Conversations about Contract Conditions

So you've signed a contract on a property- but there are some conditions to cover off on before everything is official! ...Do you have the Finance!? Is there a building inspection clause perhaps? All these things seem pretty easy to understand if you do it all do everyday, but for the first home buyer who has never signed on the dotted line before, What do these things actually mean? And what conversations should you be having when it comes to Contract Conditions when buying a home?

So you've signed a contract on a property- but there are some conditions to cover off on before everything is official!...Do you have the Finance!? Is there a building inspection clause perhaps?

All these things seem pretty easy to understand if you do it all do everyday, but for the first home buyer who has never signed on the dotted line before, What do these things actually mean? And what conversations should you be having when it comes to Contract Conditions when buying a home?

Transcript of Conversations about Contract Conditions

Episode: | E81
Show Title: | Conversations about Contract Conditions
Cast: | Aaron Horne, Patrick Berry & John McGregor
Show Length: | 23 minutes 19 seconds


Patrick: If a building inspection comes back bad, it doesn't mean the deal is dead. It just means that we've got conversations to have and see where we can go with them. Sometimes, they pan out and sometimes, we can keep moving forward; sometimes, they don't, and that's the reality of a contract. 

[intro music]

Going once... going twice... SOLD! You're listening to The Property Pod!

Aaron: All right, guys! Welcome back to The Property Pod, your weekly engagement into real estate here in the Hobart marketplace. I am your host, Aaron Horne, and I'm joined--as always--by real estate agents here at 4one4 Property Co, Patrick Berry and John McGregor.

Patrick: Boy, we are glad to be here 

John: Good Morning, gentlemen!

Aaron: How are we today, boys? oh i know he's had some really [John: smooth] good intros lately.

John: Actually, well not good, mate. No, it looks like the soreness is slowly coming to an end now after the [uh] weekend fun run. Although fun's such a loose term for charity races [laughter] 

Aaron: Yes [uh] for anyone out there, you may have seen online, but [uh] many of our staff members competed well, i say "competed" but perhaps "participated" is a better [uh] term for it.

Patrick: "survived" is another word [laughter] we'd like to use in the office.

Aaron: I can take "survived" [uh] in the 2021 RACT City to Casino Fun Run [John: yeah]  

Aaron: I saw that you competed in or you participated in the 11 kilometer Run, John.

John: Oh yeah! I did exceptionally well. I came dead last in my age group. [laughter] yeah, which is because of some great numbers here.

Patrick: John, at what point did you realize: "shoot, 11 kilometers is a long way"?

John: Oh, [stutters] it was painful when uh my knee gave out and I started having to walk, but it really came to head though when [um] I-- because obviously, they've got the--they're bringing up the rear police car and an ambulance and when I saw that in the side of my back and I thought: "Oh no! I've made a terrible mistake"

Aaron: So, how far into the race were you when [um] your knee gave out?

John: oh we're so... [Patrick:  Bunning's traffic lights]

John: Yeah, at the beginning, well I see that the best part was the start, because I was at the front line so I was number one for about... less than a second, but after that, it was great. Well, I must have got I don't know, because you start at the [yeah] at Bunning's then get up through to Canalian Bay. So once you get--once I got past Canalian Bay then back onto the highway, leading running getting to the bridge, that's when I decided I was just like: "no, something's not right here; something's not right"

Aaron: So, did you do much [um] prep before leading up to it? Did you go to the gym, John 2.0? Did you show back up to prepare?

John: I thought about the race a lot, pretty much. [laughter] 

Patrick: It's a mental game.

John: Pretty much the day before like oh [ __ ] I'm still going to buy some running gear  [laughter]

Aaron: I knew that would exactly be John's training regime, like from day one, him and Aaron Murray, his little off-sider, had [uh] said: "Oh yeah. We're gonna challenge each other to do it" which I'm actually really surprised Aaron did sub five minute kilometers [the two agree] on average as well on zero training as well, so it just shows that youth [uh] "youth" has got us, because yeah we're old [John: yeah yeah] 

John: Just like these 30--these 34-year-old knees just couldn't compete with the 21-year-old 

Aaron: Just [um] just to jump ship a little bit speaking, I don't want to say old "old", but I'm just going to [um] throw out to one of our older listeners out there--one of our favorite listeners. I've just got a little bit of audio that I've brought along. She just wanted to say thank you to you, guys, so just hold, one second.

