PIPs' hour approaches
Overview of the draft regulations for the seller's survey regime, the impact assessment published in support, and the results of the Society's online survey
In around 18 months’ time the compulsory single survey will be with us – unless, of course, political changes or, as in England and Wales, an unexpected climbdown in the face of opposition intervene.
An Executive consultation – open until 15 May – on the supporting regulations, including the format of the report, confirms both the timescale and the policy objectives (see panel opposite) behind the purchaser’s information pack (PIP), which will comprise the survey plus the property sale questionnaire (PSQ). Less controversial, the latter document, completed by the seller, gives a range of information designed to smooth the progress of the transaction.
As is pointed out, the policy objectives were enshrined in the Housing (Scotland) Act 2006, and are not now open to challenge. However one of the documents now issued, entitled the Partial Regulatory Impact Assessment, contains an analysis of the factors said to demonstrate how the PIP represents the best and only means of achieving these. If opponents of the single survey still want to see it stopped in its tracks, it is that analysis which they will have to undermine.
The big questions
The format of the survey report will be recognised by anyone familiar with that used in the abortive pilot scheme in 2004. It is to include:
- information about the condition of the property;
- an energy report complying with EU Directive 2002/91/EC;
- brief information on accessibility aspects; and
- a valuation.
Prescribing the format, the paper suggests, will provide clarity and a level playing field. For the condition report, different features of the property are listed with each being given a repair category (1 = no immediate action or repair; 2 = non-urgent repairs requiring future attention; 3 = urgent repair or replacement needed now) and space for any notes.
All these matters are open to comment. So too are the draft rules providing:
- that the survey report, and the PSQ, should be commissioned no more than 12 weeks before the property is marketed – which could result, for example, in a property going on the market in March with a report prepared before the previous Christmas;
- that both documents should be supplied to a prospective purchaser within seven days of being requested;
- that failure in either respect should attract a penalty charge of £500, the maximum permitted by the Act, enforceable by Trading Standards;
- that the report should have no information advertising or marketing goods or services (trade names of building materials will be permitted);
- that only surveyors registered with the RICS, or their EU equivalents, should prepare the survey report;
- the categories of exempt properties.
Exempt properties include new-build, those acquired under tenant’s right to buy, those of part non-residential use, partially completed conversions, and properties scheduled for demolition.
No shelf life is to be set for the report, on the view that whether an updated valuation is needed should be decided on a case-by-case basis. Plenty of scope for dispute there, one might think. And the paper concludes that to keep a register of completed reports would be an unnecessarily bureaucratic exercise.
For a deeper analysis of the policy choices than is usually heard in the political debate, it is worth reading the Partial Regulatory Impact Assessment, on which comments are also invited. As background the paper claims that while the single survey pilot demonstrated that the system will not work on a voluntary basis, “it did show that the single survey has a positive influence on the housebuying process”. How this was so on a total takeup of 74 is not explained.
The adoption of fixed price marketing and/or offers subject to survey, the paper continues, is not universal, does not improve the level of information before an offer is made or (in the latter case) address the issue of low upset prices – though that claim may be questionable if the mischief is wasted survey fees.
The most detailed section of the paper attempts a cost-benefit analysis as between the status quo and the current proposals, with the caveats that the analysis is subject to the availability and accuracy of data, and that “this is a complex area involving significant economic benefits and costs that are difficult to quantify”.
The welfare impact
Based on figures from a survey in 2002, the paper estimates that new owners face unexpected repair bills within the first two years of taking entry, totalling at least £130 million each year. With many buyers relying on scheme 1 valuations which (it is assumed) failed to disclose the defects in question, there may be a disincentive for sellers to tackle disrepair in the run-up to a sale, or an incentive to spend money only on superficial repairs.
It is also suggested that economic costs to buyers are greater if repairs are unplanned, and that unexpected financial losses (i.e. to buyers) have a greater “welfare impact” than unexpected financial gains (to sellers). The present system is also accused of decreasing market efficiency through some buyers making mental adjustments for possible repair costs, and of being subject to delay due to conveyancing-related information only becoming available at a late stage.
For these reasons, the paper contends, while the total transaction cost using a PIP will increase by between £60 and £310 per property, movers – those who are both selling and buying; seven out of eight transactions involve movers – “are net losers from the low-information environment of the ‘do nothing’ option”. The benefit from reduced search and bid costs when hunting for a property, and from improved welfare through reduced exposure to financial risk, it concludes, will outweigh the loss of benefit from deferred maintenance spending on their old properties.
From the seller’s point of view, the paper predicts an additional average cost of between £360 and £520 to provide the survey, plus the time spent completing the PSQ. (The median figure is £440; the upper end can be expected in a strong market and the lower only during a downturn.) On the other hand they stand to benefit from reduced risk of conveyancing delays.
Trust the market
Aside from the central issue of whether to have the single survey at all or not, the underlying message is trust the market. The analysis discounts the prospect of market distortions in the run-up to introduction of the PIP. Summarising, it states: “The changes in transaction costs are insignificant relative to house value, and the extent to which these changes feed into house price will in turn be offset by gains in market efficiency.”
