Misunderstandings about finance clauses – Cate Bakos

The Vice President of the Real Estate Buyer’s Agents Association of Australia is making some quite timely warnings to buyers about the use of finance clauses in contracts. Timely when you consider the tightening restrictions around lending and what’s happening with the market as well. Cate Bakos sounds that note of caution.
Kevin:  The Real Estate Buyer’s Agents Association of Australia is making some, I think, quite timely warnings or notices to buyers about the use of finance clauses in contracts. No wonder that there are more and more clauses, more of these finance clauses being used on contracts, when you look at the tightening restrictions around lending, what’s happening with the market as well. Joining me to talk about this, Vice President for the Real Estate Buyer’s Agents Association, Cate Bakos. Cate, thank you very much for your time.
Cate:   Always a pleasure to come on the show, Kevin.
Kevin:  Yeah, Cate, let’s clean up a few of the misunderstandings about finance clauses. And they are an important part of a contract and therefore there are some legal obligations that go with them, aren’t there?
Cate:   Absolutely.
Kevin:  Okay. Let’s have a look at myth number one that you can’t have a finance clause on an auction purchase. Is that true or not?
Cate:   Well, you can’t generally go to auction and assume that you can have conditions such as a finance clause without arranging them with the agent prior. Now we all know that the chances of an agent and a vendor and the vendor’s solicitor agreeing to let someone bid with conditions is very, very low. But if I said it had never happened before, I’d be telling a fib, because it has happened before and particularly in difficult times like we’re in today where credit availability has been the issue and it’s played a major role in the downturn that our major capitals are experiencing. In some cases, the agents might let you bid knowing that you will have a subject finance clause. Obviously they get that approved prior. But I also say to clients, if your finance isn’t quite approved and you’ve set your heart on this property, you can still go to auction, but you owe it to the agents to let them know that if you’re bidding, it’s generally to get the right to go inside on a pass in.
Cate:   So if you think that others aren’t bidding as well and you’ve got a chance of securing the pass in bid and then going inside and negotiating, you can then introduce your conditions and it really is a case of negotiating with the vendor and seeing whether they agree to your terms or whether they decide to let you walk and put the property on the market.
Kevin:  Yeah. If I could make just a couple of more points on that too, I think it’s a very dangerous situation to be bidding if you’re doing it under an understanding that you’re doing it with a finance clause, unless you’ve made that disclosure. Because there are times when a property can be knocked down when you think that you may be given that pass in opportunity when you’re not. It may just actually sell and then you’re caught.
Cate:   It’s a very real risk and it’s not one to toy with. In fact, even as a professional bidder, I would be very anxious about doing that because you’re absolutely right. You can’t predict at what point a vendor will put the property on the market.
Kevin:  That’s right. The other point I wanted to make too was that if you are given permission to bid under the condition that it’s with a finance clause, that same condition has to be offered to all other bidders.
Cate:   Well, you’d think so.
Kevin:  Well it does. Under law it does.
Cate:   Legally it should.
Kevin:  Legally, yeah, that’s right.
Cate:   There are situations where agents won’t necessarily announce what the other conditions are. And it’s the same for settlement variations. Let’s say they’re calling for 30 or 60 days and someone has an understanding that 120 days settlement is okay. The agents won’t necessarily announce that they’ve given permission to someone to bid under those conditions, but the reality is that they owe it to their audience and they owe it to their vendor because they could get additional bidders if they made it obvious that those conditions are being entertained.
Kevin:  Yeah, I think it’s very dangerous for an agent not to announce any special conditions because as one of the conditions of going to auction, you do announce these are the conditions under which you’ll be bidding. So if there is any variation to that, there could be a legal challenge after, if some bidders are put at a disadvantage, Cate. So I think once again, we’ve all got to be very careful of those situations.
Cate:   I agree.
Kevin:  Cate, can I take you to another one of myths and that is that if you don’t obtain finance in time and you wish to exit the contract on the basis of your finance clause, you can do so, no questions asked.
Cate:   Oh, I wish that was the way. No, that is a myth indeed. So you do have to demonstrate that you have made a serious attempt to get finance. You can’t just sit on your hands and then two weeks later say, look, sorry I didn’t get my finance, it didn’t come through. You have to demonstrate that you made an effort. And the vendor’s solicitor can take you to task on that and ask for evidence of the fact that you’ve tried to obtain finance. And if you haven’t, they could call you out on that. In Victoria we’ve actually got a section in the legislation that says that to get out of a contract on the back of not having obtained finance, you have to demonstrate that you’ve tried to obtain it.
Kevin:  Yeah, and that demonstration would be by producing a letter where you’ve been declined by the bank for your finance.
Cate:   That’s right. And you’ve got to do it in due time as well. You can’t just ask a bank manager on the day beforehand to draft you a letter. You need to demonstrate that you tried to obtain credit in a timely manner.
Kevin:  Myth number three, you don’t need a finance clause if your pre approval is granted by the lender. And this is something that I’ve got to say, even a lot of real estate agents don’t understand.
Cate:   This one is a tricky one and I’ll take it back to the letter that a lender will provide someone when they’ve got pre approval. It needs to be assessed firstly, so credit assessed. If you’ve got an indication of what you might be able to borrow without actually handing over documentation, then chances are your application hasn’t sat on an assessor’s desk. When the assessor does look at your information and decides that you might be eligible to borrow what you’re asking for, there will generally be conditions on your letter and they might be that the property has to be subject to the lender’s scrutiny. It needs to be a property that they’re satisfied with and it might be that it’s subject to a lender’s valuation. It could also have other conditions such as the applicant will provide evidence that they’ve closed down their credit card facility or whatever the condition is.
Cate:   But the point is you do need to be mindful of what those conditions are and you have to be very, very confident, if not certain that the property that you’re going for is one that you’re paying the right price on. And also it’s a property that the bank won’t refuse to accept. So in other words, it has to be a residential property. It can’t have any quirks that a bank might decide they’re not interested in accepting. So if it’s fire damaged, flood damaged, in the wrong zone. If it’s in a postcode restricted area, all of these things sound quite alarmist, but the reality is if you’re not certain and you can’t get that certainty from the bank or your broker, you should consider a finance clause.
Kevin:  I agree totally. And I think it could be clarified further by saying that a borrower can be pre approved, but there’s a big difference between a borrower being pre approved and a property being pre approved for finance, because it really depends on the valuation of the property, Cate, doesn’t it?
Cate:   It does and there are so many other quirks that the banks could decide they don’t like, ranging from their exposure to a high density building. They might say, look, there’s nothing technically wrong with this apartment, but we’ve already hit our quota in this building. Or it could be that they don’t like the size of the floor plan. There are so many quirks that a bank could be sensitive to. So borrowers should be very familiar with what banks like and what banks don’t like. And they also need to do some analysis and be confident that the price tag they’re paying is something that the bank’s valuer will agree with. Or they need to be sure that they’ve got some buffer funds on hand in case there’s what we call a bank val shortfall, evaluation shortfall.
Kevin:  Yeah. Yeah. Some very good advice. And if you are entering into a contract with a finance clause, make sure that you understand fully what you’re getting in for. There are lots of conditions around. Just putting a finance clause on it doesn’t mean to say that you’re safe and comfortable. You’ve got to meet all the conditions of the contract. Hey, Cate, thank you so much for your time. Great talking to you.
Cate:   You too, Kevin, always a pleasure.
Kevin:  My guest has been Cate Bakos. Cate is the Vice President for Real estate Buyer’s Agents Association. Thanks again, Cate.
Cate:   My pleasure.

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