[audio]

Hello, fellas! I really appreciated the little mention I got about being at home, knitting beanies, but actually I was in hospital having a procedure and I wished that I was with the young girl that's on the yacht in the Caribbean, but i am now safely home and I'm into my chore of knitting Aaron a beanie, so thank you for the mention. Appreciated!

Patrick: [laughs] I love that 

Aaron: Yep, so that was Nan out there. She [uh] yeah she had a rough week last week, but she still was in the hospital listening along to The Property Pod

Patrick: Yeah, absolutely! Probably get a spike next week now she's spruced it to all the nurses and doctors and patients

Aaron: Well, she actually had to have one of those [um] MRI things, you know, where you go into the tunnels and she said that they put on like Robbie Williams [um] and the headphones there, but she would have much preferred to hear us talking to keep her--make her feel safe. She's like, "I'll never do that again; I don't want to go back into that tunnel" [John: Oh wow!]

Aaron: So, she said it would have been nicer to have our voices so what a lovely [uh] sentiment from Nan. [John: 100 percent, yeah!]

Aaron: And yes, I'm sure if you could be on her super yacht [um] Megan would have you for sure, but shout out to you yes [uh] yeah, very nice! Great, love it! All right, so let's jump into some real estate stuff which we [uh] meant to talk about when we come in here. Yeah yeah yeah yeah... 

Aaron: I actually was speaking to a guy about a podcast last night I've told you about pickleball before, but yeah, I was crossing over with this guy who works [uh] somewhat in the industry and I said: "Oh, I've got this podcast. Be interesting to have you on", "Oh, no! That'd be too professional for me." So, we wanted to cover up today on [um] just we-- we've got to [like] this--this roadblock with a few conversations recently where it's kind of like what happens once the contract's signed--like how does handover happen? How does [uh] it become my-- that's basically all--my new investment property? 

Patrick: So, you want to know what happens if you're one of the lucky few people that can actually get past the offer stage to a contract stage

Aaron: 100 percent! At the moment, there's a shortage of stock out there. it's really tricky to [um] get it, but I guess once your contract's in, it'd be really nice to know like, "what do i need to know leading forward to be?" like, "what are all these conditions?" and "where do I go?", so John, you've kind of prepared a bit of stuff, so where should we jump off here [uh] with this one?

John: Well, it ends up being a bit of a conversation when we're having catching up with the clients, because especially even those that haven't purchased, like if they've owned a home or haven't purchased one in 20 years, [um] well often won't actually take the time to go through the terms of the contract and understand what that means, and a couple of times, I've had it with young people who've said: "okay, so this is--" so what is, you know, "--this is really great". You're really excited that you're making an offer again [um] but you know, have you--how many times you've done this? "oh, this is our fourth time" like great, "has anyone actually read through the terms and conditions with you?" "at the what?" so it's this element where a lot of people are rushing through signing these contracts without actually really understanding what are going to be the next beats in the process, because you know, getting pre-approval finance and signing on the dotted line is great, but there's still a heck of a lot of stuff that has to be satisfied before you know we can officially put that sold sticker on. Well, this--this sort of ends up being the cause as, you know, I end up [um] spending the time to get myself a nice pen which I've been considering doing for a long time. 

Aaron: Have we spoken about the pen on the podcast?

John: Ah... probably not, probably not. But it was, you know, it was inspired by Rudyard Kipling, the guy who wrote the jungle book, so it's got this really nice wolf's head on it. [um]

Aaron: Do you have it with you? Show it to the camera so that [um] people can see your pen

John: Can you-- [Aaron: Yeah, yeah. That's--that's pretty clear.] yeah, so it's egregiously large but, you know, I don't mind it.

