Revealing the hidden value in HIPs

HIPs might have little intrinsic value but they could herald a common form that would facilitate genuine point-of-sale offers and so benefit everybody in the house buying chain, says Jon Haynes

The government has published its draft regulations for Home Information Packs and much has already been written by prospective HIP providers, all anxious to panic us into believing that, wherever we sit in the house buying process we must be in a position to offer HIPs to our customers. Whether this is true depends on how and if lenders use HIPs. Their decision to embrace or disregard HIPs will have a huge bearing on the strategic value of HIPs to all of us involved in the distribution of mortgages.

In truth, a HIP is just a vehicle that redistributes some of the costs of purchasing a property from a buyer to a seller, at the same time bringing forward the point at which certain information is made available. First-time buyers can look forward to lower upfront costs but for most people moving house, absolute costs will be unaffected.

By making information pivotal to a prospective purchaser’s decision to proceed available earlier in the process, HIPs could cut the number of failed transactions and reduce the time between acceptance of offer and completion. Currently, more than one in four transactions fail (28%) and of these, 43% are due to survey findings, according to figures from the Office of the Deputy Prime Minister. The selling process takes approximately eight weeks between acceptance of offer and exchange of contracts in the UK compared with just four weeks abroad.

The single biggest misconception about HIPs is that the Home Condition Report contained within them will provide a valuation figure for a property. This is central to the whole issue of how and if lenders will integrate them into their underwriting procedures. The government has stated that one of the objectives of this element of the HIP is that it can be used and relied upon by prospective buyers, the sellers and the buyer’s mortgage lender. If this happens it will give the HCR its only unique attribute over reports currently in existence. The rest of its content is not dissimilar to a home buyers’ report. All other elements of the HIP already exist and are currently collated by buyers’ and sellers’ solicitors.

At present the basic mortgage valuation is the only report carried out for the majority of house purchases.

As this report is usually paid for by the buyer – and despite the fact that it provides extremely limited information about the condition of the property – most people are perfectly happy to rely on it when deciding whether to proceed with what is regularly referred to as ‘the biggest financial decision of their lives’.

The reality is that this valuation provides limited protection to the consumer in the event of omissions or errors as it is a contract between the surveyor and the mortgage lender.

It’s ironic that, although the HCR should provide buyers with far more protection and far more information about the condition of a property, they may be more reluctant to accept its content simply because they haven’t had to pay for it.

For all three interested parties to the transaction – buyer, seller and lender – to be afforded protection, the criteria set out by the government for the delivery of HCRs includes the provision of professional indemnity insurance for home inspectors. Despite this, commercial insurers are still showing a distinct lack of appetite for the home inspection business. The extent of this cover will be key in determining whether lenders will be prepared to rely on the information in HCRs. Perhaps this is why the vast majority of lenders have, as yet, been reluctant to lay their cards on the table. Very few have expressed any views as to how HCRs might be included in their application processes, if at all.

The CML acknowledges that competitive pressure may force lenders to accept HCRs.

Irrespective of this, the HIP will not obviate the need for lenders to have a valuation figure. But there is no reason why this should be in the form of a physical valuation.

By marrying the information contained within the HCR with a desktop or electronic valuation, a lender could have all the information they require to decide if a property will provide them with adequate security. The proposed format of the HCR makes it easy to build into existing automated agreement in principle models since it contains little free format information.

Most of its content involves the rating of a house’s external and internal constituent parts into one of three categories. Other sections simply require the selection of pre-determined phrases.

So if there is a reason to get excited about HIPs it’s the possibility of a common valuation form that could facilitate genuine point-of-sale offers.

The HIP itself may have little intrinsic value to distributors but it could just be a goose that lays a golden egg. Lenders should be doing everything possible to make sure they are best placed to steal a march on their competitors come 2007.

Trial customers welcome HCRsPilot research by the ODPM reveals that almost all sellers questioned (89%) found Home Condition Reports useful and 45% went as far as to say they were very useful. And some 78% of sellers believed the reports to be accurate.

Most of the remaining sellers felt the HCR overstated problems and only 1% felt it understated them. And 7% said the information had affected their decision on whether to sell the property or not.

Some 3% of sellers used the HCR to delay marketing while they undertook remedial work and 9% found the information in the report affected their decision on the asking price.

A total of 68% of sellers received an HCR highlighting work to be carried out and 29% discussed the HCR with people viewing their homes.

Most sellers thought the language used in the report was easy to understand (98%). Among sellers, significantly more men (68%) than women (32%) found the HCR very easy to understand.

The length of the report was considered about right by 85% of respondents and the amount of detail was appreciated by 90%. Only 3% said there were sections they found difficult to understand.

Almost all buyers (95%) found the report useful and 79% said it was very useful. The HCR made little difference to whether buyers would view a property, but 25% of respondents said the HCR was influential in whether or not they made an offer. Of these, 19% of buyers went ahead and made an offer on the property and 75% of buyers who made an offer said the HCR was more important than the estate agent’s advice in making that offer. Finally, 54% of buyers said the HCR was more useful than the surveys and reports of the past.