MAKING AN OFFER
& GUARANTORS
MAKING AN OFFER
Making an offer on a residential property is a significant step. Before submitting your offer amount to the agent or vendor (seller), it makes good sense to be well prepared for what might follow.
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Obtain a copy of the sale contract as soon as possible and have it examined by either your licensed conveyancer or solicitor. Doing this prior to making an offer will save time if you need to move things along quickly.
PAYING AN EXPRESSION OF INTEREST
Once you have made an offer on a property, you may be asked to pay an initial deposit as an expression of interest. This won’t mean that the property is yours or that it gets taken off the market. It only proves to the seller that your offer is serious. The seller or agent can take as many preliminary deposits as they like for the one property. However, when you pay this deposit, the agent must provide you with a receipt and tell you in writing that:
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they have no obligation to sell the property to you
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you have no obligation to buy the property
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they will refund your deposit if you don't end up entering into a contract to buy the property.
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The agent must also let you know if someone else makes a later offer on the same property.
It is important to remember that the agent selling the property is not working for you, the buyer, but for the seller.
OFFER ACCEPTED, BUT IT'S NOT YOURS YET
If your offer is accepted, be ready to sign the sale contract and proceed through with the exchange process. Do not sign or exchange the sale of contract until you have discussed it with your solicitor or licensed conveyancer.
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Prior to the exchange of the contracts, the vendor is free to negotiate with other purchasers for a higher offer. If the vendor accepts another offer and exchanges contracts with that party, any purchaser who misses out on the property despite having a verbal agreement to buy it, is gazumped.
GAZUMPING
Gazumping occurs when you have a verbal agreement with an agent or seller to buy a property at an agreed price but the property is not sold to you in the end. This usually happens when the vendor (the person selling the property) has decided to sell the property to someone else, usually for a higher amount.
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If you are gazumped, neither the agent nor the vendor is obliged to compensate you for any money you may have spent on legal advice, inspection reports, finance application costs or inquiries. However, your ‘expression of interest’ payment (if you have paid one) must be refunded to you in full.
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In NSW, a property sale is generally only binding on the vendor and buyer when contracts are exchanged between the two parties. Exchange occurs when the vendor signs their copy of the sale contract; the purchaser signs their copy, and the two parties ‘exchange’ their signed contracts. It is usual at this time for the purchaser to pay a deposit, usually 10% of the purchase price.
Protect Yourself
Some ways to protect yourself from being gazumped are:
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Always have your loan finance pre-arranged, and ensure you can pay the 10% deposit, by Bank Cheque or a deposit bond so there is no delay before attempting to exchange contracts on a property.
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Obtain a copy of the sale contract as soon as possible and have it examined by either your licensed conveyancer or solicitor.
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Seek to exchange contracts with the vendor as soon as possible. Anyone purchasing residential property has a five-day cooling off period commencing from the time of exchange of the contracts. Only the purchaser can waive the cooling off period and it can be extended by agreement. During this time, you can do a building and pest inspection and have the contract examined. However, if you rescind the contract during this period, you forfeit .25% of the purchase price to the vendor, as the property has been taken off the market for a period of time. The amount forfeited is recovered from the deposit you paid under the contract. If the amount of the deposit is insufficient, you will have to provide the necessary additional funds. You should find information relating to the cooling off period in your contract.
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Negotiate firmly with the vendor or real estate agent. Insist on the agent passing your bona-fide offers to the vendor and obtain written proof of this occurring. The law requires agents to do this. Be ready to exchange with a signed copy of the contract and follow through on the exchange process yourself or with another trusted person to ensure exchange. If you are advised that other offers have been made, demand to see written evidence. If you are certain that you want the particular property, be ready to possibly increase your purchase offer to the vendor.
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Be aware that the vendor is not generally compelled to sell to any specific person and can change their mind at any time prior to the exchange of contracts. Vendors may not necessarily sell to the highest offerer, but may accept a lower offer from a prospective purchaser.
GUARANTORS & HOME LOANS
WHAT IS A GUARANTOR?
A guarantor is a person who guarantees to pay for someone else's debt if he or she defaults on a loan obligation. So it’s basically somebody who is willing to help you even if that means they’re accepting a little risk to do so.
Many home loan lenders out there will allow a third party (guarantor) to provide security to help somebody buy a property but there are certain rules as to who can do this.
WHO CAN BE MY GUARANTOR?
A majority of lenders require your guarantor to be an ‘immediate family member’. It’s usually a parent but it can also include brothers, sisters and grandparents. A small portion of lenders will allow an ex-spouse or an extended family member’ to go as guarantor, but the requirements differ from lender to lender.
HOW LONG IS A GUARANTOR BOUND BY THIS RESPONSIBILITY?
The guarantor must provide a guarantee to fulfil their responsibilities as long as it takes to either:
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Be released from this responsibility when the main applicant can prove to be sufficient to cover the loan repayments and provide the necessary amount of security to secure the loan according to the lender’s criteria; or
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Until the loan is repaid in full.
HOW DOES IT ACTUALLY WORK?
A guarantor offers up the equity in their own home or investment property to be used as additional security for the loan. The major security for the loan will of course be the property being purchased by the borrower.
However, the lender will also take a mortgage over the guarantor’s property to be satisfied that the guarantee being made on behalf of the borrower is justified.
IN WHICH CIRCUMSTANCES CAN A GUARANTOR HELP?
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You have the ability to make your loan repayments, but you have an insufficient deposit saved up to purchase a property.
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Another benefit of having a guarantor is being able to avoid the costs associated with Lenders Mortgage Insurance (LMI). LMI is required by a majority of lenders when the ‘loan to value ratio’ (or LVR) is above 80% o the value of the property. If you are buying a property for $400,000 and you have saved a deposit of $40,000 (10%), you need to borrow $360,000. Your LVR would be $360,000 divided by $400,000 or 90% LVR – In this instance you’ll need LMI to cover the lender’s risk of lending above 80% LVR. The borrower must cover the cost of this insurance although the policy is being taken out to cover the lender.
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In some scenarios, a guarantor may assist with both the repayments. For example, if a borrower has saved a healthy deposit but cannot quite make the loan repayments, a guarantor can help the borrower by contributing towards the monthly repayments of the home loan. The guarantor can be released when the borrower has the ability to meet the repayments. This scenario is commonly used when parents help their child to meet the repayments until their income improves.
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WHAT HAPPENS IF THE BORROWER CANNOT COVER THE REPAYMENTS?
The lender has the right to commence legal proceedings against the borrower. If this fails to produce a positive outcome, the lender can commence legal action against the guarantor for the amount specified in the actual guarantee of the loan. This can be the repayments, the default fee, and even the entire loan amount (depending on the guarantee).
The lender usually will not have to sell the property to recover their money – the guarantor needs to treat this responsibility as if it were their own. If things do turn sour, a guarantor needs to be aware that it will affect their credit file as if they defaulted on their own loan.
On a positive note, if the borrower does exactly what they promise and keeps the loan all up to date, it can actually have a positive effect on the guarantor’s credit file. If the guarantor applies for a loan and a credit check is performed, a lender will see a financial commitment being upheld and in a state of being current, with an on-time payment history.