Understanding Your Property Contract
When buying property, it’s essential that you get good quality independent legal advice.
Some people try to do their conveyancing themselves, but it is fraught with danger.
Not understanding the legal side of purchasing could leave you seriously out of pocket and with no property to show for it.
To get an idea of some of the most common traps people fall into, we caught up with Steven Sidorovski from Zenith Legal.
Formal loan approval
When buying an established property, Steven says one of the most common mistakes he sees made is people failing to get their finance formally approved in time.
They may have conditional approval from a lender and have a deposit ready, so they find a place and make a purchase.
They then have a cooling off period (in NSW and Qld), where they can get legal advice and have inspections done, before the contract becomes binding.
During this time, if something is not right, they can withdraw from the sale and only forfeit their deposit.
But they should also make sure their finance will be formally approved.
Often, Steven says people will let this time lapse and find out later that they can’t get finance. By this time, it’s too late and they are liable for the lot.
“They may not heed or read advice,” Steven said. “They don’t check how much the loan approval is for, or liaise with their broker to make sure they know how much money they actually need to come up with.”
Steven recommends getting formal approval before the contract becomes binding and in this time ensuring all building and pest inspections, strata reports (for units), survey reports and building certificates are carried out.
Auctions can put you under the hammer
When purchasing by auction, you don’t get a cooling off period, so once you’re the successful bidder, the 10% deposit is paid on the day and you’re locked in.
Therefore it’s even more important to be formally pre-approved for finance.
This is especially difficult because banks want to do their own valuation on a property before lending against it and, if there is a big auction blowout and you spend $500,000 on a property the bank thinks is worth $400,000, you may find yourself unable to finance the purchase.
Is Off The Plan really your plan?
Like auctions, it’s risky to buy off the plan (OTP) or a house and land package which is yet to be built or registered.
Those projects are subject to registration and you can’t get a valuation until the project is completed.
Your financial circumstances, or ability to service a loan, may change significantly between the time you purchase and the time the property is ready for settlement (often several years).
Steven says solicitors will often require clients sign a waiver when they are purchasing these speculative properties, to show they understand the risk.
This part of a legal contract has caused heartache for buyers in recent years, so if there’s one on your contract be careful.
A sunset clause is designed to hold an OTP project accountable for being ready on time.
The ‘sunset date’ is the agreed date the property must be ready to settle and if it’s not, either party (vendor or purchaser) can pull out of the sale and the purchaser gets their deposit back.
A recent scandal saw buyers purchase off the plan and the market grow significantly during the construction period.
Developers, realising they could sell the properties for more money, allegedly delayed the completion of the project so it missed its sunset date.
They could then pull out of the sale, return deposits to the original buyers and on-sell to new buyers for much more money.
Instead of being rewarded for savvy timing of the market, the original buyers were denied of more than $100,000 of equity and were stuck without a property at the height of a seller’s market.
Steven said this resulted in the rules being changed to say that vendor and buyer must both agree before a vendor pulls out of a sale.
Still, it shows the importance of understanding a contract.
Other traps of OTP/Unregistered
Steven said buyers often don’t realise that all plans for OTP or unregistered land purchases are in draft format.
“You expect a 500sqm block, but this can actually reduce,” he said. “This could be because of council restrictions or intervention, but land sizes can fluctuate.”
Likewise, OTP apartments might see floor plans, views, or materials used in the development change.
Steven said buyers should ensure there is a clause in the contract that stipulates how much something can change, before the buyer can pull out.
This should also ensure any fittings or materials used are of similar quality to what was originally planned.
If you need help understanding your property contract, and you want to talk to a professional, or you want general assistance on your property investment journey, speak to our team and let’s see if we would be a good fit for you!