First Home Buyer Series #1: What to know before making an offer
At last, the search is over - you’ve found your dream home (or maybe just the home that’s great for now). But before you make an offer, there’s some homework to be done.
This guide covers commonly asked questions about buying your first home, including the sale and purchase agreement, finance, how to research a property, and the different types of property ownership.
The Sale and Purchase Agreement
1. What is a sale and purchase agreement?
Real estate transactions are governed by legal documents called sale and purchase agreements. When you are ready to make an offer on a property, the real estate agent will prepare a sale and purchase agreement for that property. This sets out the terms and conditions of the purchase including the price, the settlement date and any specific conditions to be met (both are explained in more detail below).
2. Do I need to contact my lawyer before I make an offer to buy a property?
You should always get legal advice before you sign the agreement. It may contain conditions or disclaimers that are not in your interests. It’s crucial to know that a sale and purchase agreement is a legally binding contract between you and the seller and, once signed, can only be cancelled in certain circumstances.
3. What if I am buying privately and there is no real estate agent?
We can draft the sale and purchase agreement for you. Contact us for more information.
4. What is a conditional agreement?
This means your agreement is subject to certain conditions (see below). You must confirm these conditions by the specified date otherwise the seller may be able to cancel the agreement.
5. What conditions should I include in the Agreement?
There are a number of conditions that could be included in the Agreement, but the common conditions are:
Finance (i.e. the agreement is conditional on your lender approving a loan to you)
Builder’s Report
LIM Report or Property File (see “What is a LIM report?” below)
Toxicology report
Sale of another home
Legal Title
Insurance (See “When should I arrange house insurance for the property I want to buy?”)
We can discuss what conditions you may want to include in the agreement. It often depends on the particular property and what investigations you have already completed. Keep reading to find out what things you should be looking for.
6. What does it mean by an unconditional offer?
If you have completed your investigations before making an offer on the property, you may want to make an unconditional offer (i.e. no conditions in the agreement). You should always seek legal advice before you sign an unconditional agreement.
If there are multiple buyers making an offer on the same property, you may want to make your offer attractive to the seller by having fewer conditions than the other buyers. In this case you must complete your investigations on the property before you sign the agreement. Remember - a sale and purchase agreement is a legally binding contract between you and the seller. If you sign an unconditional agreement, you must complete the purchase of the property.
7. What is the unconditional date?
Once you have confirmed the conditions in your agreement, the agreement becomes unconditional (no conditions attached). This means you must complete the purchase of the property.
8. What is the settlement date?
The settlement date is the day you pay the balance of the purchase price, the property is transferred into your ownership and you receive the keys to the property.
9. What is a “Cash Out” Clause or an “Escape Clause”?
This is a clause for the seller’s benefit. It means that if the seller receives a better offer, they can cancel your agreement if you do not confirm the agreement as unconditional by a certain date.
10. What are chattels?
The sale and purchase agreement includes a list of chattels that are included in the sale. This list can be negotiated with the seller.
Chattels are items that could be removed from the property (e.g. such as curtains, carpets, stove, heat pumps). Chattels are separate from fixtures which are permanently attached to the property (e.g. built-in cupboards, showers, decks). If you are not sure if an item is a chattel or a fixture (e.g. wall oven), you should include it on the chattels list to make it clear what items you are buying.
Arranging Finance
11. The agreement states I must pay a deposit. Is this the same as the deposit I need to apply for a home loan?
No. The word “deposit” is used in two different parts of the home buying process.
When you apply for a home loan, you’ll generally be able to borrow from a bank up to 80% of the value of the property you want to buy. The remaining 20% needed to make up the full purchase price is what the bank calls your deposit.
When you buy a house, the sale and purchase agreement usually states that when the agreement becomes unconditional, you must pay a deposit to the real estate agent (or the seller’s lawyer). This deposit is a part payment of the purchase price. If an agent is involved, it is common for the deposit to be 10% of the purchase price. However, the deposit can be any amount agreed between you and seller.
The deposit you pay to secure the house can be part of the 20% deposit you pay to the bank.
