There’s a well known saying in property and legal circles known as “Caveat Emptor” – or “Buyer Beware”. Buying a property is a significant purchase, and once agreed to it, you have to 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 deposit money.
If you’ve bought a property before, you would have exchanged contracts and paid a deposit. But not every contract is the same, and if your next home is an upgrade for the longer term, the stakes are much higher as the numbers are often bigger with more moving parts. So even if you’ve done this before, exercise care and don’t get complacent during this process.
In this video, I will outline the things you need to know before exchanging contracts and paying your deposit when buying your Next Home so that you know exactly what’s best practice.
What does “Exchanging Contracts” mean?
First off, what does it mean to “Exchange Contracts”? 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.
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 these 5 key terms with your solicitor when buying your next home:
Contract Term #1 – Size of the Deposit
The purpose of the deposit is to demonstrate that you are committed to the purchase, and not just signing a contract willy-nilly. It is essentially “hurt money” should you not proceed with the purchase.
Many contracts fall over because of an inability to get finance, so this is why we strongly recommend obtaining pre-approval before exchanging contracts and paying your deposit.
Although a 10% deposit is standard, 5% is possible where there is little interest in a property, or where 5% still represents a very large sum in terms of numbers such as when purchasing luxury property.
Contract Term #2 – Length of the Settlement Period
In NSW, a typical settlement period is 6 weeks. This might be fine for experienced property investors and first home buyers, but 6 weeks might not be enough when buying your next Home. This is because the numbers are often bigger when upgrading your home, and there are more moving parts. For example, you may need extra time to sell off assets that you own, to fund the equity gap between your initial deposit and the loan your bank is providing.
These assets can include shares which are relatively quick, but may also include other properties which take more time. If this means the sale of your current home, you may require an even longer period to prepare your house for sale and secure the right price. If there is a complete mismatch between settlements, then you may need a bridging loan which is covered in one of our previous blog.
Contract Term #3 – Cooling off Period
We also covered this off in a previous blog post on the differences between buying at auction vs via private treaty. Basically, a cooling off period is a timeframe after the exchange of contracts where you are legally allowed to change your mind and pull out of a Contract for Sale.
While 5 days cooling off is standard, more days are often negotiated in weaker markets or where you are offering a strong price, but there are other reasons for extending the time frame – such as more time needed to secure finance.
But remember, this only applies to securing property via a private treaty. There is no cooling off period where a property is purchased at an auction. For further information, refer to our previous blog post.
Contract Term #4 – What can be done with your Deposit
Once you’ve paid your deposit, it often sits in the vendor’s real estate trust account earning interest, which is shared between you and the vendor after settlement. However, some contracts allow the vendor to use your deposit for their own purposes, even before settlement occurs. For example, if they are a Next Home Buyer themselves, they may wish to use your funds to pay the deposit for their own Next Home.
If you see this, this is not standard. Get it removed. It puts your deposit at risk if the vendor walks away from the contract and you’ll end up needing to initiate legal proceedings to get it back.
Term #5 – Property Specific Arrangements
As mentioned earlier, once you’ve exchanged contracts, you must take a property “as is”. However, there is a bit of flexibility to negotiate in relation to the fixtures and fittings of the property. Fixtures are objects fixed to the property, such as air conditioning units, kitchen and bathroom amenities, and even trees on the property. Fittings are objects that can be removed such as furniture, appliances such as the fridges, blinds and curtains.
In your contract negotiations, you can request that certain fittings you like remain (such as matching blinds and curtains), or certain fittings removed (or kept!), or simply that all rubbish or old furniture be disposed of, which is not part of the property at all.
Paying the Deposit
Once your solicitor has finalised the terms, you can then sign the contract and pay the deposit. Paying the deposit is a simple administrative step and we see three common ways of making payment.
1. Making a direct debit using DEFT – this is the most common method of payment if you have won a property via auction. If you are the winner, the selling agent will present to you an online portal on their mobile phone or tablet. In this portal you simply enter the bank account details of where your funds are held and authorise payment. Your deposit is then automatically direct debited.
2. Making a manual bank transfer – this is often done when there is a Private Treaty. Here you will transfer funds directly to the Real Estate agents trust account. Since a home deposit can be quite large, you may need to visit a bank branch to request an Electronic Funds Transfer (EFT) or Real Time Gross Settlement payment (RTGS).
3. Arranging a Bank Cheque – For both Auctions and Private Treaties, you can visit the branch to request physical bank cheques as a means of paying the deposit. However this method is becoming less common as financial services become more digital.
We hope this video has helped you see the matrix of exchanging contracts, beyond just trying to get the best price as there are other terms that are also important.
When the time comes, we trust you will now have the confidence to sign on the dotted line and pay your deposit.
Speak to a Broker
We hope this has been helpful to you. If you have any questions or comments on this topic, you are more than welcome to get in touch with me () or anyone in our broking team.
For more tips on getting your next home, please stay tuned or head to our Youtube channel – “The Next Home Series“