Subject to finance… Is it really necessary?

Auction is the preferred sale method for most properties in Stonnington.

It is the most transparent method, which is why buyers tend to prefer it. You know where you stand.

One of the main benefits to vendors is that auction sales are unconditional.

This means buyers need to have their ducks in a row before committing to an auctioned property because you cannot bid or make an offer conditional upon finance, a building inspection, a contract review, or anything else.

Also, there is no three-day cooling off period.

Auction conditions apply three business days before and after auction day, so if you make an offer on the Wednesday before the auction up until the Wednesday after the auction, auction conditions apply.

As soon as you sign an auction contract (and pay a deposit) you are fully committed. There’s no out clause.

The only way to get out of completing an auction purchase, aside from any loopholes or shortcomings with the contract, or in some rare instances by nominating another buyer, is to default and lose your deposit.

The way that loan approvals work is that you cannot get a fully approved loan until the bank has an executed contract of sale. That is, until after you have purchased.

So even if you have a solid pre approval, there is still a very small chance that your loan won’t be approved.

The banks only do a loan-approval valuation after they have the executed contract. For apartments and smaller houses or townhouses this can be a computer generated “desktop” valuation.

For houses over $2,000,000, they usually do a full, in-person valuation.

For auction sales, even if the property passes in or sells post auction, the valuations nearly always stack up. The banks just use the purchase price.

For private sales and off market sales, they rely more on comparable sales for the valuation.

It is very rare that valuations don’t stack up, even for private sales, unless the price is clearly way above the odds, or the property has issues – a condemned or uninhabitable house, an apartment with cladding issues, etc.

In the unlikely event that the valuation comes in significantly below the purchase price, you can always try another bank.

If you try multiple banks and it still doesn’t stack up, you may have to come up with the difference to get the loan approval, although the mortgage brokers I have spoken to all said this is incredibly rare for houses in Stonnington.

However, brokers are naturally risk averse so they will always try to get a subject to finance clause if at all possible.

The problem is, if you have an overly cautious mortgage broker and you want to take their advice and only buy a property if you can make it subject to finance, this can severely restrict your options, as most good properties go to auction.

Furthermore, if you find a great house for private sale – either off market, via expressions of interest, or in an auction campaign but outside of three days of the auction – making your offer subject to finance could disadvantage you, especially if other buyers are making unconditional offers.

Vendors do not like selling subject to finance.

It is a big risk for them, especially not knowing your full financial situation.

I once sold a property off market in Malvern. The purchasers were both professionals and already owned a couple of properties interstate and didn’t seem like they would have any issue with getting finance, so the vendor agreed to 10 days subject to finance.

After nine days the purchasers requested an extension for another two weeks as they needed to get their interstate properties valued first.

Two weeks later and they requested another two weeks’ extension. They said their first mortgage broker had stuffed up the initial application so they were trying a new broker. They said it should be fine now and get approved any day.

By now we were quite the way down the path with no other interested buyers so the vendors agreed to the extension.

This continued on with yet more promises and excuses over the proceeding weeks.

In the end the purchasers couldn’t get finance and withdrew from the sale with no penalty after seven weeks, leaving the vendors high and dry and out of pocket with additional holding costs as it was a vacant property.

This is why vendors/agents are reluctant to accept an offer subject to finance. It’s the uncertainty.

Usually finance goes through without a hitch, often within days. But sometimes it doesn’t, and it’s completely out of our control as vendor/agent.

I’ve seen vendors accept offers tens of thousands of dollars less for an unconditional offer over an offer subject to finance.

Sometimes price is secondary to certainty for risk averse vendors.

So keep this in mind when you’re buying either at auction or via private sale.

If you have a good mortgage broker and a solid pre approval, and aren’t completely pushing the boundaries on your borrowing capacity, you should be totally fine to bid at auction or make an unconditional offer.

If you do have a situation where you are making your offer subject to finance – give the agent/vendor some comfort around your financial situation. Even let the agent talk to your broker. And make the subject to finance clause as short as possible.

If you have your pre approval and it’s just for a bank valuation, three business days should be sufficient. Five to seven days should be ample in most instances.

If you need a recommendation of a great broker who can tell you after a five minutes phone conversation roughly what your pre approval amount might look like, please let me know.

Macquarie Bank are currently turning around formal pre approvals within 72 hours.

Feature Image: 9 Shirley Grove, St Kilda East