an extra day’s interest.
Removal men (they are almost always men) are used to extracting the most awkward of furniture from the top floor bedroom with the minimum of fuss. That wardrobe you got from Granny 20 years ago and managed to get upstairs was built like a battleship. You really don’t want to risk it nor the weeks spent in bed afterwards and osteopath bills.
Removal companies can also do the packing of small items as well, another service I advise taking. That way you really don’t need to do too much on the big day.
Step 14: Utilities
Along with booking the removal firm, now is the time to get the utilities sorted out. You will need to tell the gas, electric, telephone and broadband suppliers what is happening and, on the day, provide some meter readings if they can’t do this remotely. Then you may need to pay the bills, which can be a bit painful unless you manage to roll the accounts over to the new property – moving in the spring time generally means that your budget account is in deficit because of the winter and this may need to be cleared before you go.
Step 15: Completion
Now at last the Big Day has arrived. The kids have been packed away and your old house is being emptied into the van(s) as you ply the workers with tea and biscuits – it is arduous work and always worth treating the guys well.
All the paperwork is ready and the money waiting to be telegraphed from A to B to C to D. For example, purchase money may be needed to discharge a present mortgage on a house held by the vendors, the balance going to the vendor in person. There may be all sorts of other issues that need to be attended to by the lawyers, discharging second mortgages etc.
A time is agreed and on the dot, telephone or electronic calls are made so that ownership and money are transferred. It’s all done on trust although these days.
Then you will get the keys (if this hasn’t already been arranged) and your removal men can start to unload. It is always surprising how much less time it takes to empty a lorry than fill it!
And don’t forget a decent tip for the guys who have been handling your precious possessions.
It is now your house and you can unpack everything at your leisure. Go and collect the kids, get the dog, cat or whatever, put on a kettle and make a brew. The house is finally yours (well, the small matter of the mortgage notwithstanding) and you can start planning your life that has been on hold for the last couple of months.
[This article is of course from a UK perspective and will differ in other countries, particularly in Continental Europe. An interesting review of the US process may be found here.]