Selling Home (Guidance on Postponing Settlement for 6 Months)

LNameofuser on 22/07/2018 - 15:59
Last edited 22/07/2018 - 17:38 by 1 other user

I've got an apartment for sale. The buyer wants to do a deposit and regular pre sale inspections then postpone settlement for 6 months. He will then have his daughter rent the apartment from us until settled. What are the risks I need to know of? I'm speaking with lawyers tomorrow to go over it but would like some guidance.

I want to set a date where the deposit becomes mine if the sale falls through. Something like 14-30days from signing of contract.

I also want to be able to terminate the rental lease if the sale falls through.

Does this thing sound normal?

What should I be aware of?

Thanks in advance

Financial

Comments

  • nocure on 22/07/2018 - 16:01
    +1

    Ensure there are Two separate contracts

    • Nameofuser on 22/07/2018 - 16:01

      Two separate as in one for sale and one for rental?

      • nocure on 22/07/2018 - 19:11
        +1

        Yep

  • Tee Rex Arms on 22/07/2018 - 16:26

    Why not just do a straightforward private treaty sale?

    • Nameofuser on 22/07/2018 - 17:25

      The $$ offer are within my price range so I am considering it. Ideally I'd just do a standard type sale but didn't want to say no without being better informed.

  • [Deactivated] on 22/07/2018 - 16:29
    +1

    Is there any reason you are going with this buyer and not regular buyer? If you dropped the price a little could you get other buyers interested? Are you using a real estate agent (if not then why not) what do they say ?

    The deposit does not become yours if the sale falls through. You take out reasonable expenses in re-selling the place including interest, advertising, real estate fees etc, although given the complex nature of this sale I could see you could easily use all that.

    If you do go ahead I would suggest you use a property manager to look after the place while it is being rented out so that property inspections etc are done, if the place was damaged while they were renting, you would be liable for repairing before the sale went through.

    Honestly this has red flags all over it, and there is no way I would consider ever consider this.

    • Nameofuser on 22/07/2018 - 17:23

      Reason: limited interest in the place

      It's has been rented before so I'm comfortable with that part.

      Thank you regarding deposit only being able to be used to claim expenses.

      • [Deactivated] on 22/07/2018 - 17:48
        +3

        You should really try to find out why they will be able to purchase it in 6 months and not now. What does the buyer think is going to change, are they waiting on inheritance, insurance settlement, divorce settlement, pay rise or some other lump some payout. Ask to see documentation regarding this and critically asses how likely it is. a Maybe their expectations about their payout are unrealistic.

        This is not unusual for buyers who want to sell their own home first but they don't usually get 6 months and they don't usually rent out the new place. Has their finance been pre-approved (I'm guessing not). How realistic is the selling price of their old home. (All these questions are retorical for you to answer to yourself).

  • Iamnotcheap on 22/07/2018 - 16:37

    Not an out of the ordinary transaction. Could be wanting to delay for specific cashflow reasons and hence why suggesting they will rent during the interim.

    Providing there is contracts in place, there is little risk. The only foreseeable/immediate risk is should anything happen during the rental period, to the the property, the sale contract could be withdrawn/terminated. As it will be a rental, you will need to ensure to take a separate bond for the rental and submit to your state tenancy board for holding.

    In respect to default of deposit - very hard to keep the whole amount. You could potentially structure various default fees to recoup any losses you would incur, but commonly buyers wouldn’t default on the full amount and any substantial losses would need to be recouped through civil legal avenues.

  • smuggler on 22/07/2018 - 16:39
    +2

    Pfft….

    Tell them no. Talk to them in 6 months time and see if they want to do a deal.

    What should I be aware of?

    Don't do it.

  • sahh on 22/07/2018 - 17:07
    +1

    If you do go ahead make sure the rental agreement finishes up slightly shorter than settlement date. Reduce the chance of buyers pulling out due to “condition” of the apartment or if the “tenant” refuses to leave.

  • CheapSticks on 22/07/2018 - 17:11

    Why he doesnt want to settle in a reasonable timeframe? Where the 6months is coming from given he does want his daughter to stay in there?

    Depending on what is the use of funds for you - you are missing out on opportunity cost of capital for 4.5months given typical settlement of 6 weeks. That cud be material money depending on price of apartment

    • Nameofuser on 22/07/2018 - 17:20

      My assumption is he is selling elsewhere to get money for this place.

