Most First Time Buyers will be buying their first home in a house chain. This is because they are usually buying a property from another First Time Buyer, who are looking to upgrade to a bigger property, thus creating a house chain or property chain. However, what happens when the top of the chain pulls out?
When the vendor at the top of the chain has pulled out, this causes the rest of the chain to now be in limbo, because the next rung in the housing chain has no property to buy now. However, while this is a setback for First Time Buyers at the bottom of the chain, all is not lost and many house chains do repair themselves and all the transactions go through.
Table of contents:
- Top of chain pulled out – the solutions
- Waiting for a chain to complete
- The benefits of being chain free
- Middle of the house chain pulling out
- Probability of a house chain collapsing
- Protecting yourself in a house chain
Top of chain pulled out – the solutions
There are two solutions when the top of the chain pulls out. The first solution is that a replacement seller and property is found to complete the chain. The pressure is on the next rung of the chain, the buyer, to find another property to keep the house chain alive and progressing again.
The other solution is for that buyer to decide not to buy a property, either moving out to a rental property or moving in with family or friends temporarily. This then makes that buyer the new “top of the chain”, and the chain is now complete again.
As a First Time Buyer at the bottom of the chain, the second option is your preferred option, as it allows the house chain to be complete again. It also makes the house chain shorter by one link, now that the top of the chain pulled out, so there is less risk going forwards of another chain collapse.
Therefore, it is in your interest to push hard for the second solution, to try to convince that buyer to accept their new status of being “top of the chain” and see through the transaction so the whole chain can proceed to exchange and completion.
Waiting for a chain to complete
When a chain is incomplete, the wait can be agonising, as the situation is out of your direct control as a First Time Buyer. You are dependent on a third party, often whom you have never met, that is holding to hostage your first home purchase.
While waiting for the chain to complete, you should still be viewing other properties on the market and putting in other offers – after all, until the chain is complete again, there is no certainty that the seller of the property you are purchasing can proceed to sell to you. If the top of the chain pulled out and you are waiting for that part of the chain to complete, there is no certainty the buyer at the top can find a new property. The higher you go up the chain, the more expensive properties are, the fewer of them are on the market, and the slower it is to find a suitable property.
The benefits of being chain free
As a First Time Buyer, by default you are considered chain-free; you have no property to sell, and you complete the house chain at the bottom, ensuring that everyone else in the chain can sell their property. Like a chain of dominos, you are the one that will set things in motion on exchange day.
Therefore, you hold a lot of power at the bottom of the chain. In long house chains, we have witnessed scenarios where that the bottom of the chain has demanded discounts of £10k, £20k just before exchange, and that discount has been reluctantly agreed by the sellers all the way up the chain, to ensure the transactions still go through. In a long chain, £20k divided by four or five sellers is only £4-5k each. Don’t be afraid to make cheeky offers if there is a long house chain waiting for their first time buyer at the bottom!
Being chain free at the bottom, you are also in a strong position to demand exchange dates and completion dates that suit you. And if you need more time and need to delay the exchange date, everyone else in the chain needs to wait for you.
If the top of the chain pulls out, it is a setback, but recoverable. If the bottom of the chain pulls out, the situation becomes much more critical. As a first-time buyer, and probably the only time in your life you will be buying chain free, make sure you understand the leverage you have to your advantage, in your first home purchase.
Middle of the house chain pulling out
Like the situation where the top of the chain pulled out, if one of the parties in the middle of the chain pulls out, the chain is now in jeopardy until it can be complete again. However, this might be a blessing in disguise, especially with a long chain; you have now “lost” the rest of the chain to the top, never to see them again, and if a new seller is found that is not part of a chain, then your total chain length will be shorter than it was before.
In this case, similar to the scenario where the top of the chain pulled out, you want to advocate for the second solution. For the new sellers at the top to make themselves chain free and the top of the chain, to allow the rest of the chain to progress to exchange.
Probability of a house chain collapsing
There are few official stats on house chains collapsing, as this data is not collected in a rigorous way across the country. However, we do know that approximately one in three transactions collapse. Therefore, we can calculate the probability of a chain collapsing, as a house chain is just a series of linked house transactions.
Where there is one link in the chain (one buyer, one seller, one property) the risk of collapse is approximately one in three (33%).
Where there are two links (two properties), the risk is approximately 56% of the house chain collapsing and breaking. More than half of chains with two properties will experience the chain collapsing.
With three links (three properties), the risk is approximately 70%.
With four links the risk is approximately 80%.
With five links the risk is approximately 87%.
With six links the risk is approximately 91%.
So you can see that the risk of a house chain collapsing is very high – the majority of chains with two or more properties will collapse! However, this does not mean it is a lost cause – often the chain will repair itself when a new buyer or seller is found to complete the chain. And if the chain is broken in the middle, both chains might then proceed separately. But this is something to be aware of – as a First Time Buyer – that when you offer on a property that is in a house chain, the risk of the chain breaking somewhere is very high.
Protecting yourself in a house chain collapsing
There are several ways you can protect yourself in a house chain, as a First Time Buyer, from situations like if the top of the chain pulled out.
The first is to ask the agent for a clear understanding of the financial situation of all the buyers and sellers in the chain. Who are the cash buyers? Who needs mortgages? How far along the process are they with their mortgage applications? Has surveys and other searches been done already? Do they have strong motivations to buy or sell? If you join a chain that has gotten all their ducks in order and ready to exchange contracts – and are just waiting for you, the bottom of the chain – then you know there is less risk.
The second is to constantly ask your agent for updates from the rest of the house chain. You can often spot issues early on by doing this. Red flags to look out for is if your agent has not been able to get clear updates from further up the chain. This is indicative of issues further up, and can help you decide whether to keep looking for other properties or not.
To protect yourself from conveyancing costs incurred, you can opt for a no-completion no-fee packages, where if your purchase falls through, you will not incur double costs. However, it is not possible to recoup other buying costs like house surveys and local authority searches. If you are buying a property in a chain, ensure you have extra money set aside for transaction costs, in case the chain falls through.
The third is to leverage your strong position at the bottom of the chain and demand a discount to offset the risks you face buying with a chain. Often, this discount can be spread out across the chain, so while your seller will give you the price cut, they will also get a price cut from their seller, and so on, up the chain. A £20k price cut spread across a chain of four sellers means only £5k cut for each seller. This is complex to negotiate, but it is worth trying, especially if the rest of the chain is ready to exchange contracts and just need you as a buyer to complete the chain.