The ‘Konvenju’ process – can it be improved?
There are many different similar models worldwide, none of them perfect, that I have come across in either working or managing in 28 different countries in the world.
Along with my colleague Dima NIkitin (Senior Sales executive at Luxfair Dhomes in Birkirkara) we have written this article, with others to follow, to showcase how we would foresee it changing and/or improving.
This article looks at non-refundable deposits, “subject to” offers and their time limits, information packs and RICs surveys/valuations.
So what is the Konvenju/ Promise of sale? Both parties bind themselves; with the vendor promising to sell and the buyer promising to buy an immovable property, at a declared price and by an agreed date, subject to the terms and conditions established within the promise of sale agreement.
It is normal practice, upon signing a promise of sale, for the buyer to transfer 10% of the agreed sale price as a deposit to be held in escrow by the notary, to subsequently be released to the vendors upon signing of the final deed. However, Maltese law does not impose the payment of a deposit on a promise of sale and it is up to both parties to agree a sum, if any, to be lodged as a deposit.
The question is – Should the deposit be mandatory and non-refundable?
Surely, if you want to buy the said property there should be some form of non-refundable deposit, subject to certain clauses like: i) the bank loan is not granted to the purchaser, ii) the vendor’s legal title to the property being sold is not in order, and iii) the building permits are not in order.
All of these “Subject to” would have time limits, like the 90-day rule, already in place, so the onus is on all parties to provide the necessary information quickly and efficiently or the deal will not happen.
Given the fact that the Konvenju is inherently a binding document that is followed up by the final contract of sale, a non-refundability clause can put peace of mind to both the seller as well as the buyer.
Buyer’s Remorse is a common phenomenon and given the sheer amount of property advertised on platforms that are outside of the Real Estate sector (such as social media or paid Google advertisements), buyers stand the chance of coming across a property that subjectively is a better deal than the one that they signed a Promise of Sale on.
The main stumbling block for a buyer is usually getting the required finance from a bank. In these modern times of AML checks then bank finance seems the best way forward for all, as the checks and balances will have already been made on the funds; although there is still the onus on the notary and real estate company to do the same checks.
So how do we tighten up the bank finance side of things? In many other countries you get an AIP (Agreement in Principle). This is a document/promise from the bank that, subject to all the information they have received from the applicant/buyer, then they would be able to loan a certain amount of money via a mortgage. This gives the buyer a number to work on, for example, if they can borrow
€150K at 80% LTV (Loan to value) then they will be looking at properties in the region of €180K to buy. After all, if a buyer does not have the liquid capital, then why are they signing a promise of sale?
A time limitation on a Konvenju that is subject to a bank loan puts pressure on the actual bank-to-client deal to actualise quicker. This deal, however, is out of the boundaries of what the Konvenju has power over and thus can lead to otherwise unforeseen complications. That being said, the possibility of time limitations being applied even to clauses such as a bank loan are not completely out of the question – an Aristotle Golden Mean must be and can be established that allows for enough time for a loan to be granted while at the same time putting pressure on all parties to proceed with the final contract of sale in order to finalise the deal.
If we extrapolate this idea further the bank will have two very important questions to ask before mortgage:
Is the property being bought actually completely owned by the seller and is it where it says it is situated; are the boundaries all correct?
Is the property valued at or above the value of the sale?
In many countries there is an onus on the seller to provide an Information Pack, which would include, but not be limited to, proof of ownership, evidence of title, an EPC (Energy Performance Certificate) and any leasehold/freehold information.
This would save lots of time, especially on ownership, as we all know that a property that is inherited in Malta can have many owners. The most at Luxfair that we have seen is 51; the screening and ID checks did take a long time for our administrator, Paula Farrugia!
On the second point I was both shocked and surprised that in Malta there appears to be very few RICs qualified surveyors and there is no requirement for a RICs surveyor to value every property that is to be sold using the famous Red Book (rics.org) This is the guide to valuing worldwide and something that many mature markets use effectively in all sales, both residential and commercial.
A sign-off by a RICs qualified surveyor gives peace of mind to the bank and the buyer equally. The seller might not agree with the valuation. I personally have challenged many with comparables and had values increased slightly, but it is in black and white and viewed as correct by banks in particular.
The valuation process does not take long, maybe a week in total, and can help make a quick decision on whether the buyer should progress at the initial purchase price or decrease the offer accordingly. It brings a bit of science to the offer and the whole purchase process.
These are just our initial thoughts and in the next few articles we will explore central databases for all information on properties and the use of Blockchain in real estate.
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Derrick Maguire – CEO Luxfair
Real Estate – derrick.maguire@luxfair.com Dima Nikitin – senior Sales executive, Luxfair Dhomes –
dima.nikitin@luxfair.com