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Homing in on home reports

14 April 08

Author believes that home reports as currently proposed will not benefit purchasers or sellers, and reports on his reservations and his recent contacts with government

by Graeme McCormick

Having read your feature on home reports (March, 10) I would like to advise my conveyancing colleagues of what I have gleaned over the past month from civil servants and Stewart Maxwell MSP, the minister responsible for driving this initiative. The responses were not encouraging. I can only hope that they have a total rethink. By the time you read this some of my concerns may have been addressed, but don’t hold your breath.

The scheme proposed will not materially advance the interests of sellers and purchasers at all.

First the good bit

The energy efficiency report is a requirement of an EU directive and comes in a standard form. It is helpful, but I think only confirms what a reasonably sensible prospective purchaser would adjudge from having seen a property anyway.

Historically I have found that the energy efficiency of a property is not a determining factor in whether someone buys it or not. Time will tell, but the real benefit of the energy efficiency report is that it is provided by an independent professional source.

Next, the not-so-good bit

This is the survey commissioned by the seller. Although the report is laid out in a more reader-friendly manner than homebuyer reports or valuation reports, the only parts which need the surveyor to comment are section 2, “condition”, and section 4, “Valuation and conveyancer issues”. The rest could be completed by either the seller or the purchaser (or selling agent).

The meat is in sections 2 and 4, and should provide interested parties with an element of reassurance of their suspicions of the condition of a property. However, if the truth be told it does not actually provide any more material information than a simple valuation report at present.

As the survey will be non-disruptive, any material failings in the property will still require other property professionals to produce reports (e.g. consents for alterations, or timber specialist quotations). Until these are produced, all the survey does is point up possible problems. A surveyor has told me that to provide a reliable report the survey requires to be invasive and would cost upwards of £1,500 per property. This type of report is what purchasers assume for the home report, though the market would not tolerate the cost.

Valuation reports at present give a market and insurance valuation, raise timber and rising damp, structural and alteration issues etc, all of which require further enquiry by other professionals if the surveyor recommends same. The only material difference with the new survey is that a purchaser and/or seller will be able to claim against the surveyor in negligence. With valuation reports costing on average £150, it seems incredibly expensive to have to pay another £300 to £500 for this extra protection. I am sure an insurance company could offer similar cover at considerably less cost.

Consumer benefits?

Much has been trumpeted by consumer and other groups that there is a tremendous benefit in the home report by placing a market value on the property in the survey element, which may stop the practice of setting asking prices at way below the market value, and price expectation of the seller. That remains to be seen, but again the cost to the seller is really unnecessary as the internet already provides free and low-cost house price comparison sites. The government’s own Registers of Scotland take part in this service.

The vast bulk of private housing stock is readily comparable, as unique properties are very rare. Why have consumers pay more for information which is available anyway? Would a publicity campaign to use price comparison sites not be more effective and cost-free to the consumer?

Communities Scotland indicated to me that it was envisaged that lenders would accept the home reports, thus precluding the need for purchasers and/or their lenders insisting on separate valuations. Although I understand the Council of Mortgage Lenders’ representative has been involved in the task force, there has been no commitment given by all the major lenders in Scotland to accept the home report.

There seems to be an impression that if one or more of the largest lenders agree, the rest will follow suit. I have been in touch with some of the largest building societies in the UK; these advise me that they have not been approached on this issue and would not be prepared to accept the home report, preferring instead to instruct their own valuation report (at the borrower’s expense). You may think that this practice would put that lender at a competitive disadvantage, but that does not seem to be the criterion by which most borrowers choose their lender or, given the recent financial hiatus, the way lenders choose their borrowers. As you can appreciate, a whole host of factors decide that.

It has been suggested that if surveyors who have conducted a home report for the seller, are prepared to extend their warranty to the lender and provide a valuation report to the lender for nothing, that will overcome the problem. That would mean that the seller pays more for the home report so that the surveyor can give a “free” valuation report to the purchaser’s lender.

Lenders may show a marked reluctance to accept this, as it is well known that lenders use surveys as an income stream: part of the survey fee charged to the borrower is retained by the lender.

