These notes are taken from a property purchase in VIC in the year of 2020. It can be more simple or more complicated as not all sales are the same, but here’s a general idea:
Contact a bank or a mortgage broker to help you get a pre-approval. The bank will assess your financial situation. That’ll give you an estimate of how much you can afford to purchase. Try to get all your finance assessed as much as you can during pre-approval. The pre-approval will take into account your situation, including any government grants/deposit/gifts, then based on your income and job history, credit rating, and other lending criteria, the bank will provide you with a number they’re comfortable lending you. Using this number (the loan amount + deposit + give it some room for additional fees – conveyancing, building inspection, any stamp duty or title transfer if the bank is not paying those, etc.) you should know what your maximum budget is to put in an offer.
Pre-approval is the amount up to which the bank will lend to you, but it is also dependent on what the bank evaluates the property you intend to buy is worth. For example, you can have pre-approval of up to $600,000, but the bank evaluates the property to be worth $580,000. Therefore, they will only lend you $580,000.
Once you get pre-approval, you can start looking at properties, inspect, negotiate, review a contract of sale. When you’re inspecting the property, make sure you check everything. I mean everything. Turn on every single button/tap/machine you can find. Check for scratch/cracks on the walls. Is the exhaust fan working? What about all the lights – inside and outside? Are the doors working? Can they be closed tightly? Oven, dishwasher, range hood, are they still working? Is there any damage? What about cupboards? Are they intact? Any sign of pest? If possible, pay $400 for a building inspector to thoroughly inspect the property for you. This is expensive, but is much less expensive than having to fix all the defects yourself down the track.
I also strongly recommend having a conveyancer review the contract. They will point out clauses that are strange/not standard, tell you what they mean, and you can ask for recommendations. If you want to negotiate, this is the time. Your conveyancer will help you put those conditions in the contract of sales.
I recommend to put a ‘subject to finance’ clause and ‘subject to pest and building inspection‘ clause. This is to protect you – in case you can’t get an official approval from the bank for any reason, you can walk away risk free without any penalty. Same for the pest and building inspection. If the house is in poor condition and the building inspection presents that, you can walk away risk free. Please note, these will be your negotiation strategy, because if two offers come in with the same price, it’s very likely the vendor will agree to the one WITHOUT these clauses because that means the vendor is protected.
If you work with a mortgage broker and they’re sure they can get you a final approval within x days, you can also put a subject to finance within x days (as a precautionary measure) to make your offer more attractive. After x days you’re committed to the contract and if you walk away you’ll get hit with penalty and lose the deposit. Also, you can negotiate a settlement term here (30 days, 45 days, 60 days, 90 days). The shorter the settlement term, the more attractive your offer is because that means both you and the vendor will finalise the sales more quicker. But also comes with a risk – if for any reason you can’t get all your finance and paperwork done during this time and you miss settlement date, you can be charged. Also, you can ask to have a withholding clause to be added here (explained further below). Make sure everything you need to negotiate is reviewed and put into the draft contract during this step, especially if you’re buying at auction. At auction, there’s no cooling off period and the purchase is unconditional. If you win at auction and change your mind or walk away, you’ll lose your deposit.
If you buy an apartment or a townhouse that is a part of a body corporate, don’t forget to walk around the block or the building to check for damages on the block/building during your inspection. Make sure to check if there’s any flammable cladding as well. Check strata reports. The contract normally includes the body corp’s Annual General Meeting minutes (AGMs), and will tell you the BAUs of the building, any item the owner corp has agreed to pay annually (e.g. windows cleaning, care-taking, etc.) how much money is allocated to an admin fund and how much money is allocated to the sinking fund, & if there are special levies to fix damage.
From there, you just gotta make your own judgement. If the AGMs and the finance looks healthy, e.g. no major spending on major damage, then the building is fine to live in. If there’s damage, clarify with the body corp manager (they’ll have a number to call on the AGM). Reach out to them and ask what it is, how it happened, is it the apartment owner’s duty to fix it, or is it the owner corp’s duty to fix it through sinking fund or a special levy has to be raised. If so, how much was quoted. When will the work be carried out. Then justify for yourself, whether it’s worth living in and paying for these damages, or walk away.
Side story: I once inspected a ground floor apartment that has a big crack on the wall. And it’s a step crack so it identifies structural damage. When walking around the building to inspect, there are cracks in other apartments as well. The building inspection came back saying that it was because the garden bed sits right next to the walls. Long term watering caused the soil below to move, and caused the cracks to occur. To rectify, structural engineers need to inspect and provide recommendation. The garden bed needs to be removed or stablising measures need to be added. Then the building foundation needs to be strengthen, and then we can think of fixing cracks for cosmetics. In the AGMs report in the past 3 years, nobody has mentioned anything about it. So I went further and use the login credentials in the AGMs report to log into the body corp’s portal and read reports in the past 10 years. Nobody has mentioned anything about fixing the cracks. I pulled out because in my personal opinion there’s no way in 20 years time I wouldn’t be whipping out big $$$ to fix that building. And the cracks are so obvious, so if nobody has ever mentioned it, this means the people living in that building seem to not care. Who knows after putting all your life saving down, it’s not suitable to live in and we’ll be forced to vacate and lose a home. Even if I move in, I still need to raise the concern with the owner’s corp, get their agreement to carry out the work, and then money will be raise to fix it. And that doesn’t mean everyone will agree to fix it because some of the apartments are not cracking so they won’t be willing to get the money out. Too much hassle for me so I walked away. The apartment ended up selling 25k more than I could afford though. Guess we’re weren’t meant for each other. 😕
Be VERY CAREFUL of the wording about being subject to a building inspection. You need to be specific that it is subject to the building inspection being satisfactory to your liking, otherwise the clause is meaningless if there is no significant structural issues to be addressed. A building inspection is worth it’s weight in gold. Alternatively get a builder, plumber, and electrician friend to look at the house for $$$. Also, find a conveyancer before you find a property. They’ll talk you through the wording of how to make sure you aren’t taken advantage of by real estate agents.
