On 18 April 2013, the OFT launched a market study looking at the UK’s quick house sale sector.
They wanted to find out whether this sector works well for consumers, whether any practices give cause for concern and, if so, how such practices should be remedied. They had also noted potential similarities with the sale and rent back sector and wanted to establish whether similar concerns arose.
Quick house sales can be beneficial to home sellers who want the certainty of selling their property relatively quickly, without trying to sell on the open market. There was concern, however, that some unfair trading practices may prevent home sellers from making informed choices when selling their home. In addition, there may be a disproportionate impact on vulnerable groups, such as those in financial difficulty who need to clear debts and/or avoid repossession, and older people.
Some trading practices may lead to sellers receiving not just a below market value price for their home, but a sum much lower than the amount the provider had led them to believe they would get.
Practices that gave rise to concern included:
•reducing the price offered at the last minute after the seller is financially committed to the transaction;
•making misleading claims about the value of the property or the level of discount to be applied to the sale;
•falsely claiming to be a cash buyer;
•unclear fee structures, for example, imposing an unexpected fee following an initial valuation, as a condition for progressing the service;
•inducing home sellers to enter into agreements that prevent them from selling to other buyers, with severe penalties for breach of contract.
The launch of the market study included a public request for information, seeking to hear from people with experience of this sector, including home sellers, providers, valuation experts, estate agents and debt advisors. They also carried out a survey of providers and held roundtables with providers and with a number of stakeholders. The information received helped them to build up a picture of the sector.
As part of their research they:
Analysed over 160 websites, for information about providers and to see their claims about the service they provide; and reviewed Companies House data, for company and officer information;
Considered 23 provider survey responses (out of 74 providers approached), and held a provider roundtable (attended by 13 companies), for more detailed information about providers and their practices, processes, business models and customer feedback;
Reviewed 111 public responses to their request for information, including 72 home seller complaints, plus follow-up telephone interviews with 20 complainants and analysis of other complaint data, to understand home sellers’ experiences and identify possible breaches of consumer protection law;
Engaged with stakeholders including government bodies, enforcers, consumer bodies and advice services, charities, professional standards organisations and trade bodies, for information that would inform their study;
Organised a roundtable workshop with consumer stakeholders to examine how the quick house sale process affects particular consumer groups and what good and bad business practice looks like;
and obtained HM Land Registry research, to provide data on properties bought and sold within a six month period, and conducted a survey of RICS surveyors, to help estimate the size of the quick house sale sector.
Quick house sale providers are businesses that offer to buy a property or find a third party buyer very quickly, but usually at a ‘below market value’ price.
The OFT have identified almost 120 such providers operating in the UK. It is hard to count them because some providers operate multiple websites. There are probably many more providers, particularly local ones advertising through the local media and by leaflet drops. Not all providers offer the same service:
•some buy properties direct from home sellers, either for resale or to let(when they do this, they refer to them in this report as ‘buyers’)
•some broker sales, that is they seek to introduce home sellers to third party buyers and may take steps around progressing a sale (when they do this, they refer to them in this report as ‘brokers’). Brokers can be instructed by either sellers or buyers, or both. When a prospective seller gives the go-ahead, a broker looks for a buyer from their list of investors, from quick house sale buyers and other contacts, or by advertising the property on the open market
•some identify home sellers and pass on details (or ‘leads’) to other quick house sale providers (they are sometimes called lead generators). Some providers buy some properties and broker the sale of others. Some lead generators may also sometimes broker.
How do providers profit from quick house sales?
•Most buyers try to resell the property as soon as they can for a higher price than the one they paid the home seller.
•Some buyers let out the property and receive a rental income (and sell later).
•Some brokers are paid a fee by the seller (like a traditional estate agent).
•Some brokers are paid a fee by the buyer.
•Some brokers agree a price with the seller and another price with the buyer, and receive the difference between the two prices.
•Lead generators receive a fee from the buyer or broker: a fee per lead (or batch of leads) and/or a referral fee if a deal goes through
From the upfront claims they make on their websites, most providers appear to be buyers.
However, from close examination of their websites and from what providers told us, they believe this may not be the case. Whether the provider is buying or brokering can have implications for both the speed of the sale and the discount on market value.
Brokers have less control over the purchase than buyers: they have to find a third party buyer, one who will pay at least the offer price, and one who can finance the deal quickly. There seems to be a greater risk that home sellers’ expectations might not be met. Home sellers should therefore seek extra assurances that brokers can deliver deals as promised before doing business with them.
Providers that fail to explain their services adequately to home sellers may be in breach of the Consumer Protection from Unfair Trading Regulations 2008 (CPRs) for misleading claims and/or omissions in particular. When providers broker, the OFT considers those activities are likely to involve estate agency work (as defined by the EAA), in which case they must comply with the requirements of the EAA and associated legislation.
The service on offer is one key feature to consider when looking at providers. Another is how the purchase will be paid for.
Quick house sale buyers or, in the case of brokers, third party buyers, may pay with cash funds that:
•are available immediately;
•will be freed up once another property is sold;
•will be raised from investors; or
•will be borrowed from a lender.
This too has possible implications for the speed of the service and the final offer price. A buyer with funds available immediately is likely to be in a better position to finalise a quick sale than one that needs to free up funds or secure finance. Problems with funding may cause both hold-ups and an attempt by the provider to renegotiate the sale price. Home sellers should ask questions to clarify whetherthe buyer can pay for the property and will have funds ready on time. Providers, to minimise the risk of a breach of the CPRs, should disclose how the buyer intends to pay for the property. Similarly, in order to minimise the risk of breaching estate agency legislation,brokers should not misrepresent the status of a prospective buyer, which would include their financial standing.
Lead generators are not really providers at all. They do not make deals with home sellers. They are themselves unlikely to be able to deliver either a speedy sale or a particular sale price because those things depend on buyers or brokers. They include them as ‘providers’ only because, from their upfront claims, they are currently hard to distinguish from buyers or brokers and will look like a provider to the home seller. What they actually do is an ancillary service. They attract interest from sellers and sell on the details to other providers.
Not all quick house sale buyers or brokers use lead generators, but some do. Lead generators must comply with the CPRstoo. Their claims, for example about their service, the speed of the quick sale, the offer price and the financial status of the buyer, must not mislead. Lead generators should also check whether they are engaging in any activities that fall within the definition of ‘estate agency work’ under the EAA. If they are, they will need to comply with the requirements of the EAA (and subordinate legislation) when they carry out those activities. If necessary, they should take independent legal advice on this matter.