Aaron: You're compensating for something there... 

John: Yeah yeah, no it's a--[stutters] unfortunately, you know it needed to be--to have the stuff on it because it honored it says [laughter] if you'll [uh] if you could keep your head when all those about you are losing theirs, then you'll be a man, my son, so it's off. It's my one of my favorite poems, by the same bloke, [um] so, the thought being is that, if you've got this nice significant moment, you've got something nice that you could, you know, [ __ ] you know shine it with a really nice pen, but the best part about it was after getting this, I was really excited my [uh] the first client picked up and said "geez, your pen [ __ ] " [laughter]

John: Oh well, that's... that's the--you've got to have those people to bring it back down.

Patrick: I really like this story, John. What does it have to do with what we're talking about?

John: Well, it's that same element where... so last night, I was with a young couple. We were just chatting about just, you know, the offer's been accepted and then [um] luckily enough, there was a--met a couple of people since then that actually knew what the heck it was. Yeah, exactly! [laughter] [Patrick: very fast] but, it was that sound I said to them as well, all right, you know, it's great so I always temper the-- that first moment of excitement's great, but then we have to temper it and say: "okay, here's the things that can go wrong" [um] and "here's what we need to do in the event that something happens"

Aaron: Do you frame it as "here's what can go wrong"? or do you frame it as "what's next?"? [John: It's what's next] yeah, yes just feeling like if i just signed one of the biggest contracts in my life or made a really big investment, here's what could go wrong as soon as I've signed it, probably wouldn't...wouldn't be the best way to tell them I'd want to hear, so... 

John: I'll often say like here, you know, "here's---here's the beats that need to happen" [um] or "here's what's going to happen next" and here's who has, you know, "here's who you need to speak with about it" so, a lot of the time, the influence of the real estate agents this, you know, strongest influence is actually during that marketing and negotiation stage. [Aaron: yep!] and then once the second it gets under contract. Well, that's when [um] my sort of line to clients is we'll look, you know, phone calls of a conversation and then emails for confirmation

Aaron: So you can provide kind of unofficial advice and say, like: "I've been in this situation before, so I would recommend [um] taking this course of action, however, email it through or put it in writing so that it's an official...". [John: That's right!] so, essentially, what we're talking about is the time between "I've made the offer", "it's been accepted", and then the house--the payment crossing over and any kind of hurdles in between, That's what we're talking about today.

John: Well, I suppose there's those points where we're under contract and then you've got what's known as a condition precedent have to be, so clauses that have to be satisfied before it becomes unconditional or formally exchanged or officially sold. [Aaron: yes] so, for example: the standard ones people often have is, you know, there's conditions that need to be satisfied all the stuff that needs to happen first is one, you've got to pay your deposit, so that you know it could be 10 percent, 10 grand to 2 dollars. Then, you know, you'll have your finance clause that needs to be satisfied and also too, they'll have their building inspection, so all those [um] you know, people often ask: "hey, will I lose my deposit if I don't get my finance?" for example, that's a really common question and the answer is: well, no, you won't so, because in, you know, in the standard conditions, it will describe that the... if finance is unsuccessful or if the condition is unsatisfied, [um] well then, the...all, you know, the parties under this contract like the responsibilities under this contract end, so it basically means the contract's cancelled [um] and then the purchaser is entitled to a full refund of their deposit. So what we're talking about with condi--like it's unfortunately, it's an annoying language, but it's contract language [the other two agree] so... so, when they say "condition precedent", it means it's something that has to, you know,  be satisfied before the contract moves... moves ahead

Patrick: Yep, [um] I think we might be getting people a little bit confused, because language is so intense [John: yeah yeah, exactly] but, it has to be intense, because it's law, but let's try to dull it down a little bit and really just break down what it means after you've signed a contract. 

