How to Understand the Contract of Sale When Purchasing a Property in Australia
Almost eight in ten Australian home buyers understand little about the process. The contract of sale is one of the pivotal moments when buying or selling a home. Yet, very few actually understand what it is or how it works.
Generally speaking, you will have a licensed conveyancer by your side to oversee the legal steps. However, it’s both the vendor and the buyer’s responsibility to understand the contract of sale and ensure it’s in order. The vendor must prepare the contract of sale before listing the house on the property market.
The contract of sale is necessary to make sure the sale process adheres to all Australian legal requirements. However, these legal documents can seem daunting. With clauses, fine print, and potential pitfalls, you want to understand what you’re looking at.
Don’t worry; we’ll look at these legally binding agreements more closely so you can confidently approach your next home sale or purchase.
What Is a Contract of Sale?
Purchasing a property is more complicated than a seller and buyer shaking hands on a deal. Most home buyers will face tedious negotiations on the purchase price and the property’s condition. Once both sides have reached an agreement, they each sign the contract of sale.
The sales contract is a legally binding agreement between a vendor and buyer. Essentially, it records the vendor’s commitment to sell a specific property and the buyer’s to purchase the property. The sales contract is at the very centre of the home buying process; it protects the rights of the buyer and vendor.
Yet, a document protecting your legal rights isn’t much help if you don’t understand your rights yourself. Ensure you seek good independent legal advice to know when to walk away from a deal. Your solicitor will double-check the contract and ensure the process goes smoothly. They should explain the ins and outs of the contract of sale and might even negotiate on your behalf.
Most crucially, the legalities of the sale contract differ from state to state. As an Aussie expat, you might not purchase your next property in the same state in which you already have an existing property. Therefore, an expert solicitor is even more vital.
Once the seller and buyer have signed the contract, the parties exchange; it is now a legally binding agreement. Both the vendor and potential purchaser are legally bound to proceed with the sale.
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What Does the Contract of Sale Include?
The sale contract must include specific details, such as:
- The names and addresses of the vendor and purchaser
- The address and details of the property
- The agreed deposit amount and payment deadline
- The agreed property price
- Property settlement date and agreed on conditions of sale, such as subject to finance or pest inspections – each requirement must be numbered and signed by each party. Make sure you get pre-approval on your home loan before signing the contract, even if you have a subject to a finance agreement.
- Details about whether the property is a ‘vacant possession or ‘subject to a lease agreement.’
- Details about the certificate of title
- Other properties sold as part of the deal
- Details about other special conditions, inclusions or exclusions, also known as a ‘chattels list’. This might include carpets, curtains, light fixtures, and white goods.
Each state has different rules regarding what you must include in the contract of sale. They might also use different terminology and jargon. For instance, Victoria calls the agreement a ‘Contract of Sale of Real Estate. However, in New South Wales, it’s referred to as a ‘Contract of Sale of Land’.
Therefore, you must do your research. Your solicitor should be local to the state you’re purchasing a property in and will advise you on the local requirements. Once completing the signed contract, you cannot undo it. Accordingly, you must get it right.
What Can You Negotiate in a Contract of Sale?
Before signing the proposed contract of sale, you and the vendor must negotiate the terms of the agreement. This includes everything from purchase price to the cooling-off period. If you have a buyer’s agent, they will deal with the real estate agent on your behalf. Here are your negotiation considerations.
Property Purchase Price
One of the most significant negotiations you will face is the purchase price. You, the buyer, don’t want to pay more than you should. The seller wants to get the best possible deal. They may reject you and accept another buyer if you offer a low price.
The best way to negotiate the property price is to set yourself a budget and stick to it.
If the seller asks for more than you’re willing to pay (and more than the bank will lend you), back away.
If you’re offering less than the asking price, back up your negotiation with evidence. Get an independent property valuation to assess the actual value of the property.
Although the cooling-off period is mandatory in most states, the process differs depending on where you buy a residential property. The cooling-off period allows the buyer to back out of the deal after signing the contract of sale. However, to make your offer more appealing to the vendor (as you might in a competitive market), you might waive the cooling-off period.
Before waiving your right to walk away, you must seek legal and financial advice. If the buyer terminates the agreement outside the cooling-off period, they might face a termination penalty.
You can also negotiate cancellation fees, such as a termination penalty should you cancel the contract. Generally speaking, if you have a cooling-off period, you might have to pay around 0.25% of the property value.
However, if outside of the cooling-off period, you might lose your deposit and potentially have to reimburse the vendor for lost sums. You can negotiate these fees.
The property settlement period is between the exchange of contracts and the exchange of ownership. The purchaser and vendor can negotiate the date to suit both parties, making it longer or shorter. You must organise your home loan formal approval, building and pest inspections, and any other final legal checks during the settlement period.
Fittings and Fixtures
Although you might think you know what permanent fixtures are automatically included in the contract of sale, it’s not always clear. Negotiate whether the property sale consists of the fridge, television, dishwasher, curtains, and other details. You should note all these within the sale contract.
