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Covid-19 has revealed a broken property system

Since the world was challenged with COVID-19, the number of buyers unable to complete a property purchase has increased significantly, with some reports saying as many as 1 in 10 new purchases are unable to settle.

According to property expert and market commentator, Anna Porter, this means that we’re seeing more and more buyers enter into a contract, pay their 10% deposit to the vendor and if for any reason they do not complete the purchase and settle; lose that 10% deposit, as a form of compensation to the vendor.

While this was once a rather rare occurrence, COVID-19 has got this on the increase and buyers are taking a hit.

The Suburbanite Principal believes it has highlighted a systemic flaw in our property system, especially in Sydney and Melbourne.

“A $2,000,000 transaction in these two pricey capitals is not uncommon and this can result in deposits of $200,000 being paid to the vendor,” says Porter.

“If the purchaser defaults, the vendor certainly has some expenses such as agent’s fees (possibly twice over), legal fees and other related costs but generally this only takes about half the amount paid,”

“So, the balance of about $100,000 is then compensation. If the property sells for less than the first sale this compensation is certainly warranted, but if the vendor resells for the same price, it is like winning a small lottery ticket.”

Anna Porter of Suburbanite feels this needs to be reviewed and brought inline to match the actual loss sustained by the vendor as compensation, and not just be an excessive amount of money if the loss is mitigated.

She explains that in some outlaying situations, the vendor has costs associated with a property they may be purchasing that then could fall over or gets delayed. In this case the 10% may not be enough and the amount needs to reflect the actual loss on both sides.

Porter shares some tips for what a purchaser can do to try and off-set this happening to them;

“Negotiate a smaller deposit and not have a ‘reversion to 10%’ clause in the contract,” she says.

“You’ll want something that is more in line with the actual financial loss. This should be discussed with and drafted by your solicitor or conveyancer,”

“But most importantly, always ensure that your finance is unconditionally approved before you waive any cooling off rights and go into an unconditional contract. This is always a risk with auctions as auction contracts are unconditional at purchase and the buyer just doesn’t get afforded the right to get their finance unconditional prior to this due to how the system works,”

“But the system is flawed, and with COVID-19 making more and more sales fall over due to finance and other issues, this flaw is becoming a gaping crevasse in the system.”

Anna Porter cautions that she never purchases properties for herself at auction as the risk, in her opinion, is too high and she certainly doesn’t buy any for her investors that way unless they are cash buyers.

“As a former property valuer, I have seen too many purchases go wrong and the financial fall out for all involved,” she concludes.