Aaron: I love that, Pat, thank you! [John: yeah. sorry, guys]

Patrick: You're right. No, everything you've said is golden, John, and [um] but I think we've got some listeners out there, might have never seen a contract before or they haven't been lucky enough to actually get one across the line, so really, what we're talking about…

Patrick: I'm trying to put my easy hat on, is that, sign a contract and then we've got the period between when you sign the contract and when you move into the house is the period that we're referring to. And then let's broken down again into two sections again: the section where [um] it's "conditional", which means it's subject to the finance and the building and everything that you're outlining, and then, once you've confirmed all those, the "unconditional" process, which is when they then [um] obviously are waiting for the solicitors to do the paperwork and the banks to be able to move forward with settling the property. That's a...an overall what you're trying to break down effectively, isn't it? [John: yeah, absolutely!] yeah so for most people, I think [um] because this is so intense and there's so many different ways we can potentially look at it, why don't we pick a scenario based around [um] the most common, so i reckon the most common would be subject to finance and subject to building inspection. Can you map out, John, what that looks like for somebody if they've signed a contract subject to getting finance and then also a building inspection from the day they sign today versus the day they move into the house.

John: Yep, absolutely. Well, one of the things that often they'll say is we've been pre-approved for finance. So what does that mean? Well, it just means that the bank is going to say, well, if you bring us a contract, it will lend you up to five hundred thousand and theoretically, if you bring a contract in for five hundred thousand dollars [um] we're pretty confident that you're going to get that property, [Patrick: yep] so, in that instance, we've um---they've purchased a house for 500 000 and then it's been, you know, the contract's been successful and now we're in our 21 day finance period so, that what that means is that the percher has exclusive right to be able to see [um] to get finance in that period, but on the--if within 2 on after... day 20, on day 21 or day 22, if that--if a few things haven't happened, either finance hasn't been approved by the bank or if they haven't applied for an extension of that clause, well, then on the 22nd day the--because that time frame's ended, the owner can cancel the contract if they want to.

Patrick: That's... yeah. So, it comes back to the owner choosing to cancel it or not

John: That's right, yeah. So it's always a constant  negotiation

Patrick: Yeah, so yeah, [um] I think that's a good thing to point out as well when talking finances because banks and valuation companies are incredibly hard to work with [John: absolutely] so there'd be plenty of examples out there in recent times where someone's got today: 18, 19, and they've probably given you a call or may have called John and said, "we're not going to make it. We really want the house. What do we do? and my advice would normally be for them to communicate with us and always let us know what's happening so we can keep our vendor informed. [John: absolutely] I'm dealing with one at the moment where the [um] purchasers had 21 days. They asked for a two-day extension and today, they have to ask unfortunately for another extension, but they've constantly kept us in the loop with what's happening from day one and so, I feel very confident in going back to my owner and advising them to take the attention, because I do think we'll get there with it all [John: yeah] where [um] if they hadn't been open and and let me know everything through every step of the process of what's happening, I might be less inclined to suggest to the owner to offer them extra time, because I don't know what's happening, so I think, for any purchasers out there, big tip is that even though yes, you do need to go through your lawyer for everything when it comes to a contract, after we've signed it with you, keeping us in the loop so we can keep the other party in the loop and so that we can keep them in the loop with language that you as a purchaser or a vendor can understand.

Aaron: Yes, yeah definitely. I think that's really key there, Pat. What you're kind of saying is you have the [um] the vernacular or the vocabulary to be able to explain it in a way that is [um] understandable rather than getting this important letter from--

Patrick: --getting a letter from an email from a lawyer and it reads: "they can't get their finance, you need an extension" like you need to choose to extend or cancel [Aaron: yeah] and it's always written, no offense, but quite bluntly or quite like--

Aaron: Yeah, they're not mixing words.

Patrick: Yeah. It can be quite daunting and you don't know what to do [Aaron: yeah] 

Patrick: where if you can just keep us in the loop as a purchaser, then we can keep the vendor in the loop and we can advise the vendor on our opinion and we can draw on stories like John loves to do, because obviously, that's your...your massive draw card [laughter] is that a story for every scenario or an example for every scenario, so that helps someone, then feel more comfortable about making the right decision moving forward from that point.

