Incentivising First Time Buyers

Warren Kaye, our Director of Property Services, was asked by Your Property Network (, a leading subscription only magazine for property investment professionals, to write an article for them on how to incentivise first time buyers in a market where it is hard to differentiate your property for sale from all the others, without falling foul of the requirements of a buyer's mortgage lender. What follows is the text of that article. Please contact Warren for further information.

Incentivising First Time Buyers - A Legal Perspective

Having been asked by this publication to pen a few words on Incentivising First Time Buyers, my first thoughts ran along the lines of "Why would you want to?......." Prices are still dropping across most of the country, if they haven't already bottomed out, and if you are an investor with access to funding, what better time will there be to buy? Even if you have no access to funds (and let's face it, few do), with interest rates at historic lows, why would you liquefy your capital at the bottom of the market? The answer lies in what you are able to do with that cash. With so many incentivised sellers, and a dearth of real purchasing power in the marketplace, many property professionals see now as an ideal time to pay down their debts and swap income producing assets for capital, buying below market value and selling on at a profit.

But with supply outstripping demand, how do you capture the elusive buyer? What can you do to help your property to stand out from all the others? In particular, since most investment property is basic, homogenous, "all things to all people" property, how do you make your deal more attractive to the average first time buyer, that rare beast in the post-recession jungle who sits at the bottom of the food chain and provides sustenance for the rest of the jungle dwellers? And specifically, what can you do that won't offend the buyer's mortgage lender, which has become a timorous, skittish animal, scared off by the slightest indication of anything unusual?

As you might imagine, it would be far easier to list all those things that a lender would find unacceptable, than to identify tactics which they would not object to. Straight cash incentives are almost universally unacceptable in the current climate, and any more novel schemes that are tainted with the idea that the purchase price has been artificially inflated in order to make the buyer's proportion of loan to value look diminished may be given short shrift. With the losses incurred through past bad lending decisions still fresh in the memory, the FSA's mortgage market review expected to constrain product creativity and the need to increase capital reserves whilst paying back bail out funds all making your average lender necessarily risk averse, how is it possible to separate your incentives to market from their lending considerations?

Naturally, if you ask 100 solicitors the same question, and you'll likely get 100 different answers back. What this maxim really means is that most solicitors are as averse to risk as their lender clients, and unless a particular incentive has been pre-approved under the lender's standard instructions, most will want to specifically advise their lender of the existence and terms of the proposal, and leave the lender to amend it's decision to lend or otherwise. Too many solicitors are getting burned yet again for making decisions on their lender's behalf without taking proper instructions, a practice of making hay while the sun shines, only to suffer the consequences when the weather becomes inclement, and lenders repossess property at a loss. For those of you who are that way inclined, the standard instructions for most mortgage lenders can be found in the Council of Mortgage Lender's handbook, available online at  Take a look, and you may be surprised at what lenders want to know about a transaction. Most pertinently, section 6.4.4 says:

You must tell us (unless we say differently in part 2) if the contract provides for or you become aware of any arrangement in which there is:

• a cashback to the buyer; or
• part of the price is being satisfied by a non-cash incentive to the buyer or
• any indirect incentive (cash or non cash) or rental guarantee.

Any such arrangement may lead to the mortgage offer being withdrawn or amended.

That's pretty widely drawn, doesn't leave much in the way of wiggle room, and precludes the possibility of being able to advise that certain incentives will work and certain other incentives won't. So, what follows must necessarily be by way of suggestion only. Whether a particular lender will accept the scheme in particular circumstances will turn on its own facts in each case. That must be why the actuaries and underwriters working in the smoke-filled back rooms at the lenders' head offices are paid the big bucks!

1. Incentives in the nature of cashback - the riskiest but most transparent scheme. This could involve paying the buyer's stamp duty or legal fees, and is usually given by way of a contractual allowance which affects the total sum handed over for the property on completion. Some lenders will accept such an incentive subject to a maximum percentage of the price, others restrict their acceptance to newbuild developers, while still others will view the scheme as a direct reduction in price and will reduce the amount a buyer can borrow accordingly.

2. Non-cash incentives - perhaps a refurbishment to the buyer's requirements, the inclusion of white goods free of charge or the provision of furniture packs. It is perfectly acceptable to separate the land and the property on it from the things that go into it. The same theory applies to apportioning the price between the property and the fittings and contents for the purposes of stamp duty. As a consequence, the further your incentive can be separated from the property itself, the more likely a lender may be to accept it. The usual caveat applies though, and examples of the sort of non-cash incentive that has previously been refused by mortgage lenders include the provision of a new car or holiday vouchers.

3. Other indirect incentives - let your imagination run riot. If you can think of it, the lender will still want to know about it. I have heard of such diverse incentives as the seller making a large financial contribution to the cost of the buyer's daughter's wedding reception or a promise made that in return for a sale, the seller would manage the burgeoning musical career of the buyer's son. Now, I realise that not everyone has the skill set necessary to be able to deliver such a package, but the point is that even something so far removed from the sale transaction is something that should, technically, be reported to the mortgage lender.

Ultimately of course, it is the acting solicitor that represents the lender's interests as well as those of the buyer, and that solicitor will always refer issues to the mortgagee if they feel that they are required to do so, or just if they are unsure what the lender's view of the situation will be. What is implicit in that statement is that they must act on all the information that they are made aware of, and most buyers will want to inform their solicitor of the existence of the incentive, if only to ensure that it materialises on completion.

As it has always been, and as it always will be, all of us are at the mercy of the whims of the banks…… even those owned by the taxpayer.

Warren Kaye
Director of Property Services
O'Neill Patient Solicitors LLP
8 December 2010

About O'Neill Patient:

O'Neill Patient Solicitors LLP is a well-established law firm based in Stockport in the North West of England, specialising in a number of different practice areas and having grown substantially over the years has become one of the leading providers of legal services to the residential property and remortgage markets. O'Neill Patient are aware of the huge appetite for professional legal services that combine specialist expertise with speed and quality of service that cannot be provided by traditional high street law firms and, until recently, such expertise and service was only available through large city centre law firms, whose fees reflect their expensive premises and staff costs. O'Neill Patient has taken on and met the challenge of competing with such firms by recruiting first class lawyers and support staff and investing heavily in modern computer technology to provide legal professional services that represent good value for your money.


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