Spring is, historically, when the property market starts to experience a lot more activity, which then continues through the warmer months of summer. So, we thought the timing was right to provide some information for those that may be looking to enter the market for the first time (or again). This article is the first of a three-part series designed to give potential purchasers some guidance about what to expect when they buy a property. This article will go through the process for purchases to which a cooling-off period applies. The second will consider the differences when there is no cooling-off period. The third will give some insight as to purchasing at auction.
Summary (in order)
(a) Inspect the property.
(b) Negotiate the terms of the sale (price, settlement date, inclusions etc).
(c) Exchange contracts (with a cooling-off period).
(d) Due diligence enquiries:
(i) pest & building report;
(ii) strata report;
(iii) finance approval;
(iv) review the contract; and
(v) others, as required.
(e) Cooling-off period expires.
(f) Complete the settlement.
A common enquiry for people buying real estate is ‘How do I buy a house? Where do I begin?’ There is no law about the process you need to follow. It is entirely up to you. The more experienced you get at buying houses, the more you will tailor your processes to your specific situation. The above is offered as a guide and it reflects the way that most people buy property.
Inspect the property
We have written a previous blog on what to look for when you inspect a property. It is important to cast a considered eye over the property before you make an offer. If you can detect major issues before engaging a pest and building inspector you will be able to save yourself time and expenses.
It is a good idea to take photos of the property as a reference for later. You may need to check your photos closer to settlement to see if any damage has occurred in the interim.
Negotiate the terms of the sale
Just like any contract, everything is negotiable. Your power to negotiate will depend on your bargaining position. When negotiating, consider which issues are critical to you and which are less important. Sometimes picking your battles, and only raising the critical issues in negotiations, will produce the best results. At other times, you may be able to negotiate a better deal by starting with a voluminous list of requests and negotiating down to your critical points.
Your offer does not need to be in writing, but it is often best to do so to avoid any potential confusion.
Key terms to be negotiated often include:
(b) completion date;
(d) inclusions/exclusions (dishwasher, BBQ, fridge, sound system etc);
(e) tenanted or vacant;
(f) cooling-off period (you have an automatic five business day cooling-off period when you exchange, unless your solicitor signs a section 66W certificate waiving the cool-off);
(g) work/repairs to be done by the vendor before completion;
(h) access for the purchaser to repair/alter/renovate the property before completion;
(i) access for the purchaser to store furniture in the property before settlement; and
(j) occupation of the property by the purchaser before settlement.
If your offer is based on the property being in good condition, and there being no faults or defects in the property, you may wish to include that fact in your offer. For example, you might say, “I offer $500,000 on the basis that there are no substantial structural problems with the property, there is no evidence of active or previous termite damage and that there is no major water damage in the property.” If you later discover a substantial issue in the property a comment similar to the above may give you good basis for a price reduction or for a request for the vendor to repair the property.
Once the sale has been negotiated, the real estate agent will forward a document called a Sales Advice to your solicitor or conveyancer. The Sales Advice is a non-binding heads of agreement that will give the solicitor or conveyancer a summary of the key terms of the sale.
Once you have settled on the terms of the sale with the vendor, you can then sign a contract with the agent. You will be asked to pay a holding deposit which will be equivalent to 0.25% of the purchase price (as an example, a 0.25% deposit on a $400,000 house is $1,000).
The agent will then obtain the vendor’s signature on the contract and the contracts will be dated. At that point, the vendor will be bound to the terms of the sale but you (the buyer) will be able to exit the contract. You can exit the contract for any reason, or even for no reason at all. If you do exit the contract, you will lose the holding deposit which will be paid to the vendor.
The benefit to you of an exchange with a cooling-off period is that the vendor cannot sell the property to anyone else after the contracts have been dated. It reduces the possibility of someone making a higher offer than you and the vendor selling the contract to them (called ‘gazumping’).
Due diligence enquiries
After you have exchanged the contracts with a cooling-off period, you should then contact your solicitor to commence the due diligence enquiries. The enquiries you make will depend on the circumstances but, as a minimum, one would ordinarily expect that a purchaser would review the contract with their solicitor, check council records for the property, obtain a pest and building report or a strata report, and obtain unconditional finance approval.
There is no limit to the enquiries that you can make. Sometimes the results of a pest and building report may lead you to order an invasive termite inspection (with the vendor’s approval) or a structural engineer’s report. If buying residential property, a survey is always a good report to obtain.
Your solicitor can give you some guidance about the reports that you can/should obtain. Ultimately, it is your choice about the risks you are willing to take and the level of enquiry that you want to make. Buying a bad house can cost you tens of thousands of dollars, or more. It is very worthwhile to spend some money on the due diligence to make sure that the property you are buying is not going to be a money pit.
Cooling-off period expires
Once you have satisfied your due diligence enquiries, you can let the cooling-off period expire. If you have not yet completed your due diligence at the end of the cooling-off period, you should ask your solicitor to request that the cooling-off period be extended. There is no limit to the number of times that the cooling-off period can be extended, it is entirely up to the vendor. If the vendor agrees to extend the cooling-off period, then the cool-off will be extended to that further date. If not, you will be forced to make a choice of either allowing the cooling-off period to expire and be bound by the contract, or you can exit the contract. If your due diligence enquiries are not yet complete, it is usually best to exit the contract. It is far better to lose a few thousand dollars as opposed to risk losing tens or hundreds of thousands of dollars on a bad property.
If you are satisfied with the property and intend to allow the cooling-off period to expire, you should arrange payment of the deposit to the agent’s trust account. If you are using a deposit guarantee bond, your solicitor will make arrangements with your broker for the bond to be issued to the vendor’s solicitor.
You do not need to do anything for the cooling-off period to expire, it is automatic. Once the cooling-off period expires you will be immediately bound by the contract. If you then want to exit the contract you will lose your 10% deposit (or more).
After the cooling-off period has expired, you will need to sign your loan documents with your banker or mortgage broker. If you have not signed the loan documents within a week of the expiry of the cooling-off period you should contact your solicitor and your mortgage broker or banker. A delay in signing the loan documents can result in a delay in settlement, which may cost you late settlement fees.
In the final week before settlement, you will need to make sure that any money you are contributing towards settlement is ready and available for you to draw on. Your solicitor will give you instructions on how to draw that money two or three days before settlement.
In the 72 hours before settlement, you will need to conduct a final inspection of the property to ensure that the vendor has not left any rubbish on the property and that the property has not been damaged after the date of exchange of contracts.
The final settlement typically happens in the afternoon between 12.00pm and 3.00pm. You may not get the keys until later in the day, so if you plan on taking a day off from work to move into the property you should arrange for that day to be the day after the scheduled settlement date.
The above is not intended as legal advice. You should obtain legal advice in relation to your own specific circumstances.