Reservation agreements – the practice of buyers and sometimes sellers paying a fee to show their commitment to buying a property prior to exchange – are having their moment in the spotlight as the government is on the cusp of launching its official trial.
Early in the new year, it will ask selected estate agents to implement them and report back on the results.
At Johns&Co, we have voluntarily used reservation agreements since we launched back in 2013. There are a myriad of benefits, one of the most important being the ‘skin in the game’ which comes with the buyer providing a modest upfront financial commitment, which we find results in lower fall-through rates.
Industry fall through rates have at times been as high as 49 per cent, meaning up to one in two properties which go under offer will not end up completing. This is incredibly stressful for buyer and seller alike, as well as others involved in the chain. Fall throughs also cost all parties a lot of money: usually around £2,000 and sometimes higher for leasehold properties, which require more paperwork and therefore more legal fees.
In contrast, our average fall-through rate sits at 18 per cent. In one of the developments we are selling, there have been zero fall-throughs this year when reservation deposits have been taken – largely unheard of in the second-hand sales market.
We have found that when the buyer has committed to an upfront fee which, for our clients, comes off the final price of the property, they are significantly more likely to proceed through to completion.
Serious buyers accept that this is part of our process and seldom question it, and our vendors (many being experienced investors) like the comfort blanket that a reservation agreement provides. Our experience is that reservation agreements can also speed up the transaction process: our average sits at around nine weeks from sale agreed to exchange of contracts, while the industry average sits at 14 weeks.
But what happens when the sale falls through for genuine reasons? We deal with fall throughs on a case-by-case basis, and if the sale falls through for reasons out of the control of the buyer, we refund them. As the government embarks on its trial of reservation agreements in the new year, we would absolutely welcome their introduction to the market as standard.
Whilst they are not a magic wand and are not a guarantee that a sale will complete, they certainly help to keep the client journey smooth and transparent: something that will only help to raise the reputation of our industry and consumer confidence at a time of great uncertainty.
Chris Osmond is sales director at Johns & Co