Concerns have been expressed that lenders will be unwilling in principle to accept the seller’s survey. The paper recognises only that a seller’s surveyor may not be on the purchaser’s lender’s approved list, as to which it suggests that sellers are likely to engage those surveyors accepted by most major mortgage providers – and that surveyors will position themselves to provide surveys that are as widely accepted as possible.
Indeed little overall effect is predicted for the professions involved. There may be “some local hotspots” where there is pressure to find enough surveyors, but the market will iron out any difficulties in the long run.
As for solicitors and estate agents, little effect is expected on total demand, but there may be “significant competitive pressure” on selling agents to provide deferred-payment services for the single survey. Whether larger firms will find it advantageous to develop an in-house surveyor capacity, the paper says, is an empirical question. “As such, there is no reason to assume natural advantage will flow to larger firms under the preferred option.”
PIPS WON’T IMPROVE THINGS, SAY LAWYERS
Eighty per cent of solicitors responding to the Law Society of Scotland’s questionnaire on the single survey do not believe it will bring an overall improvement to the housebuying process in Scotland. Similarly, 82% do not think it will improve the condition of the housing stock.
These strong views, conflicting with the key policy objectives behind the single survey (12% and 7% respectively answered yes to these propositions; the rest did not know) come from the 443 solicitors who completed the online survey conducted early this year.
Doubting the Executive’s view of the likely cost, just over half (52%) thought the requirement for a seller’s survey would have an adverse effect on the market (no effect 28%; don’t know 20%).
Looking at the other two claimed weaknesses of the present system, multiple surveys and artificially low upset prices, 58% maintained that the practice of offering subject to survey had removed the first problem (no, 27%; don’t know, 15%). As for low upset prices, 48% dispute that there is a widespread practice that causes difficulty, 26% say the practice is widespread but will not be affected by the new survey, only 16% believe the seller’s survey will improve matters and 10% don’t know.
On the reliance to be placed on the survey, 44% would not advise acceptance of a survey more than one month old, and a further 44% not over three months. On buyers’ attitudes, 48% thought their clients might wish to commission their own survey or interpretive report and 21% that they would ask for a valuation only. (As against that, over half reckon that more than 60% of clients buy with a mortgage valuation only, including 30% of respondents who estimate the proportion at 81-100%.) A massive 89% believe it will be a problem that prospective buyers will be unable to discuss the report with the preparing surveyor.
For the record, 63% of respondents answered yes to the question whether their firm uses standard missives for residential transactions, 20% said no and 17% “sometimes”.
Following the launch of the Executive’s consultation Janette Wilson, convener of the Society’s Conveyancing Committee, commented:
“The fact that any property survey is and must be time sensitive, means that the whole issue of multiple surveys is not solved by a compulsory single survey and its use could impact on those living in less desirable properties, or areas where properties tend to sell more slowly. Buyers currently rely on reports that are days old, and the Society believes it is in the public interest for a single survey report to have a limited lifespan. Initial results from our online questionnaire of the profession suggest that it should be between one and three months.
“The Executive may have answers to some of the concerns we have raised, such as conflict of interest issues or the inability for would-be buyers to consult the surveyor providing the single survey. We will be studying the consultation paper carefully to check on this.
We will also continue to work with ministers to try and ensure sound solutions which will be a benefit to homeowners in Scotland.”
The Society would be grateful if interested practitioners would also email their comments to James Ness (email@example.com; please enter “PIP” as the subject) so that these can be fed into the deliberations of the working party who will prepare the Society’s response to the paper. The group would be interested in views on the concept of the single survey and the other items in the PIP as well as any detailed points arising from the draft regulations themselves.
THE BOTTOM LINE
In order to implement Part 3 of the Housing (Scotland) Act 2006, the regulations must achieve the following policy objectives:
- to provide sellers and buyers with better information about the house, including the condition and value;
- to avoid the need for house buyers to commission valuations or surveys on a succession of properties that they ultimately do not buy;
- to discourage the setting of artificially low upset prices by sellers which cause house buyers to commission a survey, only to realise that the value of the property is much higher than anticipated.
What is an energy efficency report?
Under EU Directive 2002/91/EC the energy efficiency report must cover:
- an assessment of the CO2 impact rating of the property, with a specific indication of current and potential energy efficiency
- current and potential estimated annual energy use (Kwh/m2 per year)
- current and potential annual carbon dioxide emissions (Kg/m2 per year)
- current and potential estimated running costs for lighting, heating and hot water
- explanation of the standard assumptions made about occupancy, heating patterns and geographical location, and what energy use and fuel costs take into account
- a list of recommended measures to improve the rating of the dwelling (including measures which may become cost-effective in the future and measures which may be cost-effective when other building work is being carried out, and what these involve)
- typical cost savings for each individual recommended improvement
WHERE TO FIND IT
The consultation documents are at www.communitiesscotland.gov.uk/stellent/groups/public/documents/webpages/cs_012537.hcsp
Comments are requested by email to: firstname.lastname@example.org, or in writing to: John McRorie, 4th Floor, Thistle House, 91 Haymarket Terrace, Edinburgh EH12 5HE, by 15 May 2007