Pre-Purchase Considerations When Buying Property
For many home buyers, discussions that take place in the lead up to buying a property largely revolve around property features such as the number of bedrooms, property location and the size of the backyard. While these things are important, buyers and those investing in property should be aware of more than just appearances.
There are a host of pre-purchase considerations that come into play when buying or investing in property and it pays to understand them before you sign on the dotted line. These pre-purchase considerations include legalities, financial obligations, the legal process and relevant time frames.
What does the legal framework include?
In Australia, the legal framework surrounding property transactions varies across states and territories. Each state and territory have legislation that deals specifically with property and separate legislation that deals with title. The general term for this area of law is property law, and legislation outlines the processes that are involved in the buying and selling of property and the transfer of title.
Buying or investing in property is a legal process. Contracts of sale are drawn up according to relevant legislation and transactions will unfold according to those contracts. Property law is influenced by the common law of ‘caveat emptor’ which translates to ‘let the buyer beware’. This means that the onus is on the buyer to conduct inspections and investigate thoroughly before they enter into a contract. Failure to carry out proper research may result in a buyer losing their deposit, or risk being sued by the seller for breach of contract if they wish to pull out of the sale.
Why do I have to pay a deposit?
In a standard property sale, a deposit must be paid by the buyer to the seller. The deposit is typically 5-10% of the purchase price and is paid to secure the property and take it off the market to other potential buyers.
Paying a deposit protects both buyer and seller. When a buyer pays a deposit, they have a legal right over the property. This is referred to as a financial interest. Although the buyer does not own the property yet, a financial interest gives the buyer some rights over the property.
In the same way, the deposit provides some security for the seller. If a buyer decides they don’t want to proceed with the purchase, they may forfeit some of their deposit. The amount will vary according to state legislation, but in NSW, in order to compensate the seller for any losses, 0.25% of the sale price is forfeited if a buyer exits during the cooling off period. After the cooling off period, a buyer is legally bound to complete the transaction. If they are unable to do so then a vendor is entitled to keep all of the deposit.
A mortgage provider will often require that buyers have a 20% deposit to cover the property deposit and any upfront costs such as stamp duty.
When do I have to pay my deposit?
The deposit is generally paid after the legal process of exchanging contracts. In a standard property sale, a buyer signs one copy of the contract and the seller signs another copy. These contracts are then swapped so that both contracts are signed by both parties. This is referred to as exchanging contracts and this legal process is usually taken care of by a solicitor, conveyancer or real estate agent.
If a property is purchased at auction the buyer will need to sign the contract and pay their deposit on the spot.
Once the deposit has been paid and contracts have been exchanged or signed, the contract is legally binding on both parties.
Can I lose my deposit?
If a buyer rescinds on the property purchase, they can lose part or all of their deposit. Whether they lose all or part of the deposit can depend on when the buyer pulls out of the purchase. As previously mentioned, buyers in NSW who exit during the cooling-off period will lose 0.25% of the sale price and this is usually taken from the deposit already paid. This is the same in Queensland and the ACT, while in Victoria a buyer will forfeit 0.2% of the sale price.
In Western Australia and Tasmania, where cooling-off periods aren’t mandated, you could lose 100% of your deposit. In the Northern Territory buyers and those investing won’t incur any penalty if they exit during the cooling-off period, while in South Australia a buyer will forfeit a $100 holding deposit.
It is a different story for buyers who pull out of the purchase after the cooling-off period. These buyers can lose their entire deposit, but it will all depend on the reason for pulling out and the conditions set out in the contract of sale. A buyer cannot rescind on a property purchase simply because they have changed their mind.
However, there are circumstances when a buyer can pull out of the sale after the cooling off period. In these situations, a contract will often include clauses which allow the buyer to do so. For example, a contract with a ‘subject to finance’ clause or ‘subject to building inspection’ clause will enable a buyer to pull out of a sale without forfeiting their deposit if there are issues with their home loan or the building inspection.
What is a ‘cooling-off’ period?
A ‘cooling-off’ period occurs immediately after contracts are exchanged. The cooling-off period varies according to state:
- In NSW, ACT and Queensland the cooling-off period is 5 business days
- In the Northern Territory, the cooling-off period is 4 business days
- In Victoria, the cooling-off period is 3 business days
- In South Australia, the cooling-off period is 2 business days
- Western Australia and Tasmania do not have cooling-off periods
Cooling-off periods can also be shortened, extended or waived if both parties agree.
During the cooling-off period, further documents such as building reports can be obtained by a solicitor or conveyancer. If any problems are uncovered the sale can be cancelled. In order to do so, the buyer must write a letter or notice of termination to the agent within the cooling-off period. A buyer does not need to explain why they are cancelling the contract.
As explained above, the penalties applied to breaking contract during the cooling-off period will vary according to state. It is also important to note that there is no cooling-off period when a property is purchased at auction.
Do I need Insurance?
You should organise building insurance immediately after the cooling-off period. Although you are not living in the property yet, your property is still at risk of damage. Building insurance can be organised from the date of contract until settlement. Some mortgage providers will include building insurance with their mortgage packages.
What does ‘settlement’ involve?
The settlement process is a legal process where ownership passes from the seller to the buyer and allows them to legally take ownership of the property. During the settlement period a lender will sign off on the buyer’s home loan and their representatives will prepare all necessary documents.
Settlement day occurs on the last day of the settlement period. On settlement day the settlement agents (usually a solicitor or conveyancer representing each party) meet at an agreed time and place to exchange documents.
On settlement day a buyer’s lender will organise for the balance of the purchase price to be paid to the seller. Their home loan is drawn down, the buyer will start owing the lender and a mortgage is registered against the title of the new property.
When all documents have been signed correctly, the settlement agent will arrange for these to be sent to the titles office to officially transfer the title and register the mortgage. The settlement agent will then inform the buyer that settlement is complete, and funds have been paid. The buyer now has a mortgage.
How long does the process take?
The length of the settlement period is agreed upon by the buyer and seller but is generally between 30 and 90 days. The legal process on settlement day doesn’t take more than a few hours.
When do I get possession?
A buyer takes possession of the property immediately after settlement. A settlement agent will notify the buyer very shortly after settlement and at this point, a buyer is free to collect the keys to their new property.
How do I organise all of the legalities?
Engaging the help of a solicitor or conveyancer is the best way to organise all the legalities when investing or buying property. While you can do it yourself, even simple transactions can be complicated. A solicitor or conveyancer will have expert knowledge of the relevant legislation and can ensure paperwork is completed correctly and within relevant time frames. In addition, a solicitor or conveyancer can provide documentation to your mortgage provider and represent you on settlement day.
Understanding your financial obligations and the legal process involved in purchasing or investing in property is essential to ensure a smooth property transaction. At Mortgage House we’re committed to helping you find and own your home. Our dedicated lending officers have a wealth of knowledge and can advise you on the best home loan as well as all the things you should consider before buying or investing in property.
Why Mortgage House?
At Mortgage House, we are no stranger to the homeowner’s journey. It’s a long (but rewarding) one. It’s normal to feel overwhelmed when getting started with a mortgage, which is why we have dedicated Lending Specialists to guide you through every part of the process. Contact us to get started today!