With tightening lending restrictions and a possible return to a buyer’s market, it’s no wonder property buyers might be thinking more about including a finance clause in their negotiations. I’ve seen it show up on a few recent transactions in Remuera and interestingly even on deals whereby the buyers have pre-approvals.
Certainly, the ‘responsible lending’ climate has resulted in deals being held up at the finance stage, with banks increasingly cautious (or spooked, really) by any property that has issues.
In the current climate, a finance clause could give comfort to a buyer who could not financially bridge the gap in the unlikely event of a valuation shortfall. Many buyers are inserting finance clauses into the standard contracts of sale to allow sufficient time to allow banks to complete valuations and provide unconditional approval.
When it comes to finance clauses, here are 3 common myths:
Myth #1: You can’t have a finance clause on an auction purchase
It is pretty unusual that a real estate agent would allow a buyer to bid at the vendor’s reserve price with a finance clause in place, but it’s not impossible. If the vendor and their solicitor agree to permit it, the buyer may just get their chance to bid. It has a higher chance of being permitted in a buyers’ markets. The reason for this is because the vendor would be happy to have certainty of bidders, albeit finance-clause bidders.
Generally, if you are bidding at auction, make sure you have your deposit in clear funds and pre-approval ready to go.
But if you really want to bid at auction and have a finance clause, then be clear right from the start about what you require so that negotiations can be had with the vendors. Like most contracts (and life generally), everything is a matter of negotiation so a side agreement modifying your auction contract (and no one else’s) will be necessary.
In short, talk to the real estate agent about this.
Myth #2: A finance clause is like a due-diligence clause
Some people see a finance clause as just a way of getting the property under contract while they think about whether they really do want to go unconditional. In other words, if the loan is not approved by the approval date or any later date allowed by the vendor, the purchaser’s deposit must be immediately refunded and the contract will be terminated.
However, under New Zealand law, the purchaser must do everything reasonably required to obtain approval of the loan. Clause 8.7 (2) of the standard ADLS contract requires purchasers to “do all things that may reasonably be necessary to enable the condition to be fulfilled by the date for fulfilment.” What this means is that purchasers who have had conditions inserted into a contract need to make active steps towards having those conditions satisfied.
Specifically, they must do all things that may reasonably be necessary to work towards having that condition satisfied. In the case of a finance condition, this would mean that the purchasers would at least seek finance from banks and other lenders. Basically, delaying or doing nothing is not an adequate reason to exit the contract.
A buyer who chooses to rely on this ‘out’ should expect some rigorous debate from the vendor’s solicitor, including a request or the decline letter and proof of demonstrable and timely efforts to obtain the finance. And just because you didn’t get that on one offer you’ve made previously does not mean you will never get that question. Don’t play with fire.
Myth #3: You don’t need a finance clause if you have pre-approval granted by your lender
This is the most critical of all three myths.
There are several different types of pre-approvals and they offer varying degrees of assurance. In instances where pre-approval is given verbally, online or is not credit-assessed, it cannot be relied upon and a finance clause is recommended (or further effort made to secure credit-assessed pre-approval).
In cases where credit has been assessed and pre-approval granted, you should be familiar with the types of properties banks have concerns about i.e. high-rise apartments, properties with CCC issues, cross-leases with title issues, properties with very low CVs or off-the-plan or any damaged or very run-down properties.
Basically, if you are in doubt about your ability to get finance, insert a finance clause. You don’t want to be stuck like this girl who was unable to settle on an apartment sold off-the-plan due to the lack of finance.
Buying properties in this Auckland market
With slowing market conditions, it is not surprising that many bidders were becoming more reluctant to buy at auction, hoping properties would be passed in and leaving vendors more inclined to accept their conditional offers. But don’t be scared off by slowing market conditions. Just make sure you do your research and understand market value.
Remember: if you are selling and buying in the same market it all evens out generally (unless you’ve made a spectacularly bad or good buy).
Vendors in this market are generally more flexible and happy to accept offers from buyers that are financially sound – even if it takes a few more days for approvals.
If you have full finance approval, you are most certainly at a distinct advantage when at the negotiating table. With record low interest rates for a longer loan duration (the Reserve Bank has just cut the Official Cash Rate by a MASSIVE 50 basis points), you should aim to make 2019 the year of your best property purchase!