Why a ‘subject to finance’ clause is essential in your property purchase contract
Recently a young couple I know very well signed a contract to purchase land on which they would subsequently build their first house.
The developer’s marketing highlighted the demand for land in Melbourne’s north east and emphasised that there were only a few blocks left in the current development, with the next release some twelve months away.
On our advice the young couple requested that the contract be subject to finance as they had yet to secure their finance approval. The land developer refused this request and insisted the couple either sign an unconditional contract or miss out. Of course, they were keen to secure their block of land and did not want to have to wait a further twelve months. So, they signed an unconditional contract to purchase the land and paid a 10 per cent deposit.
An application for finance was duly completed and submitted and a valuation of the vacant land ordered. The valuation came back $40,000 under the purchase price!
Valuations are not an exact science; there are many factors that a valuer must consider and often what was paid for a property can be significantly more than an objective (unemotional) valuation.
Unfortunately, with an unconditional contract, this young couple must now consider not proceeding with the purchase and probably losing their almost $30k deposit, or increasing the amount they borrow and pay thousands in lenders mortgage insurance, or seek financial assistance from family. And of course, they still need to finance the building of their first house.
An appropriately worded ‘subject to finance’ clause may have allowed this young couple to renegotiate with the developer on price and/or walk away from the contract if they felt they were being taken advantage of.
Instead they face sleepless nights as they decide their best course of action – potentially turning their dream home into a nightmare.
First home buyers should seek professional finance advice and not accept at face value what they are being told by the sales representatives of land developers, marketing companies and/or builders.