By Rich Harvey, CEO & Founder, propertybuyer.com.au
For most of us the most significant financial undertaking we’ll make in our lifetime is purchasing a home. Of course, the seriousness of that decision can be masked by the fact that buying is as simple as sweeping a pen across the signature line.
So, what are some of the nuances about contracts that you must understand before you decide to proceed with an acquisition?
Here are five contract essentials every buyer should know.
1. Contracts vary between states and territories
There’s increased prevalence of borderless purchasing among both investors and homebuyers looking to relocate.
As such, you and your representatives must understand that property law is a states-based responsibility. The rules for buying in one jurisdiction won’t be the same as in another.
For example, in Queensland and NSW a standard contract will include a five-day cooling off period where the purchaser can pull out of the agreement during that time. They must, however, pay a penalty of 0.25 per cent of the purchase price from the deposit. In Victoria, the cooling off period is three business days and the buyer can get a full refund of the deposit, less $100 or 0.2 per cent of the purchase price (whichever is greater).
This is just one example of where an unwitting buyer might get caught out if they don’t understand the different rules governing property purchases throughout the country.
You’ll also discover that each jurisdiction has its own standard contract proformas specifically created to help fulfil local legislation. Many of these proformas are designed by the relevant real estate institutes but can come from law societies or other associations as well.
The lesson is this – don’t fool yourself into thinking real estate contracts are a one-size-fits-all-locations affair.
2. Managing key dates is crucial
For a contract to proceed smoothly through settlement and onto handover, several conditions with key dates will need to be met. For example, many people purchase subject to gaining finance approval withing 14 or 21 days of the contract date.
Fortunately, a reputable solicitor or conveyancer will plainly set out these key dates and what must be achieved before they fall due.
It is of the utmost importance that you fulfill your responsibilities for these conditions in a timely fashion and alert the sellers if problems arise.
Why is this vital? Well, if a key date passes and you don’t communicate any problems (or request an extension if needed), then it will be deemed under law that the condition has been met.
For example, if you have a building and pest report due on the 10th, but the inspector can’t attend until the 11th, don’t take a “she’ll be right” approach. Request an extension of the date to meet that condition. If you don’t and the report comes back later citing some major structural problems, you’ll have little recourse or remedy.
Don’t gloss over important contract dates – you and your representative must stay on top of them.
And for auctions- remember – there is no cooling off period. When the hammer comes down and you are highest bidder – there’s no going back.
3. Conditions are flexible
It’s surprising the number of new clients I meet who think that the clauses in standard contract proformas are hard and fast.
Yes, a contract is a legally binding document, but they can include any condition you want as long as both parties agree.
From the amount of deposit to leaseback arrangements, you as the buyer can request or approve whatever you wish as part of the deal.
This also means you can flex on something other than price, which is where smart negotiators like buyers’ advocates earn their keep.
For instance, say you are approved for finance to a top figure of $550,000, but another buyer has offered $565,000. Ask the seller’s agent what will make your offer more appealing. It could be agreeing to a longer settlement period that tips the decision in your favour.
So, work creatively with clauses to help bring about a successful purchase result.
4. You need to know your entity
There are pros and cons to purchasing property in different legal entities.
Buying an investment property in your own name has tax advantages such as negative gearing. On the other hand, buying in a discretionary trust might let you attribute some of the rental income to your spouse or kids.
The key is to speak with your accountant well before you look to purchase a home. If you try to change the buying entity midstream, it’ll trigger a whole new contract and may reopen negotiations. Also, buying in the wrong entity name with a view to transferring ownership later will likely mean costly professional advice and stamp duty charges.
5. Seek specialist advice
There are several professionals who can help guide you through the buying process, but when it comes to contracts, your buyers’ advocate and solicitor are top of the pile.
A legal document of this nature comes with a range of responsibilities for both parties. Breaching those responsibilities, or not fully understanding what you are signing on for, can result in extraordinary penalties and financial implications.
There is no doubt you must consult with experienced professionals who can guide you through the contract process.
We can refer you to the best local solicitors and conveyancers in each state to help you.
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