Proper preparation can help prevent any pain from Part Exchange properties

Being able to operate an effective part-exchange or ‘PX’ scheme can be an essential tool in a housebuilder’s sales tool kit.

From the housebuilder’s perspective it can be the means of delivering a sale on short notice. From the purchaser’s perspective a PX scheme is simply an incentive offered by a housebuilder which allows a purchaser to forego the stress and expense of selling their current property (the ‘PX property’) and instead give the housebuilder title to the PX property as part payment of the price for a new build house. After settlement, the housebuilder will re-sell the PX property on the open market in order to make up the balance of the price of the new build house that they never received at settlement.

The success of using a PX scheme lies in the ability of housebuilders to ensure that the buy-in and re-sale of the PX property is as quick and cost-effective a process as possible. There are a two practical issues that are worth highlighting as they could result in delays or further costs being incurred:

1. Alterations

Almost every PX property will have had works done to it at some point in the past. It is important that the housebuilder and their solicitor ensures that all necessary statutory consents were in place for these works and that all paperwork that would be required to satisfy a lender has been delivered.

The survey part of the Home Report is likely to raise any material concerns in relation to the condition of the PX property and the housebuilder’s solicitor should obtain more information/documentation from the owner. It is important that the housebuilder passes on any information/documentation to the Home Report surveyor so that they can confirm whether they are satisfied that all of the necessary statutory consents have been obtained and complied with and that all paperwork that would be expected has been delivered.

The risks that we are trying to avoid here are:

  • a. Delays – for example when the housebuilder comes to re-sell, the other side do not accept the position in respect of alterations and therefore the housebuilder needs to: (i) order copies of the paperwork from the Council; (ii) obtain a letter of comfort from the Council; or (iii) obtain a title indemnity policy covering the lack of documentation; and/or
  • b. Loss of value – for example if the Council inspects the PX property to determine if the works have been carried out correctly and decides that the works don’t comply with the terms of the building warrant or the building regulations. The housebuilder would have to pay for remedial works to be carried out to rectify these issues, or, in the worst case scenario, have to pay to put the PX property back into the condition it was in before the works were carried out.

2. Condition of services:

One area which is often not fully covered in a Home Report is the condition of any gas and electricity services within the PX property. It is recommended that the housebuilder ensures that the owner obtains gas and electricity safety certificates from qualified engineers confirming that these are in a satisfactory condition. By obtaining these as quickly as possible, there should be plenty of time for the owner to have works carried out if these are required before a satisfactory certificate can be issued.

The main risk that we are trying to avoid here is that the housebuilder inspects the PX property after settlement and discovers that, for example, the boiler is unsafe and needs to be replaced. Whilst it would depend on timings for the re-sale, there may not be enough time to have these works done prior to the re-sale and as a result the housebuilder may need to decrease the price being paid to reflect that further works are required.

PX schemes will continue to be a valuable tool for housebuilders, but they should take care to ensure that issues like alterations and gas/electricity safety are bottomed out early in order to decrease the risk of making a loss on the re-sale of the PX property or encountering delays when completing a re-sale.