It seems incredible that such a change of practice is even being contemplated without Communities Scotland contacting all major lenders to be satisfied that they will accept the home report. It appears to me that in many cases a purchaser will still have to pay for a valuation report, thus defeating part of the purpose of this whole exercise.

As you know, the market has largely resolved the issue of multiple surveys on individual properties by accepting the principle of offering “subject to survey”. Unless a person is not borrowing to buy a property, “subject to survey” in an offer actually means more than it says. It actually means it is also subject to the offerer receiving a mortgage. Since no mortgage will be approved until the lender has an acceptable valuation report, offers will continue to be “subject to loan”, so the exercise as proposed will not expedite the missive stage.

There is one final but crucial point about the cases where a lender insists on a valuation report. If, as will no doubt often be the case, the valuation figure is less than the survey figure in the home report, the lender will work out its maximum loan to value on the former figure. As the mortgage market tightens, this could have a considerable effect on purchasers’ ability to raise enough lending to buy a property. The home report would have built up prospective purchasers’ expectations, only for these to be cast down through the lower valuation of the lender.

And almost last ,the very bad bit

The purpose of the property questionnaire appears to be to give the prospective purchaser useful information about the property from the seller’s knowledge. My first question is, how useful is this information if it has to be independently verified at a later stage in the transaction?

I asked Communities Scotland how could it expect a seller to complete this questionnaire if the seller wasn’t the occupier, e.g. an owner who had let the house out, an executor selling for a deceased owner, an attorney, a trustee in bankruptcy or a lender selling a repossessed property? They replied that if a seller could not answer a question he could just mark it as “not applicable” or the like. That suggests that the value of the questionnaire to a purchaser will vary with the knowledge of the seller, which could in some cases be less than the purchaser’s.

I also asked the civil servant how enforceable the questionnaire would be between a purchaser and seller. He replied that it was envisaged that purchasers’ agents were expected to include the completed questionnaire in the formal offer (missive) for the property. Knowing solicitors as I do, no seller’s solicitor worth his salt would agree to this on behalf of a selling client because it is a hostage to fortune. As all the material issues in the questionnaire – alterations, rising damp, timber decay, statutory notices, water and sewerage systems, etc. – will still require independent verification from professional searchers, and most of the other information is requested in a normal purchase missive, what is the point of the questionnaire?

Can you imagine the consequences where the seller completes the questionnaire but the independent reports provided by the seller’s solicitors – just as the sale is about to complete – are at odds with the seller’s answers? Transactions will fall apart or have to be renegotiated, resulting in delays to completion and chains of transactions building up, so we end up with the English conveyancing disease.

This will happen a lot, because some sellers lie, and most are actually quite ignorant about their property with at best only a vague idea of their rights and responsibilities.

And the crazy last bit

Stewart Maxwell stated at a recent meeting in Alexandria that a home report will only be required where a house is being marketed. He did not define “marketed”, but said that if a seller agreed a private deal to sell to a purchaser (as often happens) without the house being marketed, a home report will not be required. If the purpose of the home report was to give prospective purchasers more information about properties before they offer, why should people who buy a house privately be prejudiced by not being entitled to demand the same information as a purchaser of a house sold on the open market? It has been suggested that this would suit both parties – but the intention of the parliament was to focus on the condition of the property, not the circumstances of the seller or purchaser.

Believe it or not, I support the idea of home reports, but only if they provide a purchaser and seller with cost-effective, accurate, independent information and expedite the sale and purchase transaction. On the survey and questionnaire elements, the home report fails bitterly.

Cost-effective?

As I have already said, the substantive information in the survey report is equivalent to a current valuation report. Many purchasers will have to pay for a valuation report anyway (as required by their lender), so will not be saving funds.

Sellers will require to pay for the home report. As someone who has used his professional life to drive down the cost of conveyancing to the consumer, I find it astonishing that our government is increasing the cost substantially. It is wrong to assume that many sellers can write a cheque for £500 for a report which might time-expire before there is interest in their property, resulting in them paying for another home report six months or a year later.