If you have to go through auction, and have had your special conditions reviewed and amended by the conveyancer, send the contract of sales back to the vendor. If the vendor is happy with your conditions, they’ll proceed with your contract of sale if you win at auction. Normally what you can negotiate in an auction contract is just settlement term or deposit % or strike out some weird conditions that are not on the standard contract. Be aware that if you win at auction, you’ll have to sign the contract straight away and the contract is unconditional, so subject to finance clause won’t apply for auction contract. You just have to hope your finance game is strong and the bank will lend you enough to pay for the price won at auction. That’s why it’s important to know when to say no at auction.
If it’s a private sale and both you and the vendor are happy with the contract, you will then sign and exchange contracts. This is when the contract is executed. The contract of sales will also tell you the settlement date. The Real Estate Agent (REA) will send you details of their trust account, and the amount you need to pay. It’s normally 10% of the purchase price, and it’s up to you to make the transfer. If there’s a limit on your transfer, ring your bank. They can temporarily increase your transfer limit for 24 hours.
After you’ve got the executed contract of sale, bring that to the bank/mortgage broker to apply for final approval. Provided the bank hasn’t tightened their credit policy, the more similar your finances are to when you got pre-approval, the higher your chance of securing approval. Also, if you have a subject to pest and building inspection clause in the contract and haven’t organised a building inspector yet, organise a building inspector at this stage. If the building report comes back not satisfactory, this is where you can pull out. Again, this is not applicable for auction. So, get the pest and building inspection done and justify whether you still want the place or not before decide to go to auction. To book a pest and building inspection, provide the building inspector with the REA’s details and the property address. They’ll organise an inspection and come back and write up a report for you.
At this stage, you’ll do a lot of paperwork. The bank will ask for your IDs, payslips, bank statements, and send you a loan document to read and sign. Make sure you read and understand everything. The loan document will tell you how much they’ll pay on settlement. Please note, at this stage the bank also values the house. If they think the purchase price is ok, they’ll lend you the loan amount. If they think the house is worth less, they’ll only lend you whatever they feel comfortable with. You will then need to organise the shortfall at settlement yourself, or find another lender that’s willing to lend you more. This is more likely during an ‘off the plan’ purchase. If the bank rejects your loan application and you can’t find any other willing bank, the subject to finance clause will protect you at this point so you can walk away.
Once you’ve signed everything, then they’ll grant you a final approval. Now there’s not much you can do except for waiting for settlement to happen.
During this period, your conveyancer will help you prepare documents to transfer the land title to your name and help you calculate the final amounts to be paid on settlement (the settlement shortfall). This settlement shortfall includes outstanding body corps on a pro-rata basis (if applicable), any fees and charges proportionately, council rates, water rates, land and title transfer fees, any government grants and stamp duty concessions and the remaining of the deposit. If there’s a request from the vendor for early release of deposit from the REA trust account, your conveyancer will get you to sign form to release it. You’ll have to release it at the end anyway, so if you don’t see any need to withhold it in the REA’s trust account, you can release it early as a nice gesture.
A few days before settlement – depending on where you are, you’re entitled for pre-settlement inspection to ensure the property is of the same condition as when you signed the contract. Contact the REA and arrange that.
If you discover any defect, immediately notify your conveyancer, so they can get in touch with the vendor to rectify. Perhaps when the REA moved the staging furniture out, they left scratches or holes in the wall. If the defect are significant, this might delay the settlement. If the defects are small, then ask for compensation (as an adjustment on settlement) or withhold the money on settlement. I know in Victoria you’re entitled to withhold up to 5k on settlement to fix for damages (of course if the withholding clause is on the contract – on a standard contract, it’s always there, but some vendors will choose to remove it to protect themselves). At this stage, the contract is unconditional. You can’t walk away anymore. So make sure you sort everything out before settlement.
1 day before settlement, the conveyancer will send you a final calculation on how much you need to pay on settlement. If the bank pays all of this amount and you don’t need to pay anything that’s fine. If you need to pay this amount to the bank, your loan document should already tell you how. Normally they’ll be a section to direct debit that amount from your account. Otherwise, this settlement shortfall has to be paid to the conveyancer’s trust account. If this is the case, make sure you ask your current bank to do a RTGS transfer (Real Time Gross Settlement). This means they’ll transfer a large lump sum of money to the receiving account on the same day. Otherwise, if the money takes a few days to clear, settlement can be delayed and you can get charged.
On settlement date, if you’ve done an online settlement, you don’t need to do anything more. The people from your bank with meet up with the vendor’s bank to finalise paperwork and exchange money.
Once settlement has gone through, the bank will notify the conveyancer, and the conveyancer will notify you. The vendor’s bank will notify the vendor. You can then meet the vendor or the REA to pick up the keys!
Note: never assume your purchase will be risk-free. Always be proactive and reach out to the relevant parties to check on progress and what you need to do next and make sure you’re on top of it. Someone misspelling your name at some stage or changing your gender on the Land Title Transfer can lead to a disaster down the track. That means settlement can be delayed, and you’ll end up paying big $$$ on fees and charges. Or if property is wrecked one day before settlement… I’m sure reddit doesn’t lack of settlement horror stories.