Reservation Agreements: An easy system to stop you from losing money in your property transaction

1 in 4 property transactions in the UK fall through. The reasons for this are complex, but can be simplified into two broad categories: those within the control of buyers and sellers, such as malpractice, and those outside of their control, such as the collapse of the chain.

Often, it is best to focus on the reasons within our control. If buyers and sellers are able to enter into a transaction with transparency and integrity, then many of these problems can be averted. This benefits buyers and sellers by cutting down on transaction times, and preventing the risk of transaction collapse. So, how can buyers and sellers get on the same page, stopping anybody from losing out in the process?

Enter, reservation agreements…

The best way to show commitment in a property transaction is by making sure the other party knows you’re serious about going through with it. However, many people don’t take a stranger’s word for it. Money talks, and this is true for buying and selling property. Instead of a promise, one powerful system to show commitment is a reservation agreement. This is a financial pledge (usually ~£2000) that acts as a deposit on the transaction. 

It goes like this: a buyer makes an offer on a property, and they really want it. They put an offer on the house, and also place a deposit e.g. £2000 as a promise that they will do everything in their power to ensure the purchase goes smoothly i.e. no lowering the offer price out of the blue (gazundering), or any other bad practice. In return, the seller offers the same amount as a reciprocal promise that they will do the same. If all goes well, buyers get their dream home, sellers sell their property without hassle, and each party gets their money back.

What happens if someone acts in bad faith?

Currently, if a transaction falls through due to gazumping or gazundering, there is no protection for the victim, who, on average, will incur financial losses of thousands of pounds. This isn’t fair, and the general public agrees, with more than half of all buyers and 70% of sellers saying that they’d use a reservation agreement if the option was available in the UK. If a reservation agreement is implemented after the price of the property is agreed, the victim will get compensated from the pot of money put aside. For example:

Mr. Buyer makes an offer of £250,000 on Ms. Seller’s house. Ms. Seller accepts the offer, and suggests they enter into a reservation agreement to protect the transaction. Mr. Buyer and Ms. Seller both pay £2000 to Housecure, who keep the funds safe. Two weeks later, Ms. Seller gets an offer of £300,000, and accepts it, even though she has promised not to. This is called gazumping. Mr. Buyer is upset because not only has he lost out on his dream home, he has also lost out on the hundreds of pounds he has spent organising surveys, his mortgage, and conveyancing fees. Luckily, Ms. Seller’s £2000 is given to Mr. Buyer, since he has been a victim of malpractice. The legally binding reservation agreement has ensured that the buyer is protected from financial loss.

Should I bother getting a reservation agreement?

There’s a 25% chance that your property transaction will fall through. Reservation agreements are the best way to show your commitment early in the process! Here are a few of the benefits conferred by being a serious seller or buyer:

• Protection from financial loss

• A faster transaction

• Less stress

• Higher chance of having your offer accepted, even if it’s lower than others

Did you know that using a reservation agreement increases the chance of a lower offer being accepted? This is because sellers value committed, prepared, and serious buyers who they know are genuinely interested in purchasing their property. Remember that sellers are usually looking to purchase their new home, too, so offer-security is really important to them.

Reservation agreements are common in the property markets of other countries, such as the Netherlands, where they prevent sales from collapsing, as they often do in England and Wales. It’s such a common feature abroad that you may be wondering why they aren’t as common here already, but the answer is that the UK property market is slow to change and adapt, even though there is a clear need to!

Get protected and get committed!

Making a reservation agreement used to be a complex process, but it’s now simpler than ever. If you’d like to show your commitment instantly, simply choose the amount of money you’d like to deposit and send your reservation agreement offer here to your buyer/seller, who can accept, negotiate or decline it. If you both agree, Housecure will hold onto the funds from both parties and compensate the victim in case of malpractice. If all goes smoothly, you both get your money back, and get the keys to your new homes faster.