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Five most common reasons property settlements fail
Don’t let a failed settlement derail your home ownership dreams. Here’s how.
So much time and energy go into finding the perfect property. There’s the endless online searching, weekends traipsing through home inspections (or virtual tours during COVID-19 lockdowns) and adrenaline-depleting auctions.
But that’s arguably all the fun stuff. It’s what happens after the thrill has fizzled from the chase that can cause a settlement to fail.
“A lot of people use up all their energy to identify a property and finally get the house and the contract and sign it, and they say, ‘Ah, I’m okay now’. But the real stretch is they need to do another hill climb to get settlement,” says Christopher Lane, chief executive of Conveyancing.com.au, an RACV partner business.
So, what can go wrong at the finish line to prevent you getting the keys to your new property? We asked Christopher to explain the most common reasons settlements fail – and how to avoid them.
Why do property settlements fail?
Forgetting a cover note
Security is everything in the property game and banks prefer a safety net when they are about to dispense a large amount of mortgage money. Lending against an uninsured property is too risky – if something happens to the home such as damage or fire the lender will lose their money.
That’s why Christopher strongly recommends that buyers organise a cover note with their insurance company as soon as they sign a contract and pay a deposit, to ensure the property is covered. “Most banks won’t draw down unless there is an insurance policy on the structure,” he warns.
He says buyers shouldn’t discount the possibility of something going wrong between paying the deposit and settlement. He had one client who purchased a house on the Mornington Peninsula, only to have it catch fire twice in the period between signing the contract and getting the keys. In that instance the owners were fortunate – the vendor had insurance and so did they, “So great outcome – the house got rebuilt.”
“For the nominal cost of a cover note it is best to put it in place as soon as you can.”
Neglecting the paperwork
Christopher says many property settlements fail simply because the buyer doesn’t get their paperwork organised on time. In many cases it might be because they simply don’t understand what paperwork is needed and when it’s required.
Christopher says a good conveyancer will operate as a project planner to facilitate the purchase (or sale) of a property. “They manage all the third-party stakeholders required to effect the transfer in order to achieve an on-time settlement,” he says.
This includes liaising with agents, insurance companies, financial institutions and the vendor’s conveyancers or solicitors to pay the agreed sum to the seller and transfer the property title to the buyer on the day of settlement.
Christopher says big financial institutions operate to strict and inflexible timelines, so failing to sign or return papers, particularly mortgage documents, on time can scuttle your loan. In other words, if you don’t sign the papers, you won’t get your money on time.
“If you want to take power back as a consumer you should get your documents signed and returned as quickly as possible,” he says.
Taking a holiday
Christopher says more than 20 per cent of his clients organise a holiday for the time of settlement, which makes communication difficult and can derail the process.
“Being readily available or contactable at the time of settlement – and in the few days leading up to it – it is essential,” he says. “You will save yourself a lot of stress.
“If you do need to be in Byron Bay, keep your mobile phone handy. But if you are going to be in Iceland, then appointing somebody who we can take instructions from before you go is really important.”
Acting in haste
Making decisions in the heat of the moment can set you up to fail from the get-go, says Christopher. For example, agreeing to a 14-day or 21-day settlement in order to secure the property during high-tension negotiations might mean you can’t arrange funds in time – given the large amount of work that needs to be done. “You would not put anything less than a 21-day settlement in a contract, particularly if you were getting finance,” he says.
To avoid such blunders, he says it’s important to get advice from a qualified conveyancer or solicitor before signing on the dotted line.
Going it alone
Christopher says while it is possible to undertake the conveyancing process yourself, it is inherently risky for those with no specialist legal training. Property transactions involve a lot of complex documentation, including a Section 32 vendor statement which discloses details of the property and its history, including any outstanding mortgages, zoning information, certificates for building permits. An untrained eye might not notice if important information has been omitted from the Section 32 or contract of sale.
Christopher says it makes sense to let the experts handle it. “Depending on the property, the documents required to give effect to a settlement can be substantial,” he says. “Not knowing what’s needed is what makes DIY difficult.
“We act for a lot of barristers, for example, who just say, ‘Give it to a professional who knows what they are doing’. Because this can be a nightmare.”
Leaving finance too late
Christopher says those who need to borrow to buy a property should organise their finance early, especially in the current economic environment where many lenders are acting with extra caution.
“The market is unstable and certain areas of employment are currently under review,” says Christopher. “We have heard of instances where lenders are checking whether someone still has their job on the morning of settlement prior to advancing the funds.”
Christopher says it is more important than ever to seek advice from a qualified conveyancer and many savvy buyers also enlist support from a buyer’s advocate.
He also recommends choosing a conveyancer with a statutory trust account. If you are using significant amounts of your own savings to purchase the property, handing over that money at settlement can be stymied if your bank imposes a daily limit on withdrawals from your account (a $20,000 daily limit is common). If, however, you arrange to have the funds paid into to your conveyancer’s trust account in the days leading up to settlement, the full amount can be transferred in one go.”
Buying or selling a house?
RACV can help you navigate the journey. Visit: racv.com.au/in-your-home/buying-and-selling-a-house/buying-a-house or check out conveyancing.com.au for help buying or selling your property.