John: And sometimes, too, as an example, so as part of that finance period, the... what the bank needs to ensure is that sometimes, the purchase price isn't so so important as it is to... because the bank will usually request a value-- a formal valuation and what that valuation is to confirm is, if you've got the purchase price of five hundred thousand dollars, they want to make sure that that formal valuation values up to 500 000, because the bank's not going to lend the purchase price they're going to lend the amount of the valuation, if that makes sense. So in that particular scenario, you may have purchased a property for 500 000 but you know, all of a sudden, the valuation only comes in at 450 000. All of a sudden, the bank gets very very nervous, because they're going to say, well look, we're only going to lend you up to 450 [thousand] on this particular property... [Patrick: ...you need to make up the difference if you want the house] That's it. So your 10 percent deposit becomes null and void and you have to find a way of getting more... getting more cash so that's a really common [um] scenario especially in really tough markets like this one where prices are changing so constantly and the valuers are having a hard time keeping up with the rising tide in the market, so…

Patrick: I think it's also good for a purchaser to note as well that having that valuation process as well [um] makes them feel more comfortable that they haven't potentially overpaid for a property or [John: absolutely!] where they stand with a property when the day they own it. [John: definitely] But, if their valuation comes in on contract price, they know they've paid a fair market value for it and they should feel happy that they've secured it at home. [Aaron: yeah] If it comes under contract value and they still want the house, because it's everything they've dreamed of and they're prepared to pay that extra, make the difference to make it happen, then at least they... they know what they're getting into, they're not getting like there's no, like [um] no one's estate agent trying to pull the rug over your eyes or something like, at the end of the day, everyone thinks that we're out to screw people over and get every last dollar, but there are so many other elements out there that allow purchasers especially purchasers subject to finance and building the ability to make sure they're moving forward on their terms and not us forcing their hand or [John: yeah, 100 percent!] or a vendor forcing their hand they're making the final decision when it comes to these things with finance and building, 

John: Yeah, and that's... that's a really good point. 

Patrick: I don't think you can ever ring your bank too much to ask how it's going [Aaron: hello] if you've got 21 days to get this deal done and dusted, and i don't think there's any harm in ringing 21 times like or 30 times if that's what it takes to get the deal done [Aaron: yeah] especially with such a hot market, you may not be given the opportunity to get an extension of time for a finance clause, there may be a backup contract sitting there that's cash ready to go and so, if you've only got a very small window to get a job done, like, don't sit back in your hands and wait for them to call you. Keep proactive and call them. [John: absolutely]

Patrick: Well, I don't care if my purchasers ring me every day and say like, sure I'll get probably a little bit annoyed by it, but at the end of the day, glizz i know they're hungry for it and they want to get, [Aaron: yeah] they want the job done, and that gives me confidence to relay that information through to my vendor. There, you have no harm in being too forthcoming with information, but you do yourself harm by not talking to us enough and just keeping quiet or if [ __ ] is the fan and it's not going to pan out for you and you go into like your little turtle shell and you don't tell us what's going on, and you just let it collapse. Well, we could have potentially cancelled it 10 days early and moved on to somebody else. We're not going to get upset with you if it turns out you can't buy the house; you'd rather just know about it earlier. Don't wait till day 21 to tell us that: "oh, two weeks ago, I got told I couldn't do the finance", just tell us something. 

Aaron: Yeah, so communication is key and it's again, like you were saying, it's kind of about keeping all lines of communication open and making sure everybody is constantly all over that. I know you mentioned one other thing--we're kind of getting up there in time, but there was one other condition that you mentioned... 

Patrick: ah "building inspection", so I reckon that's the second biggest clause that's impossible these days yeah [um] in a building inspection, what does that actually mean for a purchaser like, I think that's something that we should probably quickly touch on, John. 