      I've raised the purchasing price to cover the expense I'll incur in the 6 month period.

      • CheapSticks on 22/07/2018 - 21:22

        ok - in that case i wudnt rent out to him or his daughter (one and the same from ur perspective).

        Best you rent it to someone for 6months lease if you cant live in it. It can get quite messy and legal drawn out process if for some reason he cannot settle but he has got possession of it..

      • Deridas on 23/07/2018 - 08:25

        There are always honest loans from the bank that can cover during this process. I reckon 6mths delay rings a lot of alarm bells.

        • bremo on 23/07/2018 - 08:45

          Bridging loans can be quite expensive and I can imagine the purchaser would try to avoid if possible.

        • Deridas on 23/07/2018 - 10:23

          @bremo:

          Its not OP's problem it's expensive. I still smell something fishy/not right. I'd await advice from conveyancer.

      • onevstheworld on 23/07/2018 - 15:22

        If you're serious about selling, I'd carefully discuss this option with your lawyer and real estate agent beforehand.

        If I were the buyer, this condition would make me stop my purchase immediately. Reason being, it greatly increases my risk of the bank knocking back my finance.

        Example:
        Properties original price: $400,000
        20% Deposit required: $80,000
        Inflated property price (5% as an example): $420,000

        Scenario 1
        If the bank valuation is in line with the higher price: $420,000
        New deposit required: $84,000 - not too bad, extra $4,000 is not impossible to save up in 6 months.

        Scenario 2
        If the bank valuation is in line or lower that the original price: $400,000
        New desposit required: $100,000 ($80,000 plus the difference between purchase price and valuation price) - I'm unlikely to save $20,000 extra, so finance is denied, deal falls through and I get penalized.

        In a hot market, Scenario 1 would be likely and all is good. But we seem to be in a flat or falling market now, so Scenario 2 becomes more likely. Granted, not every buyer would take this scenario into account, so they may still say yes and have to wear that risk.

        If I were the buyer, building in your safety margin within the contract or the rental price would be preferable. Remember, I can't have pre-approval that far in advance, and the Royal Commission tears the banks a new one every time they hold a session… banks very cautious about approving finance atm.

  • ihbh on 22/07/2018 - 18:15
    +1

    As long as buyer exchanges contracts there shouldn't be a real problem. Ensure they pay a deposit of at least 10%. Legally if they don't pay the balance on the agreed date, you keep deposit and have recourse to recover shortfall if you have to resell.

    Also need separate agreement for rental part.

  • onevstheworld on 22/07/2018 - 18:39

    Everything is negotiable, so that arrangement could work. BUT make sure the contract terms are water-tight… get a good lawyer to write the contract and make sure he/she knows the whole situation, so that you're adequately compensated if the sale falls through.

    I'm guessing you're in Sydney, Melbourne or Brissy… in this market, there's a good chance the property will be worth less in 6 months. Even if the buyer is earnest, there's a chance the bank valuation comes back lower than expected and the buyer's financing falls through… then you'll be left with trying to sell at an even lower price. Pre-approvals only last 2-3 months, so it's unlikely the buyer has one.

    • bremo on 23/07/2018 - 08:46

      But seller would get to keep the deposit. Which is a win.

  • mreddie on 22/07/2018 - 20:44

    Don't do it.

  • chumlee on 22/07/2018 - 21:33

    I bought my place on 90 day settlement and rented it for 80 days prior to settlement as had to be out of my previous house due to selling that.

    A seperate contract had to be signed but can't remember what it's called. It's basically an early possession with rent - I'm sure i had to pay all the rent upfront

  • Sofie519 on 22/07/2018 - 22:42
    +3

    No, just no. At least that is my response. Too many things can go wrong, and most will have you end up NOT getting the deposit you think you will.

    If you do have to go ahead, for whatever reason, make sure the buyer is the one named on the lease, not just the daughter. Also make it a condition to waive final inspection (this occurs prior to settlement, so if during this tenancy they trash your property and demand you to fix or replace items before settlement, what do u think would happen? Fix at your cost or allow buyer to pull out without recourse?). Make buyer pay for landlord insurance as well as building insurance, utilities and council fees, as it is assumed he is taking possession through the tenancy.

    I would also not make assumptions as to why the buyer wants a delayed settlement, but ask him to be sure, then verify if the reason checks out. (E.g. if he claims he is selling his property, make sure he owns it - rates notice - and you see it on the market) Also get your lawyer to run a credit and police check on both buyer and daughter as a condition, for you to even consider the offer.

