Spending just a little money on timely legal advice when buying a property can end up saving you a small fortune in the long run.
Leading real estate lawyer Tom Wood of FC lawyers warns that while buying property should be a fairly simple transaction, there are many potential legal issues which can quickly turn the whole experience into a costly disaster.
The level of risk differs throughout Australia because of the different ways in which property is transacted. In some states real estate agents prepare purchase contracts while in other states lawyers prepare most contracts.
Unfortunately, many buyers feel pressured to sign contracts quickly and they don’t want to delay to obtain legal advice as they fear that if they hesitate they will miss out.
“There are many, many reasons for getting advice before you sign,” Wood says.
He says many property lawyers can respond within 24 hours, but it’s a good idea to speak to a lawyer before even searching for a property to discuss issues such as the correct structure of ownership.
One of the most common mistakes buyers make is signing a contract before deciding what entity to use as the buyer.
“Sometimes the buyer won’t even realise that they need to ask the question – they sign a contract and then get a big surprise,” Wood says.
It can be difficult and costly to change documentation after a contract is signed. It can risk delaying settlement and potentially result in the buyer paying double the stamp duty.
“If you change the buyer entity midstream between contract and settlement in Queensland, the alarm bells go off,” he says.
“When you’re investing it should be all about control and understanding what you’re getting into.”
Another common mistake is made by buyers who don’t seek advice about the possibility of putting a property into a spouse’s name to avoid it being caught up in the finances of a family business.
“This is the kind of thing you need to get advice on, rather than blindly going in and signing a contract in the names of both spouses,” Wood says.
“I’ve seen one situation where the buyer intended to buy the property 99% in his wife’s name and only 1% in his name. They intended to buy the property as tenants in common. And what that means is that the husband owns only 1% of the property and the wife owns 99%. However, something was lost in translation and they were actually noted on the title as joint tenants, not tenants in common.
“Ultimately when the husband went bankrupt, the wife lost the house to creditors because the trustee in bankruptcy was able to claim half the equity in the property.
There are other instances where buyers come unstuck by failing to understand the important differences between joint tenants and tenants in common.
“You quite often see friends or family members who aren’t spouses or business associates buying property together. They almost always buy property as tenants in common, rather than as joint tenants,” he said.
Joint tenants are people who own a property together and if one party dies the survivor automatically inherits that property without needing to be left it in a will.
Tenants in common means each person owns a set share of a property and this is something they can pass on in their will as part of their estate.
Wood says it’s important to understand the differences in that terminology particularly as more and more people are joining forces to buy property for affordability reasons.
He also advises that when buying with a friend or family member that the relationship be legally documented from the start, so all parties are clear on who owns what and what their responsibilities are.
This will cost them some legal fees but can save a whole lot of future grief – and expense.
A co-ownership deed legally sets out things like who owns what percentage, how long they would like to own it before anyone can sell, whether other investment partners get first option to buy out another one and how that share would be valued.
“It’s very important to document your intentions,” he says.
It’s also important to discuss with a lawyer what clauses can be included in a purchase contract and what rights those clauses – on matters such as the due diligence period, building and pest inspections, and finance – actually give to buyers.
“It’s really a matter for the buyer to determine their risk appetite, how many conditions and what the terms are – and then to do the deal,” Wood says.
“Well-drafted contracts enable the buyer to go to the seller and say, look, here’s this problem. Let’s work it through.”
Building and pest inspection clauses are not a get-out-of-contract-free card, he warns, and buyers should understand they offer protection only in relation to physical issues. Compliance issues such as approvals need to be looked at under the protection of a due diligence condition.
It may also be a wise precaution to seek a survey of the purchase property to confirm where the boundaries are. “People are paying very high stamp duty on purchases across the nation. They’re paying establishment fees and bank fees to get their loan and they are paying legals and search expenses. To add another expense such as a survey can seem like a lot of money and you might think you are saving a few bucks if you don’t do it – but it can be a case of false economy.”
He advises buyers of units to have a lawyer check out body corporate documents to ensure there are no major financial surprises awaiting them.
“It’s fairly bread and butter for property lawyers” he says. “You get a body corporate inspection done and you check out the state of the body corporate. Occasionally you’ll find a major issue that will cause you to bring something to your client’s attention.
“It could be that the body corporate has been getting quotes for many thousands of dollars to fix a structural problem. Then a buyer might be a little less keen to buy into that body corporate because the owners may have to fund that sort of work through a special levy if it’s not already budgeted for, and there’s not enough money in the sinking fund.”
Wood’s main message is to get competent legal advice before committing to a property purchase.