Buying or selling property is widely accepted as one of life’s major stress factors. When you buy and sell property at the same time and try to complete both transactions together this can add considerably to the stress levels. This is known as a simultaneous settlement and is encountered often in the conveyancing process.
Why settle simultaneously if it is so stressful?
Most people are not in a financial position to buy a new property without first selling an existing property and rely on the funds from their sale before completing their purchase. Simultaneous settlements are ideal when the family home is sold (whether to upsize, downsize or relocate) and an alternate home is being purchased. If both transactions can settle at the same time, there are considerable financial and practical benefits:
- you only need to move once, saving time, removalist and / or storage costs;
- you won’t need alternate accommodation, saving on rental costs or avoiding the inconvenience of staying with family or friends until a new home is found;
- the loan for your existing home can be refinanced and replaced with a loan for your new property, in the same transaction;
- arrangements can be made to disconnect and reconnect services from your existing home to your new home, ideally, in one transaction.
What happens at a simultaneous settlement?
The sale of your existing property is completed at the same time as the purchase of your new property. These transactions are interdependent so need to be meticulously planned and coordinated – if there are delays or problems with one transaction then the other is also affected.
The circumstances of the other parties (i.e. the respective seller and buyer of your properties) are also relevant. If they are in a similar position, then their issues also become yours and a domino effect occurs.
On completion funds from the sale of your existing property are collected and, if a refinance is involved, applied towards your purchase. The mortgage over your existing property is released by your lender and a mortgage taken over the new property to secure the funds loaned.
Come settlement day, the transaction is usually orchestrated in a matter of minutes however the plan has been evolving for the past weeks or months. With the introduction of e-conveyancing, settlements are now mostly conducted online without the need to meet with the bank and lawyers for the other party.
Meanwhile, you have arranged for the disconnection and reconnection of services such as electricity and internet and await nervously with a moving truck full of furniture and a lifetime of memories, for the ‘green light’ from your lawyer.
The legal considerations
A simultaneous settlement has practical and financial benefits however it also has legal implications. If you choose to have your sale and purchase settle at the same time, your lawyer will advise you of the legal issues and assist in bringing the transaction together.
Once contracts exchange, the parties are legally committed to the transaction and face significant implications if they fail to proceed. For a purchaser, this generally means, at a minimum, forfeiting 10% of the property’s purchase price if the contract cannot be completed. Consequently, a purchaser should not commit to buying a property without assurance that the sale of an existing property is a ‘done deal’.
To protect your interests, a simultaneous settlement requires a simultaneous exchange of contracts with both providing for the same completion date. This is critical to avoid the risk of losing your deposit. Your lawyer can make the necessary arrangements and negotiate the appropriate conditions in the contract.
Alternatively, your lawyer may be able to negotiate the inclusion of a ‘subject to sale’ clause in a purchase contract if you haven’t sold your property yet. In most cases however, a vendor will not accept this, particularly in a competitive market where there are other buyers ready willing and able to enter an unconditional contract.
What are the options?
Selling first and buying later may be a safer option for those on lower incomes or with less equity in their existing property. The down side of this is that you will need to arrange accommodation while looking for your new home. The pros are that the funds from your sale can pay out your mortgage with the balance going towards your purchase. If you have pre-approved finance from your lender you may also be in a more advantageous bargaining position in a competitive market.
If your buyer is not in a hurry to move into your existing home, you may even be able to negotiate a leaseback of your property until you find a suitable home.
If you need to move in a hurry for example, relocating for a new job, and you can’t sell quickly, renting your existing property on a short lease may also be a viable option.
Buying first and selling later can be risky. Unless you are a cash buyer and / or own your existing property outright you will need to finance both properties. For most people this will require looking after two mortgages and / or obtaining a bridging loan which may not be an option for many people. It will however enable you to snap up the property you want when it is available and then reduce your financial commitments once your existing property is sold. It can also provide an opportunity to utilise market fluctuations to your advantage. If however holding two loans becomes increasingly difficult you may need to sell quickly accepting an offer below your expectations.
Your personal circumstances and the market should be considered when buying and selling property and choosing the option that is right for you.
The current market and property demand generally influence how quickly you can sell and find an alternate suitable property. Your financial circumstances will also influence your options.
There is never a one-fit solution when buying and selling property at the same time. The most important thing however is to ensure that whichever option you choose you understand the legal and financial implications and are guided throughout the process.
A simultaneous settlement requires careful planning, good communication and negotiation skills and, importantly, a contingency plan. If one transaction falls over, then so does the other!
If you or someone you know wants more information or needs help or advice, please contact us on 02 9790 7000 or email [email protected].