Buying a new build - confused by 10% exchange

[Candleabra]

The sale of my house is progressing (likely to complete mid march) and I'm thinking about a buying a new build. Apologies for what may seem a silly question.
But how do the finances work? The developer wants a £1000 deposit to reserve the plot, then 10% on exchange which must be 6 weeks from reserve date. This will be earlier than the completion date for my house sale.
I don't understand how anyone can buy a new build unless they're a cash buyer or have sold, and sitting in rented. Am I expected to find £50k to exchange before my sale completion and at least 8 months in advance of my purchase completion? And is the 10% completely non-refundable?

The deposit gets passed up the chain. So the buyer at the bottoms pays in cash, everyone else usually just passes it up. Once you have exchanged the deposit is essentially non-refundable (if you pull out of purchase you won't get it back). Often the £1k reservation fee is taken off the 10% required at exchange. You exchange on your sale and purchase on same day. It can be hard to buy a new build in a chain because your buyers won't get a confirmed completion date at point of exchange, as you normally would when buying a house. You'll get an estimated completion date and a long stop date (usually 6 months later). Depending on the contract, if builders haven't finished by long stop date then you can get your deposit back if you wish to pull out.

And the 6 weeks from reservation is usually flexible. As long as you're showing good progress, they won't usually pull out dead on 6 weeks, particularly if the delay is elsewhere in the chain.

We are looking to relocate and considered a new build. Every developer we've spoken to (3) expected us to sell our house first and go into rented until the house was ready. When questioned on this one of them basically straight up said they get enough interest for them to prioritise first time or cash buyers with nothing to sell. So in spite of their "Easy Mover" type deals and so on, they actually only ever want to offer them as a last resort for the plots they can't shift.

I've never bought a new build before though and this been with the developers in the area we're looking at so I can't say if that's universal.

I still can't see how it works practically unless you're completely chain free. I think my sale is going as well as it can, but anything could still happen, especially at the moment. I don't want to pay a reservation fee, unless I'm sure we'll be ready to exchange in 6 weeks.

We had to pay £5,000 to reserve our new build. The solicitor assured us that only reasonable costs to the builder could be deducted from this in the event that it fell through so we had to take the risk. It was either that or hold out and hope someone else didn’t pay before us. The 6 weeks will be flexible, as long as it’s progressing they will stick with you!

I would look at a reservation fee the same way you would usually get a survey. You can spend hundreds on a survey (more if it's a full structural report) and then the chain may break anyway at any point pre-exchange. That money could be sunken costs, but it's something you need to risk to potentially get the house you want. If you want that particular new build house, then your choices are pay the reservation fee (and £1k is a usual amount, they are often more), or hope no-one else buys the house - but you'll need to find someone to buy before you exchange on your sell unless you're breaking the chain anyway. Other ways people buy new builds is some companies do part exchange schemes. They then take care of all marketing/selling, you get a guaranteed (slightly lower) price, and you know you'll be able to stay in the house until the new build is completed.

A lot of new developers are wanting ppl to exchange way in advance of completion at the moment but it's a massive gamble
If you lose your job or mortgage lender changes their mind or any other amount of scenarios then you lose your 10%

You can't exchange on your new build until you've exchanged on your sale (assuming you need the funds from your sale of course) so the funds are passed through the chain on exchange. We actually passed on less than 5% because our buyer's deposit was so much less than the deposit we required, but it was actually never brought up, we weren't asked to plug the gap, they didn't care, and I'm sure the contract said 10% too.

@Comps83 it's not just at the moment, it's very standard for a new build to need to exchange 4-6 weeks from reservation. How is the risk any different than if you lost your job just after buying a house?

Also OP, I've had the deposit refunded when we pulled out of a sale, but I've heard upgrades you've paid for won't get refunded if it falls through.

It took us about 10 weeks to exchange due to a house sale and whilst we were given some concessions due to the pandemic, it was very stressful as they do threaten to pull out constantly 🙈

@bluepie the difference is you will own the house and haven't just lost tens of thousands of pounds on nothing
They are pushing ppl to exchange months in advance at the moment. The girl who got the house I nearly bought was being pushed to exchange in Oct for a house not scheduled to be ready until April !

I believe you pay a deposit on exchange on any house, not just a new build? As others have said it gets passed up the chain. You would need to explain to your solicitors that your deposit is coming from equity not cash.

@Comps83 I've just told you it's standard, it's nothing to do with "at the moment", my mum bought a new build 13 years ago and had to exchange within 4 weeks. I've bought 2 year builds in the last 6 years, both had to be exchanged within 6 weeks.

Your point is flawed because let's say you exchange on a second hand house in January and complete a couple of weeks later, then you lose your job in March= precarious situation. If you exchange on a new build in January, house isn't ready until April, lose your job in March, either you continue with the purchase regardless as your employment won't be checked again and you're in the same situation as the person in the second hand house, or you pull out and lose the money. You can lose your job at any time so I really don't see how a delayed exchange makes any difference, if anything you have a choice to get out of it, albeit an expensive one.

(Months ahead of completion of the property I should add to my mum's and my example- they can't do more than 6 months due to mortgage expiry dates).

