Are you thinking of attending an auction for a property that you are interested in buying?
Do you know that if you are successful at the auction, or if you make an offer to the vendor that is accepted by the vendor after the auction but before midnight on the day of the auction, then you have no cooling off period?
Do you know why we have cooling off periods in NSW?
What does the law say about auctions in NSW?
There are laws regarding how auctions should be run, and we partially covered this in our article about rental apps and auctions which you can read by following this link. Those laws exist to try to protect potential purchasers from things like dummy bids or vendor bids artificially driving the price up.
For the purpose of this article we will talk about how the laws are different if you are the successful bidder. If you are the successful bidder it is as if you exchanged contracts with a section 66W certificate, that is:
- There is no cooling off period, you have very limited grounds to rescind the contract
- You must immediately pay the deposit, usually 10%
- You must immediately sign the Contract, and only bidders who were present and provided identification can sign the contract (so for instance, you probably will not be able to add your spouses name unless they were present at the auction and have suitable identification) or arrangements had been made for that to happen.
What is a cooling off period?
The legislation for cooling off periods was originally introduced to try to stop the practise of gazumping, which is where the vendor or their agent accepts an offer from a purchaser, but then later accepts a higher offer from another purchaser. The cooling off period gives a period of time where the purchaser, but not the vendor, can rescind (withdraw).
The reasons that a purchaser may need time before being unconditionally bound to go ahead include:
- Obtaining formal written loan approval from the bank, which will include the bank having time to value the property
- Obtaining a pest and building inspection of the property
- Obtaining legal advice in regard to the Contract
Why do I need a cooling off period?
During the cooling off period, which is five business days unless it is extended by agreement, the purchaser can rescind (withdraw) and they only pay a 0.25% financial penalty.
The purchaser needs time to make sure that they can actually get a loan, that they can get a loan for this property, that the property doesn't have any structural problems and isn't infested with termites etc., and that there aren't any conditions in the contract that would make the property unattractive to the purchaser.
The purchaser would also sort out their deposit and other pragmatic matters that are required once the property is unconditional.
Why do I need legal advice?
There are many reasons that you need legal advice on a contract, even a contract where you have already exchanged at auction, and it would take too long to cover it in this article. However, in the case of an auction the reason you need legal advice before the auction is that there may be terms in the contract that cause you to reconsider whether you will purchase that particular property. Also you need to obtain formal written loan approval and pest and building reports, and we can help you with that process.
You should come and see Bruce Coode in this office before you go to the auction, if you are not successful at the auction then he will not charge you for the first two or three contracts that he looks at. Obviously there is a lot to be done, so it is best not to wait until day before the auction to see him.
For example, we recently saw a couple who were purchasing a house and land package in a housing estate. What the contract actually provided was that they had to first exchange contracts with the builder, and then pay the builder approximately $10,000 and go through certain planning stages before they could exchange contracts on the land. The contract for the land made it plain that the housing estate could change the block of land offered to the purchaser even after the purchaser had signed with the builder, and could offer the purchaser a smaller block of land for the same price. The building contract provided that if the block of land changed then the builder could add additional fees, the contract did not say what those additional fees might be. This change in the block of land and the subsequent fees were not grounds for rescinding either the contract with the builder or the contract for the land. Even in a 'reasonable' situation where the separate block of land was offered, and the fees simply 'started again' the purchasers were looking at paying an additional amount of $10,000 in fees to do the initial stages (such as adjusting the house design for the land and obtaining council approval) and delays while the builders went through those stages again. This would equate to paying interest on their mortgage for the new property and rent on the current property for longer than budgeted.
We have also seen situations where the contract specifically discloses that there is work contrary to council approval on the property, or a special condition allowing for delays of many months in settlement when the purchasers were wanting to sell their property and organise simultaneous settlement of both properties.
Why do I need a pest and building inspection?
If you are purchasing a stand alone property you should obtain a pest and building inspection. If you are purchasing a strata property you should purchase a strata inspection. We can arrange these for you, usually within 3-4 working days.
Firstly, at an auction, a pest and building inspection can be a key piece of information to help you decide the worth of the property. The pest inspection may disclose termites, meaning you don't want to purchase at all, or the building inspection may disclose work that needs to be done which will impact for you the amount of money you are willing to spend on the property, as you now need to budget for these additional works.
