The key difference between purchasing a property at an auction versus a private treaty is that a cooling off period does not apply to auctions. Therefore, once the hammer goes down, the winning bid is locked in and cannot be withdrawn without forgoing the deposit.
A cooling off period allows the purchase at a private treaty to consider the purchase, arrange for the necessary inspections and arrange finance. If the purchaser decides to back out of the deal within the cooling period, the penalty would only be 0.25% of the purchase price, instead of the full deposit amount.
We note however that the purchaser’s solicitor can issue a “Section 66W Certificate” to waive the cooling off period meaning that once the contracts are exchanged, the deal is locked in.
To manage the risk aspect of an auction sale, here are a few tips if you are planning on bidding for your next home at an auction.
- Have a home loan pre-approval on hand to guide you on the budget
- Stick to the budget plus a buffer in case the valuation comes in slightly under
- Work with your solicitor to have all the due diligence completed before auction day e.g. contract terms, building reports etc
- Agree on a settlement period with the vendor.
While private treaty sales allow for a cooling off period, it is still critical to move efficiently during these 5 days to be able to achieve formal loan approval at the end of the cooling off period expiry.
Exchanging contracts and paying your deposit
Exchanging Contracts is the process where your offer to buy a home is formally accepted by the vendor. Despite all the negotiations, mind games, back and forth with the real estate agent, exchanging contracts is the way you legally secure the property.
Tip: Buying a property is a large purchase, and once agreed, you must take the property as it is. It is extremely important you do all your due diligence before you sign on the dotted line and hand over your hard-earned money.
For this reason, we highly recommend that you engage an experienced solicitor or conveyancer to represent you in reviewing the contract of sale, negotiating any special conditions and performing the necessary due diligence on the property.
When you sign the Contract of Sale
On a Contract for Sale, there is a place for you to sign as the buyer, and there is a place for the vendor to sign. Once an agreement has been reached, both parties sign and these signed contracts literally get swapped, representing a “meeting of the minds” when it comes to price and other key details.
Because the Exchange of Contracts is final, it’s important that you have the contract diligently reviewed by your solicitor and negotiate all the terms upfront BEFORE you exchange.
Even though securing the right price is the most important consideration, this is not the only factor that makes up a bargain. We recommend you go through at least these 6 key terms with your solicitor when buying your next home:
Obtain a pre-approval before handing over a deposit – You want to confident to following through the purchase after handing over your hard earned cash
Avoid contract terms that allow the vendor to use your deposit
Length of settlement period – In NSW this is typically 6 weeks but extra time might be needed for a next home purchase because there are more moving parts
Property specific arrangements – There is a bit of flexibility to negotiate in relation to the fixtures of fittings of the property (to remain or be removed) e.g. matching curtains, removal of rubbish or old furniture. These can be specified in the contract.
Cooling off period – Typically 5 days but in weaker markets you may be able to extend this to allow more time to secure finance
Paying the deposit – After the solicitor has finalised the terms, you can then sign the contract and pay the deposit – the most common ways re DEFT, a manual bank transfer or arranging a bank cheque.
What happens after contracts are exchanged
Once you have exchanged contracts of sale, as your broker, we would order a valuation on the property to confirm the purchase price. We then instruct your lender to issue a formal approval and prepare your loan documents. However, in doing so, if the lender has conditions that need to be satisfied before issuing the formal offer, we will work with you to ensure these are being met.
The next step is for the lender to finally issue your loan documents. We would review the documents in detail before arranging a time to review and sign them together. This would be your formal acceptance of the bank’s loan offer.
For more tips on navigating the home buying process, download our eBook “Your Guide to Buying Your Next Home” here.