HAVE a spare $1 million under your pillow?
Most of us don't unfortunately, so when looking to buy an investment or commercial property, we have to put on our Sunday best and front up to the bank for a loan.
My fictitious client, Victor Lawless, has decided to purchase a commercial shed from which to run his business, rather than continuing to rent.
Over the past few weeks, I have been advising Vic on different structuring options and he has decided to buy the shed through a 'family trust' structure, which I have set up for him.
Across my desk today comes a draft contract from the real estate agent. I have a quick flick through and notice that it is not subject to finance. This does not smell right.
Usually, unless it is an outright cash purchase, a contract will be subject to and conditional upon the buyer obtaining finance approval on terms satisfactory to them from a bank of their choice. The condition will usually have a timeframe of say 14 or 21 days (on average) such that if the buyer cannot obtain finance approval in that period, they can terminate the contract and have their deposit monies refunded.
I call Vic to query him on the finance condition. He replies, "Nah Suz, it's all good. I went to the bank for a chat ages ago and they had a look on the computer and they reckon I'm approved for up to $1.5 million. I even got a ripper deal on the contract because I didn't have to make it subject to finance!"
This is a dangerous trap I see all too many people fall into. Yes, you may go the bank and get conditional pre-approval for a loan up to a certain monetary amount; however, this is only an indication. Read the fine print because it is still dependent upon a number of factors, such as a valuation on the property stacking up.
If a buyer enters into an unconditional contract, not subject to finance (incorrectly believing they are fully approved for the purchase price when, in fact, they only have conditional/pre-approval) and then the bank subsequently decides they are not going to fund it, then too bad - you are locked in, despite not having access to the money. If you do not settle, then unless you have a very nice seller who takes pity on you, they can sue you for losses or apply to the court to force you to complete the contract.
Another trap is where contracts have a long timeframe between the finance date and settlement (this can be an issue for off-the-plan contracts).
Generally, any finance approval given by a bank is only valid for about three months. Accordingly, if you get finance approval now but then do not settle until Christmas, the bank is well within its rights to pull out (say if the market conditions changed).
Lesson - if you need to get a loan to fund a purchase, make sure the contract is subject to finance approval within a reasonable period. Otherwise, you may land yourself in hot water!
Suzanne Brown is a principal of McKays Solicitors and Mackay's only Business Law Accredited Specialist.
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