The suggestion put to me by Stewart Maxwell is that many large scale selling agents (i.e. estate agents and solicitor members of property centres) will attract business by offering to meet the upfront cost of the home report and adding it to the client’s bill at the end of the transaction. There is a real consumer problem with that. Such schemes push those on modest means into the arms of selling agents who will charge them a fee of around 2% of the price of their homes, as against the seller marketing privately or though a fixed price agent.

This means that many sellers will have to pay much more to sell their homes (in addition to the cost of the home report), and even more worryingly it will pass the control of which surveyors are instructed to the large estate agents and property centres who will then control the surveying market. I know that surveyors currently pay commissions to those who instruct them (kickbacks to you and me), so just think of the opportunity that gives estate agents etc to exploit that income source (without accounting to the client for it).

Worse still, the pressure on surveyors to modify their reports could be irresistible if they are beholden to one main source for their business. These things already happen, are though rarely admitted, and will get much worse under the proposed scheme. The proposal will reduce consumer choice.

Accurate?

The only way to ensure accuracy in information provided to the prospective purchaser before they commit to buy a house is for professional searchers to produce the reports they currently have to issue anyway during a transaction. These reports contain much information which will determine whether a prospective purchaser buys or not.

There are additional reports now available which are arguably even more valuable than the reports currently obtained. These include planning applications and permissions in the vicinity of a property, crime reports, educational reports, flood reports, envirosearches, etc. Should all this information, plus a copy of the title deed, not be available to the prospective purchaser before they go through the emotional experience of committing themselves to a property? All this certified information can be obtained within 24 hours, so there is no problem gathering it.

When I questioned the civil servant as to why this information was not being given upfront to prospective purchasers and their advisers, he indicated that there was a concern that it would be too much for someone to handle. That seems incredible if the purpose of the scheme is to be transparent, particularly as the information in these reports is of a type which would determine whether a person wanted to bid for a property or not. (Is there planning permission for an opencast coal mine two miles away?) My view is that if people are adult enough to own a home, government has to treat them as adults in the process and complexities of buying and selling.

Independent?

The reports I refer to above are all provided by independent professional searchers with professional indemnity insurance, and are accepted by surveyors, solicitors and lenders. Transactions are only settled if these searches are provided, and this will continue to be the case even with the home report. Completed questionnaires by sellers are not independent, and all the important information contained in or missing from the completed questionnaire has to be independently verified, so what’s the point of the questionnaire?

Expedite the sale and purchase process?

For all its faults, the major claim of the Scottish conveyancing system is its speed and certainty. This has been compromised in recent years largely by changes to the confirmation of mortgage funding for purchasers, but our system is still light years ahead of the English one and average completion times in Scotland are several months quicker than English transactions.

I have checked with some of my English colleagues as to how the introduction of the sellers’ packs (which were introduced to expedite purchase transactions and avoid chains) have fared. They say it has not expedited the process at all, and the extra cost to sellers is causing wide resentment. I appreciate that the information in sellers’ packs is not the same as the proposed home report here, but the challenge to expedite purchases and sales is the same.

I have already argued that home reports will not expedite transactions. The questionnaire is basically an add-on to existing conveyancing practice, which will continue largely in its present form. As I have also stated, there is a real danger that the questionnaire will have the opposite effect and cause delays and possible cancellations of transactions because it has been completed inaccurately or in ignorance.

Fewer people will market their homes speculatively because of the home report cost. Consquently the availability of homes to purchase will shrink. It has been suggested to me that sellers may take another approach to selling, to avoid the fear of paying upfront for a home report which might time-expire, by offering to buy another house first but conditional on the seller selling their home. Only once they have been told their offer is successful will the seller embark on selling their own house and incur the cost of a home report. This is akin to the English “subject to contract” system, which is the cause of the horrendous chains and broken hopes and frustrations endemic in the English system. Does Stewart Maxwell want to go down in history as the godfather of the English conveyancing disease in Scotland?

Given that commentators including Stewart Maxwell have stated that purchasing a house can be a very stressful matter, it behoves all of us involved in the system to reduce the stress as much as possible. It is stressful enough if someone offers for a property and the bid is unsuccessful. What is much worse is where someone has been told that their offer is acceptable and they become emotionally attached to it, only for that purchase not to complete because of a problem raised in independent reports.