    TBH these are just off the top of my head ways to mitigate some potential risks in the deal. I personally would just decline the offer, but you may need the sale. So take precautions and seek legal advice.

  • [Deactivated] on 23/07/2018 - 00:40

    Is your place a hard sell, you seem desperate for a sale

  • BigBirdy on 23/07/2018 - 09:21

    It’s no big deal.
    Loads of property transactions involve lengthy settlements, many combined with tenancy agreements. I’ve sold and purchased with 6 month settlements, one involved a tenancy. Nothing dodgy, just suited my situations at the times. Proper legal agreements, which you should have regardless, give you the same protection as any other property sale (ie there’s always some risk you might sell to someone who can’t or won’t settle, wants to change the agreement or price, is difficult over condition/faults, doesn’t communicate, etc)

  • Allan Thomas on 23/07/2018 - 15:24
    +3

    As with many other comments, something doesn't smell right.
    1. Definitely get minimum 10% deposit, nothing less. If the purchaser can't come up with that, they're no good for the entire transaction.

    1. Formal rental agreement with the "daughter", bond etc. Rental agreement to specify that the "purchaser" is not to occupy the premises, only the "daughter".

    2. Never allow a purchaser to take possession of a property in any way prior to settlement without proper expert legal advice as to the exact proposed circumstances. This is where things can really go wrong. By signing a contract of sale, you've given the purchaser an equitable interest in the property. If you allow the purchaser to occupy prior to settlement and the sale doesn't settle as per the contract, you COULD have all the trouble under the sun regaining possession of the property. "Crooks" know this.

    3. If the sale falls over, you are entitled to retain the deposit to cover all expenses (your agent will still want their commission) plus any shortfall if you then sell the property for a lower price although you must take all reasonable steps to obtain the "best" price. If,after that, there is still a shortfall, you're entitled to pursue the purchaser for it. Good luck with that!

    Sorry to be so long winded but there are major, serious issues here and you could potentially be shafted. Again, get independent legal advice from a solicitor who specialises in property matters and take their advice. Don't get advice from a real estate agent.

    Good luck.

    Cheers,

    Allan Thomas

    • HeWhoKnows on 23/07/2018 - 21:16

      Good advice Allan

    • WithCashback on 26/07/2018 - 10:17

      This is really good advice, I definitely agree with Allan.

  • HeWhoKnows on 23/07/2018 - 21:14

    The buyer can buy the apartment as per normal and then rent to his daughter
    OR
    You pump up the price to cover your risk

  • subsbligh on 24/07/2018 - 06:00

    What happens if the market crashes in the next six months? If the price was to drop by more than 10%, he can terminate, you keep the deposit, and he's off.

    Also, what's your interest holding cost for the next six months? Or, even the cost of not having the settlement money in your account earning x% interest?

    I wouldn't do it. Or I'd ask for a bigger deposit.

  • Nameofuser on 24/07/2018 - 09:39

    Thanks for the input

    Contract went back with increased deposit and increased purchase price to cover my 6 months of expenses and my risk.

    Contract is not subject to finance. I've received assurance money is there and the reason for 6 month settlement is selling of another property.

    Rental lase is seperate and includes a standard bond and everything else involved with renting a property.

    Wait to see if buyer accepts.

    • Allan Thomas on 24/07/2018 - 11:50

      So,"the money ISN'T there". If the purchaser can't sell his property for the price he needs/wants,in time, your contract will fall over.
      May I ask, what % deposit did you insist on?

      Did you propose a specific condition of the lease that the purchaser is not to occupy, prior to settlement? I sincerely hope that this all goes smoothly for you but I can't help smelling a rat.

      Please keep posting re developments and the final outcome.

      Cheers,and good luck

  • Sofie519 on 30/07/2018 - 12:05

    Funny enough, I just came across this scenario on one of my loans.
    Without going into details of my case, the correct term is "going in under license"
    So you effectively allow the purchaser to occupy the property after exchange of contracts but prior to settlement.

    The early occupancy agreement (a form of rental agreement) is conditional on the settlement taking place, so the agreement provides for a penalty if the occupation continues beyond the agreed settlement date because payment hasn't been made on time. As soon as settlement date passes, the rent increases to well above market rate.

    Effectively you will be receiving penalty rates on the rent as well as the delayed settlement.

    Hope this helps.

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