Sales and purchase agreements are crucial to the purchase of real estate. They are a legally binding contract between a vendor and a purchaser. When you decide that you would like to make an offer on a property you will advise the agent and they will help you fill it out. The basics will be done for you- The legal property description, the address, the vendor’s names etc.
Under purchaser put your name or the name of your entity purchasing it. It is possible to put “and/or nominee” as this means you can tell your lawyer which entity to give title to at a later date.
You must then fill out the parts relating to your offer:
Price – Fairly straight forward, how much you are willing to pay. Never put your best price first, allow some flexibility for negotiation. Most vendors market their property around 5 – 10% higher than they expect to sell it for.
Conditions– These can range from everything to anything.
The most common conditions are finance, builder’s reports or selling your current house.
You can also put in contingency clauses which allow you to get the property under contract to stop someone else buying it, but gives you a chance to pull out if you are not satisfied with the results. Some examples of these clauses are: (talk to your lawyer for correct wording)
Subject to further due diligence.
This is my favourite as it allows you to have one clause to cover building reports, tenant due diligence, soil testing, anything and everything in between.
Subject to my partner’s/lawyer’s approval. (Your partner can be your cat if you so wished)
Other conditions could be that the vendor has to do something.
I.e. Subject to the vendor getting a code of compliance for the property.
Subject to the vendor removing all the rubbish in the back yard, to the purchaser’s satisfaction.
It is also possible to put a sunset clause in. This will create a sense of urgency for the vendor and will get their agent motivated to push the deal across the line. It also protects you from having multiple offers accepted.
I.e. This offer will expire in 7 days from the date it was offered, if no agreement can be reached.
Deposit– Most people believe that they must put down a 10% deposit either upon making an agreement or the agreement going unconditional. This is not the case however; the deposit can be as little as $1. The deposit is completely negotiable however 10% is standard, but as property investors we should not be doing the standard thing. I normally try to cover the agent’s commission as this keeps them happy and on your side. The reason for this is that the deposit will sit in the real estate agents trust account, where as I could have it in my account, earning interest. Some vendors will ask for an early release of the deposit. This is entirely up to you. I have read that it is ill-advised to release the deposit early because: if the vendor spends the deposit and the deal falls through then there is a good chance you will not be able to recover your money. That said if you had conditions in place that made the agreement lean heavily in your favour you might put in an early release of the deposit to sweeten the deal. I.e. Early access to renovate a property.
Settlement date is the date that the seller gets their money and the buyer gets the title to the property. This is usually a month after the contract goes unconditional, but again is negotiable. If you were buying in a hot market, you might negotiate for a 6 month settlement which would give you an extra 6 months of capital gains without having any holding costs. If you were going to renovate the property you might be able to negotiate a longer settlement with early access. This allows you to get into the property and renovate, put the property back on the market and sell it again whilst having minimal holding costs. If you time it right you can even have a simultaneous settlement which means that the people you sell it to take over the property on the same day you take over from the original vendor.
Never sign a contract unless you are 100% sure and you have the right contingencies in place. Even if you have a due diligence clause in place to escape if you need to; if you ran around and had 10 offers accepted and you had a due diligence clause in place allowing you to escape the properties you weren’t serious about, you would still have to pay approx $5000 in lawyer’s fees for cancelling the agreements. I would only advise you to put an offer on a property you actually want to buy.