Closed loop chain - how does deposit work?

JT9447

I've been reading up on here to try to better understand the buying/selling process.

I understand it's normal for a deposit to be paid at exchange. I can see how that works normally, a cash buyer or FTB at the bottom of the chain pays a deposit and each party can use that to pay a deposit to their seller up the chain.

I'm in an unusual, but not unique, situation. I'm buying my buyers house. There's just us in our chain, so it's a closed loop.

How would a deposit work in this instance? Can we agree not to have one? Or agree a token amount (e.g.£1k) to pass back to each other?

TheJP

You can agree anything but i would have something in the contract that if they failed to complete they would be liable for a certain % of the property value plus costs incurred with the process.

JT9447

Thanks, much appreciated!

canaldumidi

Could each buyer pay a normal deposit (or other agreed amount) to be held by the respective solicitors in case of failure to Complete?

JT9447

I'm funding my deposit from the sale of my house, I don't have £65k just lying around...

user1977

TheJP said:

You can agree anything but i would have something in the contract that if they failed to complete they would be liable for a certain % of the property value plus costs incurred with the process.

Why not just be liable for the costs? Not sure what a percentage of the property value would have to do with it.

Given how rarely breaches of contract actually occur and how much of a headache contractual deposits seem to cause, I do wonder what the value is in having them. Merely being liable for the costs ought to be a big enough stick to encourage people to perform, without also insisting they stump up a wodge of cash just in case.

gozaimasu

I don’t think the closed loop is relevant here - buying a house that is not your seller’s would also raise the question of where the deposit comes from if it’s coming from the sale of your house.

eddddy

gozaimasu said:

I don’t think the closed loop is relevant here - buying a house that is not your seller’s would also raise the question of where the deposit comes from if it’s coming from the sale of your house.

The 'closed loop' is relevant.

With a 'normal' chain, the deposit would 'pass up the chain' starting from the person at bottom of the chain.

So in a 'normal' chain, the OP would use the deposit from their buyer as a deposit for their seller (maybe with a 'top-up', if required).

That won't work with the OP's 'closed loop'.

gozaimasu

If an FTB has 10% deposit on £100k house then that £10k goes to seller,  but if the seller is buying £300k house they’d need to find an extra £20k cash for their deposit? They can’t use the equity in their existing house?

eddddy

gozaimasu said:

If an FTB has 10% deposit on £100k house then that £10k goes to seller,  but if the seller is buying £300k house they’d need to find an extra £20k cash for their deposit? They can’t use the equity in their existing house?

They'd try to negotiate to persuade the seller to accept a 3.3% deposit, instead of a 10% deposit (or maybe try for 5% as a compromise).


But TBH, your example is probably very unlikely to happen, because...

It implies that somebody is increasing their mortgage borrowing by £200k - but haven't even even managed to build up £20k in savings.

If they've been unable to save money each month up until now, how can they afford to pay off an extra £200k mortgage each month?

(It's likely that the mortgage lender would look at their finances and refuse them an extra £200k mortgage.)

TheJP

gozaimasu said:

If an FTB has 10% deposit on £100k house then that £10k goes to seller,  but if the seller is buying £300k house they’d need to find an extra £20k cash for their deposit? They can’t use the equity in their existing house?

I used the deposit from my sale, my solicitor negotiated with our sellers to accept a reduced deposit at exchange.