How exciting! You have found a property that you would like to buy and have had your offer accepted! And to show how serious you are, you have handed over a $1000 holding deposit. Only thing is, a holding deposit holds nothing.
Now I do not know why some agents persist in getting a holding deposit from buyers since, in NSW, once you have had an offer accepted on a property there is absolutely nothing binding until contracts have exchanged.
There are two ways you can exchange contracts on a property. But you will not always be given the choice of which one to use.
The first way is with a five day cooling off period. You can do this in the agent’s office on a Saturday afternoon if you like and you don’t need to get any legal advice prior to doing so. It is commonly the done thing to pay an initial deposit of 0.25% when you sign the contract and the balance of the 10% prior to expiration of the cooling off period. By exchanging contracts with a cooling off period you will have 5 business days to complete your due diligence. This process includes getting your contract reviewed, building & pest inspection and/or strata search done, finance approved and balance of the deposit arranged.
The benefit to you is that the property is then off the market. The vendor cannot entertain offers from any other buyers and only you can change your mind – but if you do so, you will incur a penalty of 0.25% of the agreed purchase price. So, say you have offered to pay $500,000, this penalty would be $1250.
The main reasons for backing out within the cooling off period would be either a bad building inspection or strata report or an inability to come up with the finance. We hear of plenty of buyers making offers before they have finance approved but even if you have pre-approval, the bank could take longer than the 5 days to give you an unconditional finance approval or the valuation could come short
One thing to bear in mind here is that in a competitive market, or if you have made a pre-auction offer, it is highly unlikely that you will be given the option of exchanging contracts with a cooling off period.
The second way to exchange contracts is to sign an unconditional contract. The only way you can do this (other than at an auction) is to have your solicitor or conveyancer review the contract, advise you on it, then issue a Section 66W Certificate. This certificate waives your cooling off period, making the contract unconditional. Under these circumstances you need to have done all your due diligence – the contract reviewed, building & pest inspection and/or strata search done, finance approved and deposit arranged – before signing a contract.
The risk here is that while you are busy doing your due diligence, the property is still on the market and other buyers can make offers. Time is of the essence and you need to keep the pressure on your banker, solicitor and inspector/s.
So, back to the issue of a holding deposit. Our advice is to only hand over a deposit at the same time you hand over a signed contract – and get some assurance of exactly when the exchange is expected to take place. A holding deposit is simply an unnecessary step in an already complicated process. All it really serves to do is give the inexperienced buyer a false sense of security.
Published:- 2 February, 2012
Please note: Good Deeds buyers tips are intended to be of a general nature. Please contact us for advice that is specific to your individual circumstances. You may also need to get advice from other professionals such as an accountant, mortgage broker, financial planner or solicitor.