Unconditional Contracts

[digs75]

Would be great to get some advice on this one ......

My partner and I have in the last couple of days missed out on a couple of properties due to other buyers signing an 'unconditional contract' to get the property.

We are not so keen on this idea ourselves as we believe that doing due diligence first (i.e .strata check, pest/building inspections,etc) is important, to cover ourselves should something come up in the reports.

Can anyone tell me how 'high risk' a strategy is signing an unconditional contract and what the potential pitfalls can be ?

 

[Peter_Tersteeg]

The obvious pitfall is that you can't get finance (if you need it) and you can't complete the purchase. You end up liable for the 10% deposit (or more) and no property to show for it. Avoiding a finance clause can be a great insentive, but you need to have a good understanding of just how strong a finance application would be. As a general observation, if you need to borrow more than 90% of a property purchase price, ALWAYS have a finance clause.

The same goes for building and pest inspections. You don't want a property that's not what you expect. My feeling is that if an agent won't accept building and pest conditions then you need to ask if they know something about the property that you should.

The risks with unconditional contracts is variable depending on the property and your financial position.

Are you buying in NSW? They generally don't have special conditions as you deal with all these prior to exchanging.

 

[digs75]

The obvious pitfall is that you can't get finance (if you need it) and you can't complete the purchase. You end up liable for the 10% deposit (or more) and no property to show for it. Avoiding a finance clause can be a great insentive, but you need to have a good understanding of just how strong a finance application would be. As a general observation, if you need to borrow more than 90% of a property purchase price, ALWAYS have a finance clause.

The same goes for building and pest inspections. You don't want a property that's not what you expect. My feeling is that if an agent won't accept building and pest conditions then you need to ask if they know something about the property that you should.

The risks with unconditional contracts is variable depending on the property and your financial position.

Are you buying in NSW? They generally don't have special conditions as you deal with all these prior to exchanging.

Yes we are buying in NSW and all our finances are in place. However we would not feel comfortable signing an unconditional contract prior to the appropriate inspections being conducted.

 

[vaughan]

My partner and I have in the last couple of days missed out on a couple of properties due to other buyers signing an 'unconditional contract' to get the property....

We are not so keen on this idea ourselves as we believe that doing due diligence first (i.e .strata check, pest/building inspections,etc) is important, to cover ourselves should something come up in the reports.

WHat makes you think the other buyers haven't done their DD? They may have got everything sorted BEFORE making their offer.

 

[Aaron_C]

Standard practice in NSW is to get unconditional finance approval organised before exchange. I suggest you do that.

 

[thepeoplesagent]

You can sign contracts with a cooling off period. During this time you can organise pest/building reports, finance etc. If you can get finance or don’t like the result of the results you can rescind the contract and will lose .25% of the purchase price.

 

[Jake Milne]

You can sign contracts with a cooling off period. During this time you can organise pest/building reports, finance etc. If you can get finance or don’t like the result of the results you can rescind the contract and will lose .25% of the purchase price.

^ This is correct but needs clarification.

When you buy a residential property in NSW there is a five business-day cooling-off period after you exchange sale contracts. During this period you have the option to get out of the contract as long as you give written notice. The cooling-off period starts as soon as you exchange and ends at 5pm on the fifth business day. Most agents will let you cool off without penalty; some will request that you pay the 0.25%.

In Victoria buyers used to remove the cooling off period to make their offer 100% unconditional but the legislation was changed recently. In NSW, as far as I’m aware, the practice of withdrawing cooling is still used.

TIPS for making a strong offer:

• Do not organise a building and pest inspection before you submit an offer via private sale. (Sorry Vaughan) The agent will know you're keen and get you to pay more money.
  
• Do not put a building inspection clause in the contract – do it in your 5 day cooling. Most Building Inspectors can do an inspection within 24hours of your call.
  
• Do not put a pest clause for reasons above.
  
• Do not include a finance clause unless the mortgage broker has serious concerns
  
• DO include special conditions for access prior to settlement, and goods + chattels + inclusions must be in working order
  
• DO talk to the agent and negotiate/agree on price prior to your offer

 

[Jake Milne]

Just another quick note...

It's completely natural to get the jitters when making an offer. Confidence is key if you're going to win.
Make no mistake, if you’ve chosen a cracker you’ll be up against competition.
Be reassured that other buyers feel the same as you too.

If you want to be successful with your property purchase you have to be sure that you want it.
If you're really uncertain perhaps you're rushing in?
Perhaps you haven't seen enough other properties to know you really like this one?

TIPS: Buy with confidence
The deal of a lifetime comes once a week. Don’t be emotional, there’ll be another one.
Organise your team – get a conveyancer, broker, and building inspector ready; it takes a quick Google search and a phone call to do this for each.
Be confident that you can organise the inspections in time to cool off by talking to the inspector.
Be confident that your finance is okay by talking to the broker
Be confident that the contract checks out by talking to your conveyancer.

Be confident. Make an offer.

 

[thepeoplesagent]

Might be worth noting that 80% of sales through my office are actually via a 10 day cooling off period (10 business days). As these days, many purchases struggle to get everything done in 5. In my experience most vendors have no issues granting this time frame. Having a longer cooling off period will also NOT make any difference to the settlement date.

