Six major risks of purchasing property and what you can do to manage your risk

Nobody wants to buy a defective property or get themselves in a financial fix when committing to a purchase. So, I’ve compiled some practical advice about the six common risks of a property purchase and what you can do to manage them. I hope this helps you!

Risk number 1: 
Not being able to secure sufficient finance for the purchase, particularly for off-plan purchases or purchases involving purchase of unregistered land. This is because the period between exchanging contracts and settlement can take a long time and anything can change in that time which might affect your ability to secure a mortgage or other finance. Purchasers should ensure they can opt out of the contract ,should they not be able to secure finance, without harsh penalties for doing so.

What can you do?

• Negotiate a "subject to finance" clause in the special conditions of the contract.
• Ensure you have obtained in-principle approval from your mortgagee before looking at any property (including for any future building you may intend to do on that property)
• Keep your credit-score high by paying bills on time and paying off your credit card debt regularly.
• First home owners can take advantage of government assistance schemes and grants.
• Save for your deposit and stamp duty.
• Speak to your lender even after obtaining conditional approval and keep them informed of any changes to your circumstances – for example, a change in employment. Discuss the matter with your lender and ask how it may affect your purchase.
• Try to not to undergo any changes in your life that may affect your ability to pay your loan in future and after you have exchanged contracts and before settlement. While one cannot always have control over these matters, where you have a choice it is not advisable to make major changes to your lifestyle in this period.
• If you are a foreign buyer, ensure you have approval to buy property in Australia from the Foreign Investment Review Board before making any offers.

Risk number 2
Not being able to put down a cash deposit automatically increases the overall costs of the purchase – from mortgage insurance costs to costs for obtaining deposit bonds (in lieu of cash) to higher interest rates that might be charged by your mortgagee as their rate will be based on your risk as a customer and not having a cash deposit means you are a greater risk for your lending institution.  In addition, you may be required to rely on a guarantor loan which considerably increases the complication and affects the overall cost of the purchase. Finally, you may face additional risks such as the deposit bond lapsing over time  or inability to secure unconditional finance approval which could put a purchaser in breach of the terms of the contract of sale and allow the Vendor to cancel the contract and claim 10% of the purchase price as a forfeited deposit from the purchaser or the purchaser’s deposit bond insurer. If the deposit bond is paid out to a Vendor, the insurance company will claim the amount paid out from the purchaser under the insurers right of subrogation.

What can you do?

• Save as hard as you can for the deposit. Really be tough on not spending and have a budget and stick to it.
• Start saving early and invest your savings in a high-interest savings account. 
• Investigate government grants such as the First Home Buyer Assistance Scheme and New Home grants.
• If you are lucky enough to have willing parents or family, they may be able to advance a sum to you as an “early inheritance” but your parents will need to check the tax and social security implications of doing this. Your parents or family may also agree to acting as guarantor but note that this does complicate matters and will slightly increase the overall cost of your purchase.

Risk number 3
The building and/or land may have latent defects that are only discovered after contracts have exchanged. These defects could be defects in the title, land, any dwelling or even in respect of the financial position of the property or owners of the property. Once contracts exchange, risk for any defects passes from the Vendor to the Purchaser.  

What can you do?

• Obtain a pest and building report.
• Obtain a Strata Report if buying strata.
• Ask your future neighbours about the neighbourhood and drive through it at different times of the day to check traffic conditions, safety, noise, pollution and so on.
• Do an internet search for reviews and data about the area. RealEstate.com and other real estate websites can give you information about rental demand, demographics, median price and so on.
• Ask a lot of questions about the property and location and about the contract of sale. Ask the agent, strata manager, pest and buildng inspector and your solicitor lots of questions.
• Ask local Council. Council officers are usually a very useful resource when purchasing a property. They can give you more information about planning and development for the area and you might even find the person you speak to lives near where you want to buy and can give you that little bit of local knowledge.
• Take out title insurance even after you are satisfied with your enquiries.

Risk number 4
Unforeseen financial and tax consequences on the purchase or even on the re-selling of the property in future. This is particularly true of trusts, foreign purchasers (non-citizens or permanent residents) and companies buying property. 

What can you do?

• Speak to your financial advisor before exchanging contracts and particularly if you are not purchasing in an individual capacity, or are a foreign purchaser or wish to develop the property in future.
• The ATO (for queries about GST and CGT) or Office of State Revenue NSW  (for queries about Land Tax or Transferee (Stamp) Duty) may also be called for generic advice.
• Look at the ATO and Revenue NSW websites.
• Establish before exchanging contracts what tax adjustments need to be made at settlement. The contract of sale provides this information and you can also speak to your solicitor about this.
• Understand that Transferee Duty (also called Stamp Duty) is levied on the purchase price plus any GST on the sale i.e. the GST component of the purchase price is also assessed for calculating  Transferee Duty.

 Risk number 5
The property may not be zoned for its intended future use or other restrictions such as easements and covenants (registered or unregistered) may prevent a purchaser from using the property for its future or even its current use. This is particularly the case where purchasing commercial or retail property is purchased or where a residential property is purchased with the intention of converting it to commercial premises in future or where residential property is located in flood zones, bush-fire prone zones, on ecologically sensitive land to name a few obvious restrictions.

What can you do?

• Pay attention to the planning certificate attached to the contract of sale.
• Pay attention to the easements and covenants reflected on the title search.
• Do not rely on the estate agent or online information or any brochures you have received giving you accurate advice about the property. Remember: Agents work for Vendors, not Purchasers and advertising material tends to paint a rosy picture.
• Order the relevant reports when you have any concerns about the property and order as many reports as you can that your solicitor may recommend to you.
• Obtain title insurance.
• Speak to local Council if you have any concerns.
• Commission a survey of the property and obtain a building report before exchange if you have doubts and concerns about boundaries and encroachments.

Risk number 6
The property is being sold by a Vendor facing financial strain and legal proceedings. While these circumstances are not easily discoverable by the Purchaser, Purchasers should be wary of purchasing a property that appears to reflect a price below market value. The risk is buying a property where the Vendor’s lender or other creditors are taking action to forcibly sell the property. In that scenario, you might not be able to purchase the property after all and will have wasted some time and money on the property already. Depending on the circumstances, you may even find yourself joined to the insolvency or bankruptcy proceedings as an unsecured creditor. This can be costly as well as frustrating.  
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What can you do?

• Ask your solicitor to apply for a priority notice or, where the settlement period is long, register a caveat for the property. The additional cost is well worth taking owing to the severe potential consequences of purchasing a property where the Vendor may be bankrupt or insolvent.
• Watch out for bargain deals or a Vendor who appears over-anxious to sell.
• Take out title insurance if you are not going to caveat the property.