For first-time homebuyers, the journey of acquiring a home loan can be an overwhelming sea of information to navigate.
In addition to understanding the ins and outs of home financing, another crucial aspect of the homebuying process is comprehending the two primary methods of selling a house:
- a private treaty,
- or an auction.
Let’s delve into how property owners in NSW can sell their homes and what you need to grasp about these processes when purchasing.
How a Private Treaty in NSW Works
When it comes to selling property in NSW, the private treaty sale is a strategy that offers sellers a unique level of control and flexibility.
It’s a process where sellers are firmly in the driver’s seat, allowing them to initiate negotiations with prospective buyers through their chosen agent.
So how does the process work?
Once both parties agree on a price, the buyer typically places a deposit, marking the beginning of what is usually a “cooling-off period”, usually lasting up to 10 days.
During this phase, buyers still have the option to step back from the deal, although it may come at a cost in the form of forfeiting their initial deposit.
For example, say you agreed on a purchase of a $1m property (assuming you already had a pre-approval in place); the following are the steps taken:
- Sign a contract noting the purchase price of $1m
- You will then put down a non-refundable deposit of 0.25%, being $2500. In addition, you will be provided with a 5 to 10-day cooling-off period, however, it’s generally better to ask for the full 10 days.
- You will provide the signed contract for your solicitor to review if not already doing so. Also, you will provide a signed copy to your mortgage broker – ASAP.
- During the cooling-off period, your broker will organise to get your loan fully approved; they will order a valuation. Generally, if you are borrowing 80% or below the purchase price, no valuation is needed, but if you’re borrowing more than 80%, and also depending on security and location of the property, a full valuation may be needed. This could take 2-5 days depending on when the valuer is provided access.
- Your mortgage broker will then obtain any other relevant documents from the customer e.g. updated payslips.
- Once valuation is obtained with the same value as the purchase price and all relevant docs are submitted to the lender, you should typically get the full approval.
If all other variables, such as the pest and building report and/or negotiations with the contract in itself are all good and you’re happy with proceeding with purchasing the property, then you will provide the remainder of the 5% or 10% deposit (this has to be negotiated by you or the solicitor) to the Real Estates Trust account at the end of the cooling off period.
But if any of the variables noted above comes back negative OR you simply changed your mind about purchasing the property, then you will result in forfeiting the 0.25% deposit.
How Property Auctions Work in NSW
Property auctions are overseen by an auctioneer, typically hired by the property owner or their real estate agent.
To participate, you’ll need to register with the selling agent on the date of the auction.
Upon registration, you’ll receive a unique bidder’s number. The auctioneer takes charge of the bidding process, where prospective buyers or bidders compete with each other by progressively raising their offers until the property is awarded to the highest bidder.
Typically, the seller of the house sets a reserve price. This reserve price represents the minimum amount at which they are willing to sell the property through the auction.
If the bidding reaches or surpasses this reserve price, the property is considered “on the market” and will be sold to the highest bidder.
However, if the reserve price isn’t met, the property is often described as being ‘passed in’ or ‘withdrawn from auction.’ In such cases, the highest bidder usually gains the opportunity to enter into private negotiations with the seller, potentially leading to a sale, but will still be sold under auction terms and conditions.
Following the conclusion of bidding, the winning bidder is obligated to provide an immediate deposit, typically ranging from 5% to 10% of the property’s purchase price and pretty much obligated to purchase the property.
What You Need to Know and do BEFORE an auction
- Arrange your finances
- Obtain a pest and building report, OR strata report if it’s not a house.
- Have your solicitor/conveyancer to review the contract
- Do your own research on the property and set a realistic price in case the valuation comes back lower than the purchase price.
Things to note: Auction VS Private Treaty
- There is no cooling off in auctions, so once you win the auction, you are obliged to proceed with the purchase, otherwise you may be liable for any loss.
- Make sure you don’t OVER pay. In a private treaty, if the valuation comes back lower than the purchase price, you have the right to pull out of the sale and forfeit the holding deposit. However, in an Auction, you are obliged to proceed with the purchase.
So, in any of these two scenarios, if the valuations come back lower than the purchase price, you can:
- Proceed with obtaining a loan with lender mortgage insurance (if not already)
- Borrow funds from family members to cover the shortfall.
- Potentially resubmit your application to another lender whose valuations come back at the purchase price.
NOTE: please only use this as a guide as all legal/questions matters should be better explained by your solicitor.
For more information on how this process works, do not hesitate to get in touch with The Mortgage Agency now!