Subject to Finance
Even if you have pre-approval on your home loan, there’s no guarantee the bank will give you the total loan amount. Home loan approval is often slightly more challenging for an Aussie expat – many lenders don’t like considering foreign income. Therefore, you must include a subject to finance clause in your contract.
You can leave the contract without penalty if the bank does not approve your home loan application. However, to avoid such a frustrating situation, speak to a mortgage broker to ensure you secure the necessary financing.
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Who Prepares the Contract of Sale?
The vendor’s solicitor, conveyancer, or real estate agents prepare the contract of sale. It mainly depends on the circumstances of the sale and how complex it is. For example, if sold privately, the real estate agent will draft the contract. The other party must check the contract details, and the purchaser’s solicitor must approve it.
What Happens to the Deposit?
Once the contract is binding, the purchaser must pay the deposit. You will need to follow the agreement’s deposit conditions as set out. Generally speaking, you will have two or three days to pay the deposit to the vendor.
The vendor might ask you to pay a partial deposit when you make the offer – also known as a good faith deposit. This acts as security that the seller will take the property off the market. However, it’s not a guarantee that they will accept your offer. If they reject it, you will get your full deposit back.
What Happens on Settlement Day?
All parties meet to exchange the contract and other documents on the settlement date. It’s the day when the property finally becomes yours.
So, what happens on the settlement day?
- Solicitors complete final checks, such as taking a water metre reading.
- The purchaser pays the agreed price to the vendor.
- Relevant parties exchange all legal documents.
- The vendor supplies the buyer with a vendor’s statement.
- All parties receive signed copies of the contract.
Moreover, the Land Titles Office must complete the process by transferring the property title. You must have a person lawfully authorised overseeing the property sale on settlement day.
What Is a Failed Settlement?
If the purchaser fails to uphold their end of the agreement – for example, they fail to obtain financing and waive the subject to finance clause – then the vendor may keep the deposit.
Before settlement, the real estate agent keeps the deposit in a secure account. The agent may release the deposit only when the sale is complete, or a failed settlement occurs. However, the real estate agent will need written authority from the purchaser, solicitor, or court order.
Therefore, include all the necessary conditions, so you don’t risk defaulting on the agreed sale contract.
Contract of Sale: State by State
- Victoria: Verbal agreements are not legally binding; you must have a written contract. The cooling-off period is three days.
- New South Wales: You must also have a written agreement; however, NSW has many recent regulation changes. For example, with properties valued above $2 million, the purchaser must follow the foreign resident capital gains withholding payment rules. The cooling-off period is five days.
- Queensland: The contract must include a warning statement. The cooling-off period is five days.
- South Australia: The vendor might provide a vendor’s statement and a Form One Disclosure Statement. The cooling-off period is two days.
- Western Australia: The contract includes two documents – Title by Offer and Acceptance form and Joint Form of General Conditions for the Sale of Land. There is no mandatory cooling-off period.
- Northern Territory: You must use a Contract of Sale of Land form, approved by an authorised organisation, such as the Registrar of Land, Business and Conveyancing Agents, or the Law Society Northern Territory. There is a four-day cooling-off period.
- Tasmania: There is no cooling-off period in Tasmania.
- ACT: The vendor must provide the relevant documents before the purchaser signs. The cooling-off period is five days.
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What to Watch Out For
Once you sign on the dotted line, that’s it. You have to follow through with the property purchase or face severe legal penalties. Fortunately, the cooling-off period will save you from significant mistakes. However, even if you back out during the cooling-off period, you could still waste your time, money, and effort.
It’s your due diligence to ensure that the sale contract doesn’t include any red flags before you commit to the sale. What should you watch out for?
- Sellers who don’t wish to negotiate the price.
- No property condition disclosures from the vendor.
No upfront valuation – sometimes the bank valuation might not be the same as the agreed price. They won’t lend you the full home loan amount and you will have to make up the difference. A professional valuation should protect you from such instances.
The contract of sale is the most important legal document you will encounter throughout the home buying process. While your solicitor should help you unpack the complex legal language, it’s in your best interests to make sure you understand the contract yourself.
In particular, ensure a subject to finance clause is present to avoid paying for a property without the required funding. Speak to a mortgage broker about securing expat finance for your desired home.
Frequently Asked Questions
What Is a Contract of Sale Called?
Contracts of sale have different names depending on which state you’re in. For example, Victoria calls it the ‘Contract of Sale of Real Estate’ while New South Wales calls it a ‘Contract of Sale of Land’. Make sure you know what it is referred to in your area.
What Are the Examples of Contracts of Sale?
A sales contract is a legal agreement between a vendor and purchaser about the sale of a property. It includes details about each party, the property, and the conditions of the sale.
What Information Does a Contract of Sale Contain?
A contract includes details about the vendor, purchaser, property, and the agreed negotiations. For example, if you waive the subject to the finance clause or the cooling-off period, this will be in the contract.