Buying a property, whether you’re a first home buyer or seasoned investor, may feel like a long and complicated process.
Buying a property is a big life moment, so be patient; the prize is just around the corner. A buyer’s first and most important job, long before the day of settlement arrives, is to engage a competent team of advisors to support them in their journey to settlement. That step will help ensure that all the others fall into place. So, what do buyers need to know about settlement?
What is settlement?
To refresh the basics, settlement is when the ownership of the property legally passes from the seller to the buyer. A well-advised buyer must then be prepared to complete seven steps:
- Inspect the property;
- Review title issues;
- Organise insurance;
- Prepare to pay the remaining purchase price;
- Pay taxes and fees;
- Brace for surprises; and
- Collect the keys and security codes.
A buyer need not be present at settlement, although many choose to do so. The heavy lifting falls to the buyer’s legal and financial representatives.
Step 1: A last look at the property
At settlement, the property should be exactly as described in the contract. The final inspection should take place in daylight, in the presence of the seller’s agent, and as close to settlement as possible. The buyer should raise any issues as quickly as possible.
What will actually be included in the sale will be specified in your contract, so make sure you understand it thoroughly. Most standard sales contracts include a schedule entitled ‘Excluded Fixtures/Included Chattels.’ Only excluded fixtures may be removed by the seller at settlement. Included chattels (sometimes called ‘reserved items’) remain with the buyer.
Step two: The last look at the title
Have any new ownership interests, such as liens, been created in the property since the search was completed? Make sure that any caveats on the property have been lifted so that a change of ownership may occur.
Step three: Sort out insurance
In NSW, the risk of loss passes at settlement or, if earlier, on the date the buyer takes possession of the property. In theory, buyers don’t need insurance coverage during the period from the exchange of contracts until the date of settlement, unless they take possession first. This is a spectacularly bad choice.
Prior to settlement, the seller’s insurance “kicks in” first. If coverage is insufficient to restore the property to contract condition, the buyer may seek a price adjustment or take back debt from the seller. Alternatively, the buyer may make a claim against his or her coverage.
Step four: Arrange payment
The buyer’s attorney generally holds the remainder of the purchase price in escrow until the date of settlement, when it is paid to the seller.
All rates and other charges will be adjusted between the buyer and the seller. The seller is responsible for rates up to and including the day of settlement. The buyer is responsible as of the day after settlement.
Step five: Don’t forget taxes
Taxes triggered by the transfer of property include stamp duties and the Goods and Services Tax (GST). State and territory stamp duty is imposed on some transfers of land and dealings with interests in land as well as on dealings in some interests in a company, trust or partnership. Stamp duties are usually paid by the buyer, although both parties may be liable. Be alert: the methods for calculating these taxes tend to change.
Step six: Anticipate surprises
Even unexpected surprises are not entirely unexpected. Generally, they fall into two categories. The first relates to financing, and the second involves failure to remove a condition.
If either the buyer or the seller is unable to go forward on the date of settlement, a Notice to Complete may be the remedy. This gives the non-performing party a brief additional period of time, usually 14 days, to fix the problem.
Sometimes, however, a seller’s problem is a tenant who fails or refuses to vacate. This is a special kind of issue because it involves the particular obligations of tenant rights and protections.
At last: Get the keys
Since buyers often do not attend the settlement, it is important to organise who will get and deliver the keys to whom. Buyers should also make sure they have the codes for security devices.
Once you’ve undertaken these seven steps as part of settlement, congratulations the property is yours.
WRITTEN BY ROLF HOWARD