Once you’ve found the home you want it’s time to take the plunge. It’s an exciting time but you don’t want to get carried away by emotion. You’ll need to be clear about what you want and what you’re prepared to pay – and you may need a lot of patience as well.
Buying by offer and negotiation
Most homes are still sold by the process of offer and negotiation. Normally this is done through a real estate agent using a standard ‘Sale and Purchase’ agreement. You use this form to make your offer and once both you and the seller have signed it, it becomes your sale contract. But before you sign anything you need to talk with your lawyer and Mortgage Broker.
The big plus about buying this way is that it can give you time to think. An offer might go back and forth between you and the seller several times. You can also put in conditions that gain you time to check the place out before you’re fully committed. On the other hand you may need to act quickly if you don’t want to miss out – the seller is free to consider other offers at the same time.
Here’s how it usually works
The first step is to talk things over with your lawyer. They will check the agreement (your offer) and add any conditions you need. If time is short ask if you can fax them a copy to get an opinion.
Usually you start by offering an amount below the asking price. The seller may reject the offer if they don’t like it. Or they could countersign it. This means they cross out and change the bits they don’t like (such as the price), initial the change and sign the offer.
When the offer comes back to you – you can do the same. You can cross out and change the price again for instance, initial the change and send the offer back. If anything other than the price is changed it would be a good idea to check with your lawyer again before you sign.
This process goes on until you and the seller both agree – or one of you decides to stop. During all this it’s the agent’s role to go back and forth between you and the seller and help the negotiation process. They’ll be as keen as you to see the deal signed.
Reaching an agreement
Once you and the seller have both signed the offer and initialed all the changes the agreement becomes binding. You can stop the negotiations at any time up until then. You can also take your time if you want to think something over or get more information. You don’t have to have everything agreed in one day or evening – although this is what the agent may be hoping to do.
You can also change the conditions of your offer – so if the price goes up you may want to extend the settlement date for example. Or you may want to make your offer more appealing without raising the price by taking some conditions out.
Paying a deposit to the agent
Once everything has been agreed you pay a deposit to the agent – usually five to ten percent of the sale price. This money is really a down payment on the home and the rest is paid on settlement day. The agent holds this deposit in a trust account and it’s protected by law. No one can take it if the real estate firm goes broke and there’s a fidelity fund to cover the missing money.
The agent pays your deposit on the home to the seller after your offer is unconditional (when all the conditions are met and the sale is definitely going ahead). If your offer falls through before then you get the money back. But if you change your mind after everything’s unconditional, you probably won’t get the money back.
If you’re buying privately
The process is much the same if your buying privately but it may be more difficult negotiating directly with the seller, especially as they may be expecting more from the sale (it’s probably why they’re selling privately). It’s very important you use your lawyer at each step. If you buy privately, pay your deposit to you lawyer so they can arrange for it to be held in a safe trust account.
The sale and purchase agreement
The agreement used by most people these days is a standard document created by the Real Estate Institute and the Auckland District Law Society. It’s about eight pages long and in small print, you may want to get a copy of it from the agent and read it in advance so you understand what’s in it.
It covers things like responsibilities under various laws and what happens if settlement is late – as well as allowing you to insert dates, amounts and conditions of your own.
Is your offer conditional?
Making your offer subject to conditions gives you time to check that everything’s okay. If you find something is not right you don’t have to go ahead with the deal – or you can renegotiate the offer – for instance you might be prepared to do repairs if the price is lower.
It’s very important your lawyer checks your offer and any conditions you add. The other thing to remember is that too many conditions can put a seller off.
Is your offer unconditional?
If you make an unconditional offer you need to be 100% sure you want that property and that you’ve sorted out your loan and everything else before hand – because once the offer is accepted you have to go through with the sale. If you break the contract you can be sued.
Sellers can add conditions too
Sellers can add conditions to the agreement too, although this is less common. One you may see is an ‘escape clause’. It means that if the seller gets a better offer they can give you a deadline to make your offer unconditional. If you can’t meet the deadline they can accept the other offer.
Your offer has several dates in it. There’s the finance date, the date your money needs to be confirmed by, and the settlement date – the day you take over the home.
We also suggest you put in a date that your offer ends if the seller doesn’t accept it. It means you can’t be left wondering while the seller possibly waits for a better offer.
This offer is subject to…
Here are some common types of conditions buyers add to the agreement (please check with your lawyer).
- Finance. This gives you time to arrange your loan. But make sure it says finance satisfactory to you – or you could be forced to borrow on terms you don’t like.
- Title search. So your lawyer can check there are no problems with the title – or restrictions, covenants or easements you need to know about.
