What’s Involved in an Exchange of Contracts?
Near the end of a property transaction, both parties sign contracts detailing what is expected and it’s at this stage that they commit to go through with the agreement.
The exchange of contracts is an important milestone when you buy a home. It’s a legally binding agreement that means both the buyer and seller agree to go through with the sale. Read on to find out how an exchange of contracts works and how to avoid delays.
What is the exchange of contracts?
Exchange of contracts is when the buyer and seller each sign a contract committing to the sale of the property.
The contracts become legally binding once they are signed and exchanged. This means if either the buyer or seller pulls out of the property deal after the contracts are exchanged, they may have to pay damages.
For example, the buyer may lose their deposit if they breach the contract, while the seller may have to pay a daily rate of interest and return the buyer’s deposit.
Up until the exchange of contracts, both the buyer and seller are free to pull out of the property purchase without facing any penalties.
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What is required for the exchange of contracts?
After an offer has been accepted, a conveyancer, or solicitor, needs to collect information to include in the contracts before they are exchanged. There are several tasks that need to be completed before an exchange of contracts can happen, including:
- Property searches: The buyer’s solicitor will need to carry out ‘searches’ on the property, to check, for example, how close the property is to public sewers or whether any planning applications could be granted which would negatively affect your property.
- Finalise purchase price: You will need to agree on a price for the property, including any fixtures and fittings which may be left behind.
- Mortgage offer: You will need to have a formal mortgage offer if you are not a cash buyer.
- Buildings insurance: If you are buying a freehold property, you will need to have organised buildings insurance.
- Deposit: You’ll need to have the deposit ready in full.
- Completion date: A date for completion will need to be agreed by both parties.
Any legal questions that come up during the property search will need to be clarified before the contracts are exchanged. For example, if there are any boundary lines in dispute with neighbouring properties, such as a shared driveway.
It can take around eight to 12 weeks to finalise all of these details for the contracts.
How does the exchange of contracts work?
Generally, conveyancers, or conveyancing solicitors, manage the exchange of contracts. The contracts are usually read out over the phone to make sure that they are identical. This call is often recorded as evidence and to protect against any issues that come up after the exchange takes place.
If both conveyancers are happy that the contracts are identical, they will post their copy to each other. This marks the exchange of contracts.
When do you exchange contracts?
Typically, exchange of contracts can take place anywhere between one and four weeks prior to the completion date. But this can vary depending on those involved in the deal and if you’re part of a property chain.
Do I need to pay a deposit before the exchange of contracts?
When you exchange contracts, the buyer will also need to pay a lump sum called the exchange deposit. This is usually around 10% of the purchase price. If you are purchasing the property with an exchange deposit that is smaller than 10% of the purchase price, your conveyancer may need to negotiate a smaller exchange deposit with the seller to see if they’re willing to accept it.
The exchange deposit is different from your mortgage deposit. But don’t panic, it doesn’t mean that you’ll have to save up two separate pots of money! The exchange deposit is usually taken out of your mortgage deposit.
The main reason why they have separate names is that the function for each lump sum is a bit different. Your mortgage deposit helps you secure a home loan while the exchange deposit is what you use to make the property purchase legally binding. A mortgage deposit can be much bigger than the exchange deposit, so you may only need to use part of it when you exchange contracts.
This exchange deposit commits you to buying the property. This means that if you decide to pull out of the purchase after you have exchanged contracts, you will lose this deposit.
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What is completion?
Completion is when the sale of the property is completed, with ownership transferring from the seller to the buyer.
Setting the exact date of completion will not just be down to you. If you are in a chain, it will also be influenced by the proposed day of completion for other sales along your property chain.
Your conveyancing solicitor will arrange for the transfer of your funds to the seller in order to complete the deal. There will be a set time for the completion to occur, often around midday. This allows time for the funds to arrive in the seller’s account before proceeding with moving all of your possessions to the new property.
Can I exchange and complete on the same day?
Yes, it is possible to exchange and complete on the same day. This can help speed up the house buying process so the buyer can move in quickly.
However, there are a number of risks that come from exchanging and completing on the same day. For example, you may need to arrange a removal van and be ready to move once the contracts are exchanged. If there are any delays in exchange or the seller pulls out, you may be left without a new home to move to and a removal van or two filled with your belongings.
Completing on the same day as exchange may not always be possible if you are buying with a mortgage either, as some lenders insist on a grace period of at least a few days between the two points.
Can I pull out after exchanging contracts?
While you may be able to pull out of a deal after the exchange of contracts, it will be very costly to do so. In addition to losing your 10% exchange deposit, the other party may be able to claim damages.
What can hold up the exchange of contracts?
Several things that can hold up the exchange of contracts, including:
- Mortgage lenders: Most buyers will need a mortgage to purchase a property and delays arranging a home loan could hold up the exchange of contracts.
- Busy solicitors: Conveyancers, or solicitors, usually have multiple clients which may slow down the process of the exchange.
- Unanswered questions: If either the buyer or seller’s solicitor has outstanding questions about the property, they’ll need to be clarified before the contracts are exchanged.
- Complexity: Some property transactions are more complicated than others which can slow down the exchange of contracts.
- Survey delays: You’ll have to wait for the results of a house survey before an exchange of contracts can begin. Any delays in the process could hold up the exchange.
How to enjoy a smooth exchange and completion
Picking an experienced conveyancing firm will help both the exchange of contracts and completion, as not only will they be able to carry out the required searches speedily, they will be best placed to pick out any questionable results or issues that need rectifying, too.
If you can, avoid trying to exchange and complete on the same day. This will minimise stress and the potential for complications.
Finally, getting your documentation and finances in place, and responding quickly to any questions or requests for further information, will help the process go more smoothly and swiftly.
Image source: Getty Images
John Fitzsimons has been writing about finance since 2007. He is the former editor of Mortgage Solutions and loveMONEY and his work has appeared in The Sunday Times, The Mirror, The Sun and Forbes. Read more
Brean is a personal finance writer at NerdWallet. She covers a range of financial topics and has written for consumer titles including Which?, Moneywise and The Motley Fool. Read more