Investment tip: How to recover from settlement setbacks

The usual circumstances include:

1. Bank valuation comes at below purchase price, so the amount of loan that the buyer gets may be insufficient. Unless the difference is filled in from their own pocket, it could be difficult to get pre-approval for finance.
2. The pre-approval may be subject to conditions and, for some reason, the buyer finds himself unable to meet them.
3. For off-the-plan purchases, the market may have moved in between signing the contract and applying for finance, making funding acquisition more challenging.

According to accountant Munzurul Khan, funding may also be held up if the buyer is relying on another property to settle simultaneously, thereby delaying the transaction.

Other than finance, time, personal circumstances, and inability to comply with contract terms can also present issues when arranging a settlement, he highlighted.

Common consequences

While conveyancing law varies in different states, most settlement provisions state that the vendor can charge interest for every day of delay on the buyer who misses settlement, according to Mr Khan.

The vendor can also serve a notice ordering the buyer to complete the transaction within a definite time frame. Once the notice period has expired, the vendor can terminate the contract and claim the full amount of deposit. 

Aside from the deposit, the buyer may also be held responsible to cover the shortfall in the event that the property sells for a lower amount than the original contract price.

Mr Khan explained: “On a $500,000 purchase, the buyer may lose their $50,000 deposit, pay interest and also marketing and sales costs to re-advertise the property. Then, if the property sells to a third party for $470,000, the buyer may have to pay a further $30,000.”

In extreme cases, the vendor can also opt to sue for damages if the buyer caused significant financial loss.

Recovery options

As extensive as consequences get, buyers have limited options to recover once the notice to complete settlement has been issued.

Experts recommend contacting a lawyer to review the contract and check for any loopholes or help in negotiating with the vendor.

“If it's only a short period —weeks, maybe a month—a vendor may be prepared to accept just interest in that period provided they have some comfort that a purchaser will be able to settle at the end," according to the accountant.

If the vendor refused to negotiate, Mr Khan suggested looking into alternative finance methods like extracting equity from other properties, offering additional security to the lender, or seeking assistance from family.

Due diligence

The cost of missing settlement can be higher than more common financial losses so make sure that you have done due diligence before you sign a sales contract.

Property experts strongly advised getting your finance approved before the contract is deemed unconditional.

Mr Brach said: “With an existing house, you can get the bank’s approval before you have to settle. That's the best way for sure because you have all your ducks in a row."

For investors who opted for an off-the-plan or auction purchase, he recommended keeping funds worth $50,000 to $100,000 on hand in case the valuation comes in below purchase price.