- Valuation report. So you can check the market price. Your lender will probably want you to get one anyway.
- LIM report. So you can check what the council knows about the property and make sure there are no problems with things like consents or flooding.
- Building consultant’s report. So you can check the building is sound and find out bout any problems that might cost you money.
- Engineer’s report. So you can check any structural or land issues.
You might also want to add other conditions covering things like repairs they’ve said they’ll make or extra items they’ve agreed to leave.
Your conditions need to state that the report, finance, repairs or whatever must be completed satisfactorily to you. Otherwise you will still have to go ahead with the agreement even if you’re not happy with the results.
Buying at auction
Auctions are often used if a property is unusual or hard to value because it has some special features – such as a great view.
Or the seller may want to sell by a set date.
When you buy at auction it’s unconditional, so you need to have everything sorted out first and you need to be 100% sure it’s the place you want.
Before the auction…
- Register your interest with the agent.
- Talk things over with your lawyer.
- Ask them to do all the checks, like checking the property title.
- Get a copy of the auction contract.
- Arrange your finance (Discuss with your broker).
- Get a valuation done and any other reports you need.
- Get all the other information you need such as a LIM report from the council.
- Decide on your top price!
You’ll also need to make sure you have the money ready to pay a deposit to the auctioneer on the day if you’re successful.
The deposit is usually 10% of the sale price and you may need a bank cheque for this.
How does the auction work?
It’s a good idea to go along to a few auctions first just to get a feel for the way they work and to watch what other bidders do.
The auctioneer will run the auction. They’ll tell you what amount bids they will accept. Generally they’ll try to open the bidding at a high amount – but towards the end they may accept bids of $1000 or even $500.
When is the home sold?
Usually the seller sets a reserve price (the lowest they will sell for). Only the auctioneer knows this price. If the highest bid is over the reserve price the home is sold and the buyer pays a deposit to the auctioneer. Settlement day, the day you get ownership, is usually set for 20 days after the auction – but this can often be negotiated with the seller.
If the reserve isn’t reached, the home is ‘passed in’ – meaning it didn’t sell at auction. Often the home sells by negotiation straight after the auction. If you are the highest bidder you have the first chance to negotiate and can add conditions to the contract at this stage if you need to.
What’s good strategy?
Buying at auction makes most buyers nervous. Chances are the people bidding against you have never brought a place at auction before either. Everyone has his or her own ideas about how to bid. But one good strategy is to hold back at first and then come in when some of the other bidders have dropped out. Once you’re in the bidding try to appear calm and determined – so other bidders think you mean to keep going. You can start bidding at anytime right up until the auctioneer say ‘sold’. And you can stop at any time. The auctioneer will still give you chances to bid – and don’t worry, they do know a genuine bid from an inadvertent nose scratch!
Buying by tender
Buying by tender has elements of buying by offer and negotiation – and of buying at auction.
With a tender you make a written bid for the property. It needs to be your best offer as the seller looks at all the offers together and you probably won’t get the chance to negotiate.
The seller may accept the highest offer – or decide to negotiate with the peon whose offer they like best – or they could reject all the offers. You don’t get a chance to find out what the other offers are.
You can put conditions in your offer if you want. But its better if you can check things out before you make the offer instead – because the more your offer has the less attractive it will be to the seller.
How do you go about it?
Register your interest with the agent.
- Get a copy of the tender document – it tells you how the tender offer must be made, and gives you details like the settlement date.
- Discuss the tender document with your lawyer and prepare a written offer.
- You’ll probably want to get a valuation and other reports, like a LIM, first so that you know the market value- and what the property is worth to you.
- When you put the offer in you may have to include a deposit – this is refunded if your bid is not successful.
- If your offer is accepted you are committed to buying the place and have a set amount of time to meet all the conditions of sale.
Tenders are usually arranged through real estate agents. If the tender is ‘closed’ it means the offers won’t be considered before the tender closing date.
Can I buy before the auction or tender date?
Often the seller is prepared to look at offers before the auction or tender closing date. In fact you might see the words ‘if not sold prior’ in the advertisement for the sale.
Check with the agent handling the sale what their policy is on ‘prior’ offers. Usually what happens is that if someone makes an offer that is acceptable to the seller, the agents give everyone else who has registered their interest a chance to make an offer too. You won’t know what anyone else’s offer is.
So if you’re interested in a place that’s being auctioned or sold by tender it’s important to register your interest straight away and do all your checking as soon as you can. That way you can make an early offer yourself if someone else gets in early.
If you want to try and buy the place before the auction or tender date you’ll probably have to make an unconditional offer.