Secondly, if you have already exchanged contracts at an auction there is no point obtaining a pest and building inspection because nothing in the report will result in you being able to rescind the Contract. The writer once acted for a woman who insisted on exchanging contracts with a section 66W certificate (that is, no cooling off period) after ordering a strata inspection but before it had been delivered, against the writer's verbal and written advice. Fortunately it was a race with another purchaser and our client lost, because when the strata inspection turned up it disclosed that the owners' corporation (strata) of this large apartment complex was teetering on the brink of insolvency, the bank had a mortgage over the common property of the building and was threatening to foreclose. Again this would not have been grounds to rescind the Contract and our client would have incurred considerable expense when the bank took over the strata and started proceedings against all the owners for their overdue loan amounts. One unique thing about owners corporations is there is effectively no cap on the expenses that they can incur, and then recover from the owner, in pursuing unpaid levies. The potential cost to our client was probably immeasurable.
Thirdly, if your bank later finds building defects they may revoke your loan. It isn't just a question of whether you are happy with the property but also whether your bank will lend on that particular property.
Why do I need formal written loan approval?
We have seen purchasers ultimately knocked back by banks even though an online calculator, or a manager inside of branch originally told them that they will have 'no trouble' getting a loan for that amount.
Some of the reasons that we have seen purchasers rejected by banks include:
- The value of the property is not high enough for the bank
- The property itself fails some other internal test within the bank, such as having a partially finished addition
- The bank has additional requirements for that particular suburb or that particular style of property, such as a minimum property size
- The bank decreased the percentage they are willing to lend (so only 80% instead of 90%) because of some factor that came up during formal checks
- One or both of the purchasers has an issue in their credit history that they were unaware of, such as a missed Telstra bill or a credit card they applied for but were rejected a couple of years ago
Having formal loan approval isn't just about making sure you can actually get a loan, but also about making sure that you don't suffer delays. If the bank hasn't progressed to the state of formal loan approval then they may not be ready by the settlement date, despite their promises. The penalty interest rate on most contracts is 8-10% per annum, calculated per day, if you are not able to complete the purchase on time. On a $700,000 contract for purchase of land, if there is a balance of $630,000 owing (after payment of 10% deposit) and the rate of interest is 8% and the bank runs a week later than promised, the purchaser could pay $966.58 extra on top of the purchase price, (or $138.08 per day). There will also be a legal penalty of $350 to $500 payable by the purchaser because the vendor has to issue a notice to complete.
Even if another bank will subsequently lend money to the purchasers, typically the purchasers now do not have enough time to formalise that loan prior to the settlement date and risk losing their deposit, but at the very least will incur the additional cost of daily interest. More times than we can count we have seen banks promise to obtain certain things within certain time periods for customers and then fail, blaming lawyers, vendors, other departments within the bank or the purchasers themselves.
We have seen a situation where a borrower was knocked back for a loan, coincidentally the day after she walked into the branch eight months pregnant to pick up the formal documents. The rejection was ostensibly on the grounds of insufficient income to cover the loan (which had been checked at the very initial stage, banks do not progress to formal loan document preparation until they have ticked all their boxes). The bank would not revisit it on the basis of a joint loan including the husband's income, stating his income would not be high enough without asking what his income was. Another bank then offered a much larger loan on the husband's income alone. While discrimination on the basis of pregnancy is illegal, it is costly to prove that that is what occurred. Banks have many reasons for knocking back loans that you can't anticipate. By the time you have exchanged you just need to get the loan finalised and do not have time to sue the bank for discrimination.
We have seen situations where the banks change key terms in loans, like the interest rate, but by this time the bank is running so far behind schedule that the purchaser has neither the time nor the energy left to argue.
Another example is we often have banks try to back out of loans because the purchaser has recently entered into a binding family law settlement, after the customer was told this would not be an issue, because the banks are afraid the spouse will 'sue' the bank. While we are generally able to convince the bank that binding means binding (based upon legislation from the 70's which the banks really should be across by now), this can cause delays of up to two weeks while they send the documents off to the department that understands family law. There can be similar delays if the vendor turns out to be an executor selling on behalf of a deceased vendor, or if the vendor was recently bankrupt.
The point is to not become legally bound to buy a property until you have written loan approval.
What should I do?
Make an appointment to see Bruce Coode and obtain advice on your auction contract before you go to the auction. He will not charge for the first two or three contracts if you are unsuccessful at those auctions.
Bruce Coode has not only been practising law in Penrith for forty years, but he has an extensive property practise including not only purchases of real estate but also disputes with Council, litigation surrounding property and commercial contracts, compulsory acquisition by government departments and drafting and advising on complex contracts. He has in the past given lectures on real estate to universities and professional organisations such as valuers, and he has previously acted for three local Councils. Bruce understands more than your basic conveyance and understands that for many people the purchase of a property is one of the largest financial decisions they will make. He will explain things to you in plain English and help you to navigate the stressful situation that is buying a house.
If you would like some more information about our firm, or about real estate generally, then follow the blue link to the right for more articles on this topic.