Op, put simply you can’t exchange on thr new build till you know for sure when you’ll exchange on your current home. As such, uou need to tell them at this stage you’re unproceedable. If the new build sells before you’re ready, then it sells.

@Bluntness100

Op, put simply you can’t exchange on thr new build till you know for sure when you’ll exchange on your current home. As such, uou need to tell them at this stage you’re unproceedable. If the new build sells before you’re ready, then it sells.

I know, I agree. I thought buying a new build might be an easier option! I knew part ex was pretty much a thing if the past. None of the developers will take that on now. I just wonder how anyone who doesn't have the cash sitting in the bank can commit, it seems really risky otherwise.

And house isn't ready til October. I'm sure those timescales will slip. Long time to wait.

@Candleabra I don't understand why you keep saying cash in the bank is needed, it's no different to any onward purchase, when you're buying a house, new build or otherwise, you need to pass on a deposit at exchange? If you're a FTB you pass on your cash deposit, if you're in chain the deposit gets passed on from your buyer, 10% is very standard? How would you having cash in the bank for deposit make any difference, you wouldn't be allowed to exchange on the new build unless you'd exchanged on the old house, exactly the same as a standard chain?

If your sale is progressing through, then I would think that the new developer will wait more than 6 weeks for the 10%. Which developer is it? I bought new build last year and only paid £500 and a 10% deposit on the finishing touches before completion day. Like you, I had already sold though, so I could have paid 10% if necessary.

I suppose it depends on how much you want the house, and what the arrangements are for the 10% if either party pulls out?

Having said that, if the completion date is October you'll be lucky to find a mortgage company that'll let an offer last that long, Halifax do 9 month offers but most others are 3-6 months. But they will be acutely aware of that so I think it's worth discussing with them seriously the situation. It might be they are doing early releases but the 6 week clock won't start yet, that happened to us with the first new build we tried to buy.

I totally understand the point being made.

But if your sale is expected to complete around mid-March OP, so 7-8 weeks away, but the newbuild wouldn't be ready for months, never mind the finances (which would appear to be about right given your above timing) where are you anticipating living after you've completed on your sale - which isn't that far away?

I can see the newbuild exchange timings are a problem in many cases, but can't see how the finance part of this is a real problem in your circumstances. Or have you not got £50k equity in your sale property & savings? If that's the case then I'd say the newbuild purchase is beyond you as you don't have a 10% deposit and a mortgage for the rest would seem unlikely?

The situation is my house purchase fell through this week and I'm looking for alternative purchase options. I've seen the show home already and loved it, but this is the first time I've considered it as a serious option.

I will need to go into rented after the sale of this house. So the gap isn't an issue.

So, when exchange takes place in a normal chain, does that involve money? I've only ever exchanged and completed on the same day, so the money transfers all happened at the same time.

The reason I keep going on about having the cash is that I couldn't see how is get hold of all the equity in my current house until completion.

The new build is double the price of my existing house. So 10% of £500k (new build) is £50k which the developers want 6 weeks after reservation. I don't see how I can access that sort of cash until final completion?

(Sorry for labouring the point, these are all very genuine questions and everyone's been extremely helpful so far)

@Candleabra I'm with you, so yes when exchange and completion happens on different days an agreed amount is sent on exchange. If you're in a chain you often don't see this money, it just all happens by solicitors pushing it up the chain.

So we did what you are talking about here last year. We had an offer on our house in May, reserved a new build for £500, we did a simultaneous exchange on our sale and purchase in August, so what this meant was we exchange on our sale and purchase on the same day, our buyer's deposit was passed to the developer (it was much less than the contracted 10% but this was fine, though I was still legally bound to it if the sale fell through) we completed on our sale the next day, moved into rented, and didn't complete on our purchase until the following month.

The only things we paid up front was the reservation fee and solicitors' deposit.

If you haven't completed on your sale before you exchange with the builder, you can negotiate how much is passed up the chain (just as with any chain purchase) I would assume in a lot of cases the buyer's deposit will not be enough and your equity is tied in the sale, so I think it's a very common scenario that is fluffed a bit, but remember, even if you pass on less than 10%, you are liable for 10% if he sale falls through and it's your fault (it's not your fault if the sale falls through due to delays in the build).

Does that help?

And just to add that's no different to a standard chain, many of which exchange and complete on different days (an option I prefer), the only difference with it being a new build is that there can be a longer lag between exchange and completion of the build is not ready yet, it's usually 2 weeks max in a standard chain, so people tend to either negotiate with their buyer to wait or to break the chain and go into rented.

If you complete your sale before you exchange on the new build, you obviously have the funds to pass on, and would most likely then do the full contracted 10%.

In terms of ridiculous delays, I exchanged on a new build (well conversion, but same principle) in Nov 2019 (and paid deposit) and still haven't completed. We reserved it in July 2019 at which point they were estimating Dec 2019 completion date. Now hoping for March 2021. I've also paid for numerous upgrades. Long stop has clearly passed so I could pull out and get deposit back but I still want the house so I'm holding on (and gritting my teeth).

@Dinosauraddict how frustrating, have they said they'll cover your stamp duty if it slips again?