Woo-hoo! We’ve just purchased ourselves a property for our first ever renovation project (don’t worry, that picture above isn’t it!). It’s in a regional town in Victoria called Traralgon. Well, actually we made our offer two weeks ago and had the offer accepted on that day, but we are only now signing contracts this week…things work a little slower it seems in the country!
We are super excited and busily completing our major due diligence tasks before the contract goes unconditional in another 14 days, this includes:
- Full renovation costing
- Finance approval
- Building inspection
- Pest inspection
I’ll definately be giving everyone the low down on this entire project, so stay tuned over the upcoming weeks and months for updates! In this post, however, I wanted to talk about signing contracts as this is the current activity that has been occurring round these parts! Particularly, I wanted to talk about some of the common features and conditions that people include in contracts and some things to be on the lookout for. I’m basing this discussion on a Contract for the Sale of Real Estate in the state of Victoria, Australia. So you may find that some of the things I’m discussing may not be relevant for you, however, many contracts may have similar types of sections or conditions – so take this as more of a theoretical discussion with a take home message that is to make sure you understand what you are signing and that you ensure that your best interests are looked after as much as possible – by you!
A quick disclaimer – I’m certainly no legal professional, so this article is just general information and some of my experiences. Making sure you are looked after means having a good team of professionals around you to help you understand what you are signing. I do the best I can to understand my contracts, however, I also have my legal team look at them and provide me with professional advice and I think you’d be wise to do the same if property contract law is not your area of expertise!
Cooling off period
This refers to a period of time following signing of the contract where you may end the contract without major penalty. Cooling off periods sounds great, but they don’t apply to all contracts and they come at a cost.
As an example, here in Victoria there is a 3 day cooling off period, however, it doesn’t apply when:
- You buy at auction
- You receive independent legal advice before signing
- You buy industrial property, commerical property or a farm
- You’ve already signed a similar contract before for the same property
- You’re an estate agent or corporate body
It will also cost you to enact this ‘escape clause’, either $100 or 0.2% of the purchase price, whichever is more. So if you purchase a house at a cost of $250,000 as an example, and you decide to use the cooling off period to end the contract, it’ll cost you $500. Not serious money, but enough to make you think about signing contracts all over town and then just pulling out!
Loss or Damage before settlement
Although the contract states that the vendor carries the risk of loss or damage until settlement, the purchaser cannot delay settlement because of any loss or damage to the property and can only claim compensation from the vendor after settlement. I highly recommend that you read all of the contract carefully so that you understand what happens in the case of loss or damanage prior to settlement.
We have had a circumstance once where we did our final inspection on a property just 3 days before the intended settlement date and found out there was a major issue that we had not been made aware of and had actually been concealed. It’s a long story that I’ll cover some other time, however, just as an indication it involved hydroponics, illegal wiring and a whopping great hole in the wall! In this particular circumstance we had our legal team write a letter the vendor’s legal team and thankfully common sense and better judgement prevailed, with the vendor rectifying the issue to the tune of about $3000. Settlement was delayed, however, no one got too narky and the whole thing was just a bump in the road.
I did read an article once though about some people who purchased a house which was severely damaged by fire during the settlement period. They were mortified to found out that they would still have to settle on the property. On the advice of several property experts we take out insurance on a property as soon as we sign a contract on that property.
I’ve purchased property unconditionally before, purposefully to make the offer more attractive to the vendor where they had received multiple offers. This wasn’t in the current financial climate though and to be honest, I probably wouldn’t do this now. Thankfully, it all worked out fine at the time.
One of the first conditions you should make sure your purchase contract includes is a condition relating to you, the purchaser, obtaining finance. There is a space on standard real estate contracts which ask for the lender. Often when a real estate agent fills that part out they’ll write something like ‘Any recognized bank’ or something similar to this. We tend to write ‘Lender of the purchasers choice’. This gives us flexibility as often at the time of signing we haven’t necessarily committed to a particular lender and don’t want to limit ourselves to only ‘recognized banks’.
We always put in a special condition that relates to obtaining a building inspection and my advice on this one is that whether or not you plan to get a building inspection you should include this condition anyway. There can be times where you need to get out of a contract and in those times the more ways out you have the better!
My thoughts on getting a building inspection are that they are worth the money you pay, certainly if like me, you don’t have any sort of building or trade background. We have purchased once without a building inspection. The house was relatively new and we thought, ‘nah, surely it’ll be fine’ – this was the one where we had issues (see my comments above relating to hydroponics, illegal wiring and a whopping great hole in the wall!).
Now the wording of this condition is important. Often when a real estate agent has prepared a contract, you’ll receive it and the wording will be something along the lines of this:
“This sale is subject to the purchaser obtaining a building inspection report by XX/XX/XXXX. The purchaser may end this contract if the report shows any major structural defect, but only if the purchaser serves written notice on the vendor together with a copy of the report by XX/XX/XXXX. All monies must be immediately refunded if the contract is ended.”
This wording may seem fine at first glance, however, there are a few problems with this approach. These problems are:
- Who defines what sort of issue is to be considered a major defect?
- The issue must be structural (affecting the structural integrity of the property).
There are many types of building issues you may find that will not qualify for this ‘major structural defect’ definition and so this clause is very limiting.
What you really want is a special condition that basically states that if there is anything in the building report that is not to your satisfaction then you have the right to end the contract. As an example, for us in this renovation project, if we find any significant issue (major structural issue or otherwise) that will drastically impact upon our renovation budget then the deal just no longer works for us and will not be profitable so it was imperative for us to have this clause reworded. We went with:
“This sale is subject to the purchaser obtaining a building inspection report by XX/XX/XXXX. If the report is not to the satisfaction of the purchaser, the purchaser may end this contract, but only if the purchaser serves written notice on the vendor together with a copy of the report by XX/XX/XXXX. All monies must be immediately refunded if the contract is ended.”
The pest inspection condition is similar to the building condition. Often the contract you’ll be provided with from the real estate agent state that you can end the contract if your inspection finds ‘current termite activity’. The problem with that statement is that your termites may have been and gone but your property has major damage from them (did you put that building clause in??). Wording we had sent to us on a contract recently said that for us to end the contract there must be evidence of past or present termite infestation. To me, that’s a bit like the ‘major structural defect’ issue – who is going to define ‘infestation’?
Once again you want a condition here that states that the report must be to your satisfaction.
Signing a contract is a big deal. Often buying your home or an investment property will be the biggest purchases that you ever make. You need to:
- Seek professional advice about the contracts you sign if you are not an expert (or at least understand the risk if you don’t).
- Increase your own knowledge. I once used a conveyancer who told me that the standard ‘major structural defect’ building clause couldn’t be changed and I should just sign it! Luckily I had just enough knowledge to not settle for that advice and I did in fact get the condition changed. Needless to say I don’t use that conveyancer anymore! It really pays to increase your knowledge too and to read the contracts yourself to understand them and go through them with your legal team. With every purchase you make – and hopefullly it will be many you will build up your knowledge base substantially.
Here is a sample contract from the REIV: Sample Contract
Note that all contracts can be different even within the same state, so always have your solicitor check over a contract before you sign!