The main problem with house purchase in Scotland is the speed with which prospective buyers become emotionally attached to property. Every morning we have calls from clients wanting to offer for property immediately, having seen it for the first time the night before, often in the dark and only for 10 or so minutes. Despite our best endeavours to suggest they take another look before offering, they invariably decline this advice because of the desperation to buy it and avoid the fear of competition.

Most people contract to buy a property with only a cursory look at it, and can’t even remember what it looks like in detail until they get the keys some weeks later. I would suggest (only partly tongue in cheek) that if we really want to reduce the amount of discontent amongst purchasers when they move in, the sellers’ questionnaire be adapted slightly and prospective purchasers are required to complete it instead. This would mean that a viewer would have to take some time to have a proper look at the property to answer the questions and reduce this crazy tendency of quick look, offer and purchase then regret at leisure.

Too late?

Consumer bodies have grasped the idea of more information, but have failed to recognise that for information to be of any value it needs to be verified and independent.

I am very conscious that virtually all shades of political opinion in Scotland seem to want a home report. I do not have a problem with that, but a home report which is worthless is pointless, particularly when the information to give the report independence and worth is available within 24 hours of enquiry.

This critique is not designed to give you my solutions. I have solutions which are consumer driven and in the public interest, but are unlikely to find favour with many of the government’s so-called stakeholders.

In my book everyone who owns or aspires to own a property is a stakeholder. My overriding concern is that the home report will be seen by sellers and buyers as “the Emperor’s new clothes”, and by sellers as an unnecessary and considerable cost for something of no value. As it is part of the conveyancing system, we solicitors will get the flak. There is still time to mount an effective challenge.

Finally I should declare an interest in addition to my business as a conveyancing solicitor. I was a candidate for the SNP at the 2007 Holyrood elections and am currently the candidate for West Dunbartonshire. I applaud the SNP government for its focus thus far on growing our under-performing economy. Anything which diverts us from this aim is a distraction, and home reports as proposed are a nonsense.

Graeme McCormick, Conveyancing Direct, Glasgow


A YES-NO GUIDE TO HOME REPORTS

What the home report doesn’t do

1. Provide independent verification of sellers’ answers to the questionnaire on issues such as consents for alterations, public authority planning, environmental, sewerage, water, roads and building notices, condition of heating and other services, construction or remedial guarantees.

2. Provide independent verification of any such issues raised by the surveyor.

3. Expedite the house purchase and sale process

4. Save most purchasers who need a mortgage from paying for a valuation report, since lenders are not signed up to accepting the home report and they control the market.

5. Provide any more material information than an existing valuation report for a person to decide whether or not to bid for a property.

6. Force the seller to answer the questionnaire fully and incorporate it into the missive of sale.

7. Reduce the cost of buying and selling a property.

8. Encourage consumers to reduce their costs by marketing their homes themselves.

9. Guarantee a borrower a loan-to-value based on the survey figure in the home report (all other conditions for lending being equal)

What the home report does do

1. Provides an idea of how energy efficient the house may be, which confirms what most viewers would expect having seen the age and superficial condition of the house from viewing it.

2. Increases the cost of house sales, by forcing the seller to pay for a home report.

3. Reduces consumer choice by discouraging private sales and encouraging sellers to use estate agents and property centres, so that the seller doesn’t require to meet the cost of the home report upfront.

4. Gives power to estate agents and property centres to control the surveying market by deciding which surveyors view a property, and encourages the practice of professional cross commissions, adding to sellers’ costs.

5. Provides the purchaser with a questionnaire by the seller which may be incapable of completion by many sellers, is not legally enforceable, with no guarantee of accuracy or independent verification.

6. Delays or cancels transactions on the point of completion, due to discrepancies with independent verification.

7. Raises stress levels to buyers and sellers.

8. Encourages sellers to buy first subject to the sale of their existing properties thus introducing English style property chains and “subject to contract”.

9. Gives sellers and purchasers a right of relief against the surveyor for negligence.

10. Causes resentment among up to 70% of the population who own their homes in substantially increasing their costs of selling, in direct contrast to recent market developments to reduce the cost of selling.

11. Prejudices people who buy a house which is not on the open market.