Exchanging contracts - what this actually means when buying a house

Exchanging contracts is a crucial milestone in the home buying and selling process. Until contracts have been exchanged, both buyer and seller can each walk away from the sale and nothing is guaranteed.

Here we explain what’s involved and the things you can do to ensure you’re able to exchange contracts as quickly and easily as possible.

What does exchanging contracts mean?

The exchange of contracts is the point at which the sale of a house becomes legally binding, both to the buyer and the seller.

In order for the sale to proceed both the buyer and the seller need to sign copies of an identical contract and the buyer needs to pay a deposit – typically 10% of the purchase price. This is separate to the mortgage deposit.

Nick Owens a property partner at Keystone Law explains: 'The seller’s solicitor prepares the contract which is usually a very simple two sides of A4 document which includes standard terms (details of the buyer and seller, the details of the property and the agreed price and deposit) and conditions.'

In addition to the standard terms the contract may also include any ‘chattels’ that have been included in the sale, for example furniture or white goods.

Once the contract has been signed, solicitors representing each party then read copies of the contract over the phone to each other in a recorded conversation before posting the signed copies to each other.

At what point in the process do you exchange contracts?

Before contracts can be exchanged, you (and your solicitor) need to be sure that you are happy to buy the property at the price that has been agreed.

This means it cannot happen until the necessary searches and surveys have taken place and any questions or queries that may have arisen as a result have been resolved.

Kate Hathaway, a property solicitor at Keystone Law adds: “The buyer will also need to have received their mortgage offer before exchange of contracts.” This will provide the necessary evidence that you’ve got the money to buy your new home.

You’ll also need to have bought buildings insurance for your new home and have agreed what fixtures and fittings are to be included in the sale.

A completion date should also be agreed.

According to Halifax, it typically takes between eight and 12 weeks to go from offer acceptance to exchange of contracts. However, just how long it takes you will depend on the results of the searches and the building survey.

If any problems arise, these can take time to resolve.

The length of your chain can also make a difference, the shorter it is, or if your process is chain-free, the less complicated it is likely to be and the faster you can hopefully exchange.

Can a buyer or seller drop out after contracts have been exchanged?

Once contracts have been exchanged the buyer is legally bound to buy the property and the seller is legally bound to sell it.

This means that if either party were to pull out, it would be considered a breach of contract and there would be significant financial penalties.

The buyer would lose their deposit and may have to pay interest on the outstanding balance of the completion funds. The seller, meanwhile, would become liable for the costs that the buyer has incurred so far.

This is why it’s vital all parties must be certain that they want to go ahead, before they sign the contract.

Even though the seller doesn’t have as much to lose by backing out at this stage, it’s worth pointing out that it is incredibly unusual for sales to collapse after contracts have been exchanged.

What happens after exchanging contracts?

After contracts have been exchanged, there is still a fair amount of work that needs to be done before the transaction can complete. That said, it’s less fraught because the difficult work has been done and you should at least have the confidence that your move will go ahead as planned.

Nick Owens says: 'Once contracts are exchanged, the solicitors swap their clients' signed parts of the contract and the buyer and the seller then sign transfer deeds to transfer the ownership of the property in readiness for completion. The buyer's solicitor will collect the money from the buyer and his mortgage company (if applicable) that they need for completion and will carry out final checks and prepare the stamp duty land tax return.'

It's a busy time for the buyer and seller too who will need to start preparing for the move in earnest, for example packing and arranging removals. It’s also a good idea to contact utility providers and arrange mail redirection ahead of the big day too.

Can you exchange contracts without a completion date?

The completion date needs to be included in the contract and unfortunately for those seeking flexibility, you can’t exchange without it.

All parties involved in the sale need to agree on the completion date, which is usually scheduled for a few weeks after exchange.

This allows both buyer and seller the necessary time to pack up and arrange their move.

Can you exchange contracts and complete on the same day?

Completion is the final stage in the home buying process. All payments are made and the title documents are transferred to the new owner. The seller vacates the property and the buyer can finally move into their new home.

If you are in a real hurry, or it’s been such a stressful experience building up to exchange, you may want to wrap things up as quickly as possible by exchanging contracts and completing on the same day.

However, while it is possible to exchange contracts and complete on the same day, Daniel Knott, mortgage adviser at Active Financial, points out that it may only add to your stress. 'There are a lot of different parties within a chain and therefore a lot of moving parts to all work for completion to occur. If there are any issues throughout the chain, this could be delayed. This can be inconvenient and costly if you have booked removal vans, taken time off work or redirected your mail.'

Kate Hathaway takes a similar view. 'The risk of not having time between exchange and completion is a lack of certainty in the transaction — until contracts are exchanged either party could walk away from the transaction at any point without penalty. An exchange of contracts provides the certainty to all parties that completion will occur on a specific day.'

Is the fee for exchanging contracts included in the solicitor’s fees?

Yes. Your solicitor’s bill will be made up of two parts – a fee for their services (including exchange of contracts) and disbursements. Disbursements are additional legal costs charged by third parties, for example searches, fraud checks, stamp duty and bank transfers.

Tips for exchanging contracts as quickly as possible

Daniel Knott says it’s a good idea to keep talking to your solicitor.

'It’s essential you work together with your conveyancing solicitor. A good solicitor will tell you the individual who will be looking after you and your purchase or sale. This means you’ll know exactly where to direct your queries or concerns.'

'The biggest stress is usually uncertainty, this is especially true for first-time buyers who haven’t experienced the process before. Communication with your conveyancing solicitor will ensure you understand what’s already been done, what stage you’re at currently and what is still to come.'

Kate Hathaway, also recommends that buyers act quickly and get everything they need to do done as soon as possible. 'Although there is some financial risk involved, get your mortgage application in, your solicitor instructed and your survey commissioned as soon as possible. This will help you flush out any issues as soon as you can.'

She adds that you might also want to try and avoid being in a chain, if it is at all possible. 'A chain will only ever move as quickly as the slowest link and it can be difficult getting information further down the chain.'