Under standard real estate law, if you buy a house and exchange contracts, you are entitled to a five-business day cooling off period.
House prices are rising fast, further increasing the pressure on buyers.
This electric housing environment has caused fear of missing out (or FOMO) amongst would-be buyers.
Prospective buyers are scrambling and competing for the limited homes in their price range. In an effort to seal the deal quickly, some are presenting vendors with the option of an unconditional contract.
Increasingly, we’re seeing this happen to frustrated potential buyers who’ve been in the market for months, sometimes even years.
Unconditional contracts pose serious and considerable risks, so here’s everything you need to know before you get locked into a contract you can’t get out of.
Under standard real estate law, if you buy a house and exchange contracts, you are entitled to a five-business day cooling off period, as well as other clauses and safeguards which give the buyers (and in some circumstances the sellers) space to change their minds for whatever reason.
One of the most common safeguards is a finance clause, so you can get out of the contract if your finance is not approved.
Building and Pest clauses are also often included. If the Pest & Building Report highlights termites, leaking bathrooms or other significant, costly repairs that you were unaware of, you can pull out of the sale.
An unconditional contract means there are no preconditions. The buyer and the seller are legally obliged to follow through with the sale – you can’t back out. A prime example of an unconditional contract is buying a house at auction.
The risks and how to mitigate them
We can’t deny that there are certain and heavy risks involved with an unconditional contract. However, being well-informed and aware of the risks will make a difference to your bottom line.
You have been house hunting for almost a year and keep getting outbid, but you fell in love with a house. After inspecting the property at an open house along with 30 other people, your real-estate agent suggests that ‘going unconditional’ will make your offer more attractive to the seller. The buyer agrees and you get caught up in the whirlwind of excitement and relief. You decide to skip the valuation process, and the pest and building inspection – you just want to move into your dream home!
Upon the final inspection you find out that there are costly damages to the retaining wall that wasn’t noticed earlier. The damages now become your concern and obligation to rectify. In another scenario, the valuation the bank undertakes may come in lower than the price you agreed to pay and therefore you cannot borrow the total funds you need to complete. If you can’t go ahead with the purchase under an unconditional contract, you may lose a 10% deposit and risk being sued for damages.
The process of unconditional contracts has intense highs and lows. If buyers take it slow, think it through and talk about the options with professionals in the field, the process may be less daunting.
When you first inspect a house, its often at an open home while you politely squeeze past people in the doorway or try to sneak a look at the master bedroom over some guy’s shoulder.
If you decide to make an offer on the property and you’re successful, ask to return to the property for another more in-depth and less rushed inspection.
Hire a professional to undertake a pest and building inspection and make sure you’re going in to the purchase with as much information as possible. You don’t want any surprises when moving in.
Without doing your due diligence, you have a higher risk of uncovering unexpected damages or unseen maintenance issues after you own the property. Surprises like this can be very costly.
Pre-approval means the documentation sent to the lender (the bank, for example) meets the lender’s home loan criteria. The lender indicates that they will lend you a specific amount of money if you meet certain conditions.
It’s a step in securing a home loan and it gives you the green light to begin house hunting.
For a formal approval, the lender is saying the property you’re buying is worth enough to cover the cost of the loan. It’s confirmation that the lender is willing to loan you the money.
It’s important to note that pre-approval offers usually expire after 3-6 months. Pre-approvals are also subject to a ‘satisfactory house valuation’.
Because pre-approval finance is conditional, serious issues can arise if your financial situation changes or finance falls through after signing an unconditional contract.
An appropriate approach to this situation is to buy within the lender’s conditions and to gain as much financial confirmation as possible when considering an unconditional contract.
The fear of missing out or being gazumped is real and frustrating. It’s tempting to consider whether the risk vs the opportunity of an unconditional contract might be worth it. Our advice is to always take the time to explore, know and understand exactly what you’re signing up for can give you some peace of mind.
Talk to your lender, real-estate agents and sellers about your next move. An informed and frank conversation with the relevant parties involved will make a world of difference.
If you’re considering an unconditional contract and would like to find out if it’s a smart option in your circumstances, call our experienced team on 4910 0522.