 

[vaughan]

Do not organise a building and pest inspection before you submit an offer via private sale. (Sorry Vaughan)

No, I get a verbal acceptance of the offer, then do the inspections. If they are good then I pay the 0.25% and lock it in. There is a possibility that this won't work in a bullish sellers market, but that's not a concern right now.

The agent will know you're keen and get you to pay more money.

Is there *really* a problem with an agent knowing I am a serious buyer? How can they get me to pay more money?

 

[thepeoplesagent]

No, I get a verbal acceptance of the offer, then do the inspections. If they are good then I pay the 0.25% and lock it in. There is a possibility that this won't work in a bullish sellers market, but that's not a concern right now.

Hi Vaughan,

You don’t need to be in a "sellers market" to lose a property. You only need a good property which is priced correctly for there to be competition. But I understand what you’re saying.

I have had cases where buyers have used your strategy. Most of the time everything works out fine and they end up buying the property. But every now and again, whilst their organising a building report or waiting for its arrival another buyer plucks the property from under their nose.

Now, they may have not paid .25% but have lost the money they paid for the pest/building reports which can be around $600.

Also keep in mind that the agent is supposed to work for the vendor. My thinking is, a bird in the hand is better than the two in the bush, so I will not purposefully go out of my way to find another buyer. I will keep promoting the property and continue to collect buyers details in case the sale does not proceed.

But, what about the buyers who have already seen the property? If they make an offer, we as agents have to disclose this to the owners.

And a buyer wishing to pay the same or more and happy to sign contracts and pay .25% straight away often looks very attractive to a vendor.

You may be surprised how much us humans are prepared to sell our souls for… Then again I am an agent and apparently don’t have a soul.

 

[digs75]

This is correct but needs clarification.

When you buy a residential property in NSW there is a five business-day cooling-off period after you exchange sale contracts. During this period you have the option to get out of the contract as long as you give written notice. The cooling-off period starts as soon as you exchange and ends at 5pm on the fifth business day. Most agents will let you cool off without penalty; some will request that you pay the 0.25%.

In Victoria buyers used to remove the cooling off period to make their offer 100% unconditional but the legislation was changed recently. In NSW, as far as I’m aware, the practice of withdrawing cooling is still used.

TIPS for making a strong offer:

• Do not organise a building and pest inspection before you submit an offer via private sale. (Sorry Vaughan) The agent will know you're keen and get you to pay more money.
  
  

  ^ [*]Do not put a building inspection clause in the contract – do it in your 5 day cooling. Most Building Inspectors can do an inspection within 24hours of your call.

  Our last offer we stipulated all the subject to 'building/strata/pest checks' on the signed contract, that we feel in the end lost us the property to a competitor who went in with unconditional. Might take your advice here on the next offer we make.
  
  
• Do not put a pest clause for reasons above.
  
• Do not include a finance clause unless the mortgage broker has serious concerns
  
• DO include special conditions for access prior to settlement, and goods + chattels + inclusions must be in working order
  
• DO talk to the agent and negotiate/agree on price prior to your offer

 

[dexx]

I have an accepted offer on a residential block (i'm the buyer). Finance approval was a condition i requested and was written into the contract. Unfortunately the bank is taking longer than expected. It looks good, but will come in after the due date. Ive asked the seller for an extension and he has declined. I suspect he now thinks he can get more and wants this sale to fall through. The remainder of the settlement period still gives me plenty of time (4 weeks).

I'm thinking of requesting that the finance approval clause be removed from the contract - making it an unconditional sale. I risk losing my deposit ($5000) if the sale falls through. But that is a small price compared to the asking $$ of similar properties. Can the seller refuse to allow the contract to become unconditional?

 

[oc1]

I risk losing my deposit ($5000) if the sale falls through. But that is a small price compared to the asking $$ of similar properties. Can the seller refuse to allow the contract to become unconditional?

Your risk is much more than that. It is 10% of the purchase price plus the difference between what you offered and what the new buyer pays if your offer was higher. Be very very careful here. Your risk on is very real if you default on an unconditional contract.

Oscar

 

[Aaron_C]

Can the seller refuse to allow the contract to become unconditional?

No he can't. Only go unconditional if you are sure you can get finance.

 

[dexx]

No he can't.

This there a ruling or regulation or somesuch that i can quote to the agent?

 

[Peter_Tersteeg]

This there a ruling or regulation or somesuch that i can quote to the agent?

Not really. If you don't notify the vendor that the finance is not available or get an extension, the contract is assumed to become unconditional by default.

These days about 50% of the insurmountable finance issues we see are found almost immediately after submitting the application. Most of the rest come when credit takes their first look at the deal, usually about 2-4 days after submission. Valuations can be a problem but it's in the minority and we usually order these upfront so we've got that result fairly quickly as well. At this point your broker or banker should have a fairly good indication of the viability of the deal even if it is taking longer to get the full approval.

Essentially with most finance applications, I'm usually about 95% certain of an approval within a week. The rest of it is just getting an extra payslip (which is really just doting the i's) or waiting for the formal approval.