12. My bank has told me I can borrow up to a certain amount. Does this mean I can make an unconditional offer?
You should always talk to your lawyer before you make an unconditional offer. It is likely that your bank has only provided conditional approval of how much they could lend you. The bank usually requires details about the specific property you want to buy before they provide you with final acceptance of the amount they will lend you. The final acceptance is usually limited to that particular property – so you won’t be able to use it to make an offer on a different property.
Researching the property
Before you make an offer it’s really important to conduct research on the property. This ensures you’re fully aware of anything – such as council plan limitations, natural hazards or boundaries – that might affect your ability to finance the property, make changes to it or its future value.
13. When should I arrange house insurance for the property?
It is important to check that the house you want to buy is insurable. You should check this as part of your due diligence on the property as the bank generally will not loan you money to buy a home if that home is not insurable. Older homes, or homes that are at risk of flooding or other natural hazard, can be difficult to insure and have significantly higher insurance premiums. This may affect your budget for loan repayments, and therefore how much the bank is willing to lend you..
14. What is a LIM Report? Is this the same as a property file?
No – they are two different things. A Land Information Memorandum (LIM) is a report prepared by the local Council containing information held by the Council about the property. A LIM usually includes:
Permitted alterations that have been made to the house
Building consents, code of compliance certificates, building permits, and certificates of acceptance for the property
Any remedial work required by the Council in relation to works on the property
Land features including possibility of flooding, potential erosion, slippage, hazardous substances
Location of private and public stormwater and sewerage drains
Unpaid rates
District Plan classifications and zoning information that relate to the land or buildings
Other information about the property Council considers relevant.
A LIM report should not be relied on to the exclusion of other enquiries. This is because it only details the information that the Council has on its records at the time of the report. For example, it may not provide you with the information needed to ascertain whether a property is suitable for development, subdivision, or whether it is under review in the District Plan.
A property file provides documents held by the council that may not be included in a LIM report such as copies of the original plans for the buildings. This can be helpful to indicate whether there has been any alterations or extensions to the buildings and whether the works have been consented or permitted.
It may be necessary to obtain both a LIM report and a copy of the property file. We can help you obtain both.
Different property types
15. What is a freehold property?
If you own a freehold property (also known as an “estate in fee simple”) you own the land and the buildings on it.
16. What is a cross lease property?
A cross lease property is a type of land ownership where a number of people own an undivided share in the land and the buildings on that land. Each home is then leased from the other owners.
The rights and obligations of each cross lease owner is set out in a document called a “lease”. The lease may contain restrictions about your use of the property. For example, it may prohibit you operating your business from your home or from keeping pets.
The lease is registered on the legal title with a “flats plan”. A flats plan shows the outline of all buildings, including garages on the land. The flats plan may also show which areas are for the exclusive use of one cross lease owner and which areas are common areas (e.g. driveways).
If you want to make any alterations or additions to the buildings on the property, you will need to obtain the consent of the other cross lease owners. If those alterations change the exterior boundaries of the buildings, a new flats plan will need to be registered along with an updated lease.
If you are considering purchasing a cross lease property make sure to talk to us early on to ensure you clearly understand the cross lease and its conditions.
17. What is a unit title?
Apartments or townhouses are usually unit title developments. Unit title owners own a defined part of a building (e.g. Their apartment and parking space) and share common areas such as lifts, driveways and gardens.
All unit title owners are members of the body corporate and pay body corporate fees. The body corporate handles the management and maintenance of the building and the property. Each body corporate has their own rules which apply to all unit title owners. These may include restrictions regarding rubbish, hanging out washing, parking etc.
Before you buy a unit title property, the seller must provide you with a pre-contract disclosure statement. You can also ask for more information about the body corporate such as the long-term maintenance plan, insurance policy and other liabilities attached to the property. It is important that you obtain this information before you commit yourself to buying a unit title property. We can review the disclosure statement and any other information with you to make sure you are fully informed before making an offer.
Note: This information is intended to be of a general nature. If you have any questions specific to your situation or that are not covered off here, please do get in touch - we’re always happy to help.