John: Yeah, so in the Tasmanian contract, it talks about a defect, so what they're trying to find is defects in your property and you have to set a defect amount, so in an example you might say, look [um] you've got a building inspection clause with the ten thousand dollar defect limit. A defect can be anything. It can be peeling paint, it can be a, you know, bad guttering or a bad roof. The old contract used to state specifically electrical plumbing roof... roof or structural defects, but now, it's anything: ripped carpet. Now, what the "building inspection" means is that if during the process of that inspection, the inspector then finds defects together likely to cost more to remedy than that amount, so it just means, if all the defects... 

Patrick: Let's pick a number, so say on the contract it's ten thousand dollars is written on the contract [John: that's right] so that's what you're referring to by your defect limit. [John: yeah yeah] That is agreed amount on the contract

John: Yeah, and so all of a sudden, if they find the, you know, the footings are shot in the house and it's going to cost you maybe 20 grand to repair, well then, obviously, it's [um] it's gone above that 10 000 dollar limit, and now you can exit the contract now

Aaron: So now, you can exit the contract doesn't mean that you definitely do. It just means that you have the option, so it kind of is you've... found out, you've done your research, you found out what you want and then you can change…

Patrick: Well, there's a couple of options you've got. If you're the purchaser, you've got the ability to walk away if you want. [Aaron: yep] Second ability is that you can just accept it is what it is, [um] you look through the report and you think: "oh well. I sought 90 percent of those [um] I'm not worried by them, I was worried more about the things that I couldn't see", so you might just disregard it. The third option which happens sometimes is that you might say: "well, I didn't realise that this sub-floor had a missing pier and that's going to cost two thousand dollars to repair" okay, I understand it's been like that forever, but it's something I don't feel comfortable with, so you might say: "well, I would like either the owner to rectify that prior to settlement or [um] I'd like a discount in the agreed price that we paid for the property", so it just means that [um] and it doesn't mean that the owner has to agree to any of those terms. The owner can say not get stuffed, buy it as is or don't buy it and that's well within the owner's rights, but that's where it comes back to John and myself having conversations with both the purchaser and the vendor and why we like to have those conversations rather than the lawyers having the conversations, because the lawyers will be very [um]--

Aaron: --by the letter 

Patrick: Yeah, by the letter of the law. [John: which is their job] yeah, which is what they're paid to do and by all means, we don't expect anything less of them, but sometimes, there are workarounds that we can find by just having an open communication between both parties

Aaron: And by work around, you don't mean like "oh, we're going to do a dodge and we're just going to kind of pop a pretend bit of wood there and that'll fix it" you mean, kind of will come to [John: --an agreement] an agreement [Patrick: yeah, to keep a deal alive] 

Patrick: So, it doesn't mean... if a building inspection comes back bad, it doesn't mean the deal is dead. It just means that we've got conversations to have and see where we can go with them. Sometimes, they pan out and sometimes, we can keep moving forward, sometimes they don't, and that's the reality of a contract
John: Like, specifically, in the contract it reads that the parties… the purchaser is the party benefited by this condition. Now, what that means is that if the defect limit is unfavorable, basically, all the controls in the purchaser at that point, so they can withdraw. So, when we...when we're looking to do it is, you know, in my wording is hey, if it's not--if you don't like it, just come back to the table and, you know--

Aaron: --it just opens up negotiation once again and it's good to again be in communication with you, guys, so that you can cover off on any issues that are come up like you deal with this every day, rather than being overwhelmed by this idea of like, "oh, crap! I didn't know the house was going to fall down, because it said it was, this is like, "oh no, it's not going to fall down, it's just... we just need to fix this one little thing; it's going to cost this much" 

John:  What to know, it's a point where we can stop and renegotiate 

Aaron: Yep, definitely! Excellent! I think that's a really good point to [uh] kind of finish things up there. Thank you again, boys, for another fantastic Property Pod. We'll be back next week with a guest [John: Go, looking forward to it] so yeah, we'll catch you all then. All right, see you! 

[extro music and disclaimer]

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