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Found a property and ready to make an offer?
Now that you have found a suitable property, your next step is to make an offer to the vendor. If a real estate agent is involved, you will make your offer through the agent, who will present it to the vendor.
In the current market, many property sales are advertised with an asking price, price by negotiation or by deadline sale. This article relates to these methods of sale, where you make an offer to the vendor. Properties sold by other methods such as auction or tender will follow a slightly different process. It is best to speak to your lawyer if you are looking to purchase at auction or by tender, and they will be able to discuss the process with you.
Making an offer on a property can be stressful, exciting, and will often involve time pressure. Even if you are feeling the pressure to get an offer in, remember to have your lawyer review it. As highlighted in earlier articles, sale and purchase agreements are legally binding documents which means, once the conditions are met, you are legally required to complete the purchase.
The details that you add to the agreement for sale and purchase are very important. On the front page of the agreement, you will need to add the terms of your offer. These terms include price, deposit amount, and conditions (finance, LIM report, building report, toxicology report, OIA consent and Land Act consent etc). The conditions listed above are standard conditions, so you will need to add or remove them as they apply to you. Your lawyer can take you through this and draft any additional clauses or conditions that you require, such as due diligence, subject to valuation and solicitor’s approval.
You need to insert a purchase price. This is the total amount you will pay for the property. Seek advice from your lawyer about GST - the purchase price can be inclusive or excusive of GST, depending on the GST registration status of yourself and the vendor. Any offer made in writing that you give to a real estate agent must be presented to the vendor, regardless of whether it is more or less than the advertised price. Remember, it is an offer, and the vendor can accept or reject it at their discretion, without having to provide any explanation.
As standard in the agreement, the deposit amount that you put on the agreement is the amount you will pay to the vendor when you make your offer. In practice, real estate agents and lawyers amend the agreement tomake the deposit payable only once the agreement is unconditional as this is more practical.
An agreement becomes unconditional once of all the conditions it contains are met. For example, if the only condition is for you to obtain finance, once you confirm finance with your bank and notify your lawyer, the agreement will be declared unconditional, and you will need to pay your deposit.
You should only insert a deposit amount on the front page of the agreement that you are able to pay when the agreement becomes unconditional.
The deposit payable to the vendor can be made up of your KiwiSaver and your savings, if being paid when the agreement becomes unconditional. It cannot include the First Home Grant, or any money that you will receive as a home loan, as these funds will only be available for settlement. If you plan to use your KiwiSaver as part of your deposit you need to let your lawyer know so that they can arrange for the funds to be paid out in time.
Generally, the deposit clause is pre-filled with “10% of the purchase price”. On a purchase of $500,000 a 10% deposit is $50,000. For example, if you have $15,000 in your savings account, and $10,000 that you can withdraw from KiwiSaver, the maximum deposit you can pay is $25,000 so you need to change the deposit clause to either a percentage of the purchase price (5% here), or to the dollar amount you have available. You can do this by crossing out the 10% and adding your deposit amount.
n agreement can contain any conditions that the vendor or purchaser require.
Some common conditions are finance, LIM report, building report, and toxicology report. We also advise adding a “Solicitor’s Approval” clause to allow your lawyer to look over the agreement once it is signed and protect you from potential issues.
If you are receiving a bank loan and have conditional approval for lending you require a finance condition.
Your financial adviser, mortgage broker, or bank contact will be able to tell you how many days they require to obtain final approval of your loan. This is most commonly 10 or 15 working days. Remember that working days only include weekdays, and do not include weekends or public holidays. If you require your KiwiSaver funds for your deposit, your lawyer will also need to work behind the scenes to get your KiwiSaver withdrawal organised within this timeframe.
After speaking to your adviser/broker/bank contact and your lawyer, you will know how many days are required for your finance condition. This timeframe is inserted into “Finance date” on the front page of the agreement and should look like this: “Finance date: 10 working days from the date of this agreement”.
LIM, building and toxicology reports
These optional reports can tell you important details about a property that you may not know otherwise. You will need to pay the cost of these reports upfront, so make sure you have enough savings to cover reports as well as your deposit.
A “Land Information Memorandum” (LIM) report from the local council will provide you with all of the information that the council holds about that property. This includes special features and characteristics of the land (such as vulnerability to erosion, slippage, liquefaction, susceptibility to flooding, and hazardous contaminants within the land). The LIM will also provide all information the council holds about the buildings on the land. The house and any outbuildings including garages, as well as decks, may require building permits and consents. If a building does not have the required permits or consents then this can cause issues with finance and insurance, as well as when it comes time to sell the property in the future.
Some councils have an online system for ordering a LIM report, and for others you may need to phone them to order. The cost of a LIM depends on the council that provides it, but generally ranges between $300 and $500.
Once you receive the LIM report, you should forward it to your lawyer to review.
A building report (also known as a pre-purchase inspection) provides information about the structure of the house, outbuildings, and additions. A building report will highlight anything that needs fixing and will allow you to decide whether the property is a good investment in terms of what you need to repair. To find a suitably qualified building inspector who prepares written building reports, look online, or ask your lawyer for a recommendation.
A building report may cost you between $300 and $1000 but will depend on the size of the property, the level of detail in the report, and the urgency required.
Toxicology reports (also known as meth tests) are often offered as an add on by building inspectors and cost around $200. It is a good idea to have this testing carried out if you are concerned about past occupiers of the property, or if you want peace of mind for you and your family that the property is free from contamination.
OIA and Land Act consent
If you are not a New Zealand, Australian, or Singaporean citizen or permanent resident living in New Zealand, you may require consent from the Overseas Investment Office (OIA) to purchase land in New Zealand. Speak to your lawyer about this before you make an offer, as you will need to include additional conditions.
4. YOUR OFFER Vendors take varying amounts of time to consider the offers they have received. This could be an hour, or a number of days. The real estate agent, or your lawyer if no agent is involved, will let you know the outcome of your offer once a decision has been made.
Your offer is accepted – You will be notified that your offer has been accepted, and now you can get to work meeting any conditions that you have included in the agreement. Your lawyer will calculate the dates for your conditions to be met. This period of time between your offer being accepted and the deadline for your conditions is crucial, and you will need to make sure you stay on top of the tasks that you need to complete, such as organising for a builder to compete their report. Your lawyer will keep in contact with you during this time to ensure you are on track.
Once you meet your conditions, the agreement will be unconditional. This is when you will need to pay your deposit to the vendor. You will pay this directly to the real estate agent or to the vendor’s lawyer. Your lawyer will help you with this process.
Your offer is declined – what next? If the vendor does not accept your offer right away, they may negotiate with you or they may accept another purchaser’s offer.
The time, money and effort spent just to have an offer rejected makes the process difficult, but if you miss out on one property don’t give up your property search. Keep an eye out for new listings and you’ll be ready when the next property comes up for sale.
The next, and final article in this series, is focused on the process that comes after your agreement becomes unconditional, while you are preparing for settlement. As always, if you are thinking of purchasing a home now, or in the future, we look forward to hearing from you.