Failure to obtain mortgage financing and issues concerning valuation and inspection can alter a buyer's plans and necessitate withdrawing from a property purchase. Cold feet, a change in personal circumstances, or unexpected financial difficulties are also reasons that can deter homebuyers from proceeding.
And in some rare cases, instances like when "the buyers spent the money they need for the purchase in between exchange and settlement, so they no longer have the funds to cover the purchase" have also led to a sale pullout, according to Lloyd Edge, author and founder of Aus Property Professionals.
See Also: InfoChoice Free Property Report
Can I back out of a property sale?
If any of the circumstances above happen, and you need to renege on the deal, the first question you'll probably ask is this. The short answer is yes, you can back out of a property sale.
The much longer answer is yes, you can, but whether you'll face any consequences or not depends on the period in which you pull the plug on your home purchase. That window of opportunity where you can walk out of a sale unscathed (or just lightly scratched) happens during the cooling-off period.
"The cooling-off period is the last stage that a buyer can pull out of a property purchase before there are legal and financial consequences," Mr Edge said.
"This period allows the buyer to be certain of their purchase and perform any final checks that they may need on the property, and to ensure their finance is in place."
Basically, you must secure home loan approval from your lender before the cooling-off period ends. It's also your last chance to do your due diligence and make up your mind before the transaction proceeds to a point where backing out would likely hurt you financially.
The cooling-off period varies from state to state, but it typically lasts from two to five business days and commences from the date the contract is signed by both parties and ends at the close of business on the last day provided - typically at 5:00 p.m.
But here's a catch, you may not even have a chance to get out of a contract relatively smoothly. One reason is that you live in Tasmania or Western Australia where they do not have a statutory cooling-off period for residential property contracts, and another reason is that the avenue through which you made the purchase won't allow you to bow out that easily - as in buying at auction.
What happens if I buy at auction?
Buying at auction is a transparent and speedy home purchase process. It's simple - bidding means buying. As such, you don't go to an auction to test the waters, because once the hammer falls and you are the highest bidder, the property is "sold" to you.
Immediately after the auction, you will sign the contract of sale. The contract is unconditional - that is, it is legally binding - and there is no cooling-off period.
"When you buy at auction, your point of no return is when you raise your hand to make the winning bid. Once it's accepted, there's no going back unless you want to lose your entire deposit," said Tracy Leske, principal buyers agent at Queensland-based LYNC Buyers Agents.
Winning bidders must pay the full deposit, typically between 5% and 10% of the property purchase price, at the end of the auction. That said, you must have your deposit and financing ready if you're buying at auction.
MEET THE EXPERTS. Tracy Leske, director and principal buyers agent at LYNC Buyers Agents (left); and Lloyd Edge, founder and managing director of Aus Property Professionals (right)
How about if I buy through a private treaty?
Buying a property through a private treaty is more traditional and less pressured compared to the highly competitive and high-stakes approach of auctions.
Not only do you have a chance to negotiate during the sale, but you may also have a cooling-off period depending on your state or territory and whether the contract is conditional or unconditional.
Most contracts exchanged in a private treaty typically include a cooling-off period (in states where it's mandated).
Buyers can put all manner of conditions in the sales contracts; two popular ones are subject to finance (meaning you need to be approved for the home loan), and subject to building and pest, meaning the inspection needs to pass.
Should the loan fall through, or if significant issues are found, you may be able to back out of the deal, negotiate repairs, or work out a price reduction.
However, Ms Leske confirmed that contracts exchanged through this avenue can also be legally binding immediately if it is unconditional.
"An unconditional contract is exactly what it sounds like: a contract of sale without any conditions, therefore, the contract would have no conditions and a waiver of a cooling-off period in place," she said.
In a hot property market, a vendor selling via private treaty may opt for the buyer with fewer conditions and a shorter settlement period.
Consequences of backing out of a house sale during the cooling-off period
If you want to back out of a house sale during the cooling-off period, the consequences are generally more straightforward and less severe than withdrawing from an unconditional contract.
The penalties and duration of the cooling-off period vary by state or territory.
|
State |
Standard Cooling-off Period |
Penalty for Backing Out |
|
New South Wales |
Five business days |
0.25% of purchase price |
|
Queensland |
Five business days |
0.25% of purchase price |
|
Australian Capital Territory |
Five business days |
0.25% of purchase price |
|
Northern Territory |
Four business days |
No penalty or explanation required |
|
Victoria |
Three business days |
$100 or 0.2% of purchase price (whichever is greater) |
|
South Australia |
Two business days |
$100 of deposit |
|
Western Australia |
N/A |
100% of purchase price |
|
Tasmania |
N/A |
100% of purchase price |
Source: Government websites. Information is correct at the time of writing.
This means if you pull out of a sale of an $800,000 property during the cooling-off period in NSW, QLD, or ACT, you'll need to forfeit $2,000 from your deposit. If you're in VIC, your termination penalty will come to $1,600.
Although there is no mandated cooling-off period in Tasmania and WA - which will then result in your paying 100% of the property purchase price should you back out - a cooling-off period can be included in the contract if the vendor and buyer agree to it.
"An optional three-business day cooling-off condition can be added to contracts in Tasmania, allowing the buyer to cancel without penalty during that period," Ms Leske said.
On the other hand, the buyer can also shorten or waive their right to a cooling-off period by signing a waiver form (in NSW for example, this is a Section 66W form). This is often done to make an offer more attractive to the seller.
How to back out during the cooling-off period?
Backing out of a house sale during the cooling-off period is relatively simple. You only need to provide a written notice to the seller or the party's solicitor indicating your decision to terminate the contract. Alternatively, you can get your solicitor or conveyancer to write the letter on your behalf.
The balance of the deposit, after deducting the penalty, will then be refunded to you within days.
After the cooling-off period, getting out of a contract will be more difficult and the penalties more severe.
"Once the cooling-off period has expired, the contract is legally binding and there will be legal and financial consequences for pulling out which will be detailed in the contract of sale," Mr Edge said.
Consequences of pulling out of an unconditional contract
Life happens; if you were unable to secure financing, a change in your circumstances arose, or the property did not pass final inspection after the cooling-off period (if there's any), you can still back out of an unconditional contract before settlement - but there will be a lot at stake.
Legal and financial consequences await if you pull the plug on your property purchase.
"A buyer can terminate an unconditional contract, however, it is not advisable as this can put a buyer at serious risk of penalties, additional fees, and legal action by the seller," Ms Leske said.
Because an unconditional contract is legally binding, pulling out of it constitutes a legal breach, and therefore will entail legal and financial consequences, which will be described in the contract of sale.
These are the potential liabilities you will face if you terminate an unconditional contract.
1. Breach of contract
A buyer's failure to meet the agreed terms in the contract may result in legal actions by the seller to enforce the contract or seek damages/loss.
2. Legal fees
The buyer may also be responsible for covering the vendor's legal fees in addition to their own if the matter goes to court.
3. Forfeiture of deposit
Breaching buyers risk losing their deposit as they will likely need to pay the full 10% of the property purchase price.
4. Additional costs
The seller may seek compensation for any additional costs incurred due to the buyer's breach. On top of legal fees, this can also include interest on any outstanding amounts, conveyancing fees, costs associated with re-listing the property, and the difference between the original contract price and the price that the property eventually sold for.
How to withdraw from an unconditional contract?
If you intend to withdraw from an unconditional contract, you should seek legal advice first to understand the full extent of your liabilities and explore possible solutions.
"The first step is to discuss the circumstances with your solicitor and request them to notify the seller's solicitor to see whether you can come to any agreement with the seller to terminate," Mr Edge said.
"Who knows? Perhaps the seller will only request minimal compensation if they are understanding and compromising of the circumstances."
If the seller refuses to agree to the termination, the buyer will face the penalties mentioned above. "In some circumstances, the seller may even be able to sue for the whole amount of the property purchase price," Mr Edge added.
Conversely, you may avoid potential liabilities if you can provide legal justification for the termination.
"For instance, the buyer may terminate the contract if the seller has breached a contract term such as by neglecting to disclose a property defect," Ms Leske said.
What happens if the vendor pulls out of the sale?
Suppose the tables are turned and the seller pulls out of a contract of sale after the cooling-off period (if applicable), the buyer may be entitled to take legal action against the seller.
"In a hot market, buyers can be 'gazumped', meaning an accepted offer or exchange of contract is subsequently cancelled because a higher offer comes in before settlement," Mr Edge said.
If this happens, the seller can be held liable to financially compensate the buyer for any losses resulting from the failed transaction.
"These losses are typically called damages and if the seller refuses to pay, the buyer can apply to court for an order to compel payment," Ms Leske said.
"Typically in this scenario, the seller is required to pay the damages in addition to the buyer's costs including legal fees and any other out-of-pocket expenses."
Despite the penalties, some sellers still elect to break the contract "if they are ahead after the financial consequences for gazumping are considered," according to Mr Edge.
Tips for buyers purchasing properties
Barring unexpected life changes, you can minimise the risk of needing to pull out of a property sale by taking these necessary steps.
Know the market
Study the local real estate market of the state or territory you're buying into to understand property values and trends. You can do this by looking at recent sales of similar properties in the area, attending open homes, and speaking with real estate agents.
"Understand the current supply and demand in certain areas, what impacts property values, potential risks of an area/street, and if the property meets the fundamentals of what makes a sound, long-term investment," Ms Leske suggested.
Set realistic expectations
On top of having a clear budget, including all associated costs such as stamp duty, legal fees, and inspections, you must have a clear understanding of your priorities and what your budget can realistically afford.
"Many buyers become frustrated because they keep 'missing out' in the market but this is mostly because they are setting themselves unrealistic expectations on what they can afford or where they can buy for their budget," Mr Edge said.
Get a home loan pre-approval
That said, it can be a good idea to obtain mortgage pre-approval from your lender to ensure you know how much you can borrow and can act quickly when you find the right property.
Seek professional advice
Engage a solicitor or conveyancer early to review contracts and provide you with legal advice. It's also recommended that you seek an experienced buyers agent and building inspector to guide you through the process and avoid potential pitfalls. A mortgage broker, meanwhile, can assist in navigating loan options and secure the best deal.
Inspect the property thoroughly
Conduct thorough building and pest inspections to identify potential issues or necessary repairs before making an offer.
Review the contract carefully
That contract is the thing that stands between you and a court order, so read it carefully. Review the terms, including any special conditions, and ensure that you understand the implications of all clauses.
Do your due diligence
Check local zoning laws and regulations to ensure you can use the property as intended. Further, Ms Leske recommended, "research local councils for any planned infrastructure projects that may positively or negatively impact the property's value".
Negotiate wisely
"Leverage your buyers agent's expertise to negotiate the best possible price and terms. If you are not sure of what the property is worth, your buyers agent can conduct an appraisal and negotiate the purchase so you aren't paying too much and you can successfully secure the property you want," Ms Leske said.
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Experts' headshots supplied
In-text photo by storyset on Freepik
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