The one thing many people don’t do to get rich + A trap to watch out for on a property contract

The one thing many people don’t do to get rich + A trap to watch out for on a property contract

 

Knowing the right questions to ask is more important that knowing the answers.  That applies, in particular, when you are in negotiations with a financier.  Andrew Mirams will explain today and give you the questions to ask.

Over the years I have seen many people think about getting rich, proclaiming affirmations, visualizing, meditating and going to conferences yet they don’t get rich.  That’s because there is one thing they don’t do.  Michael Yardney tells us what it is.

Getting an edge in your negotiations is what I discuss with 2 top negotiators – Nhan Nguyen and Mark Armstrong – in the show.

In a 2 part series, we feature some sound legal advice from Rob Balanda about time is of the essence, gazumping and dutch auctions.   In the first part he talks about the quaint and hazardous clause in some contracts that can catch you out as a buyer if you are not on the ball. In the second part he talks about why in some parts of Australia it is legal to gazump yet in others it isn’t.   He also explains what it is to be gazumped.

 

Transcripts:

What is ‘time is of the essence’? – Rob Balanda Part 1

Kevin:  When we talk to investors in different parts of Australia, it’s always interesting to note the different types of systems of buying property, and I’m going to talk to Rob Balanda about that right now. Rob, of course, is our expert. He’s from MBA Lawyers on the Gold Coast.

I guess you probably see both Queensland and New South Wales. Well, you see contracts from all around Australia, I guess.

Rob:  Yes, we do. It’s a very vibrant part of the world here.

Kevin:  Let’s firstly talk about “time is of the essence,” where it applies and what it really means.

Rob:  Time of the essence is a unique system. It’s an integral part of a conveyancing system that operates only in the two big resource states in Australia. It operates in Western Australia and in Queensland. As you know, from time to time, there’s a fair bit of action in both of those states, Kevin.

Kevin:  Yes, but it has nothing to do with resources, has it? It has more to do with the way the laws were set up in those states.

Rob:  That’s right. They were set up by those parliaments 100 or 150 years ago, and we’re all stuck with them now in this modern age.

But as an investor, especially as this market is recovering or at least an emerging recovering market, and recovering in a lot of places around the country, you need to understand what this time of the essence system is and what the fundamental difference is between the two big resource states, the legal system, the contract system from start to end, how it operates versus how it works in the big, eastern seaboard states, Victoria and New South Wales.

Otherwise, Kevin, you will come to grief; it’s just a matter of time. You’ll be Dutch auctioned, you’ll be gazumped, you’ll be terminated because you didn’t comply with payment of monies by a definite date.

We probably should start with what underpins the system in the big eastern seaboard states, this concept of time of the essence. It’s a sudden-death concept. What it means is in Western Australia and in Queensland, if you sign up to buy a property and you agree to pay, say, a balance deposit by, say, tomorrow or settle in 30 days, and that is tomorrow or 30 days, that date is set in concrete.

Nine times out of ten, if you have a reasonable reason not to be able to meet that deadline, sellers will give you an extension, but investors need to understand they do not have to and they can terminate you at the knees, keep your deposit – you lose the property and lose your deposit.

When doing business in Queensland and WA, investors need to understand that very clearly and they need to be asking their conveyancer and solicitor, “Tell me; is it time of the essence here? What does that mean? What are the big dates? Why are they so important? Will you follow them up? Will I follow them up?”

My strong advice is never assume because you have a dog, you don’t have to bark too, if I can put it that very blunt way.

Kevin:  Yes, you can, and I want to make a comment about “time is of the essence.” It seems to me that it’s a major benefit to the seller but it is an area of great caution for the buyer. Is that what I’m reading into it?

Rob:  To a degree. But having worked in both systems – the eastern seaboard states and Queensland for many years – no, it’s generally overall for the benefit of the buyer and the seller. It’s a much superior system. The buyers’ take on it, the twists for them that make it so good is they have certainty.

Especially if you’re buying a place, you want to book your kids into a school, you want to book a removal, and you can do it with great confidence in those states. But in other states, it’s just an estimated date, Kevin.

Kevin:  That’s what I was getting back to in terms of the seller. The seller has some certainty if they have a contract in Queensland or WA and there are dates on that contract. They are dates that must be met, so therefore, a settlement date on such and such a date must be met on that date.

Rob:  Yes, or something as simple as paying the balance deposit. If another $10,000 balance deposit is payable tomorrow, if you don’t pay it tomorrow – you pay it at 9:00 the next working day – you are in default. The seller can terminate the contract and keep your deposit. That’s something.

In a moving market, sellers hover there waiting. They just wait. They have another offer for another $30,000 to $40,000 from another buyer. They’re just waiting for you to miss that date in Queensland or WA, and if you do, they’ll often just swoop.

You must, as an investor, beware of those dates, make sure you and your conveyancer/solicitor have them in your diary and you both follow them up and make sure you get the money there on the due date.

Kevin:  It’s at 5:00 on that particular day; is that the cutoff point?

Rob:  That’s it, mate. It’s 5:00.

It gives certainty, though. I always like to reframe these things. It’s not something that you should be unduly worried about. It’s just a matter of allowing a property period of time to pay a balance deposit. Never say “Balance deposit payable – quote – ‘on approval of finance,’” because that means the day you tell the seller that finance is approved, that’s the day in Queensland and WA, if you use that wording, that you have to pay the balance money.

It’s much better to use a form of wording such as “Balance deposit payable within two working days of finance approval.” Then you always have got that in-built governor and you’ll never get caught.

Ditto with the settlement; always allow a proper period of time, at least 30 days, ideally 35 or 45 – especially if you’re interstate and the money is coming from an interstate lender.

Kevin:  I guess it also underscores the importance, if you’re buying a property in another state, to make sure that you’re dealing with a lawyer or a conveyancer who is familiar with the law in that particular state.

Rob:  You must use the local sheriff, Kevin.

Kevin:  Indeed. Rob, we’re going to round it out there. I want to come back and talk to you about another couple of issues. One was one you mentioned in our chat this time, which was gazumping. I thought we might just have a quick look at that next time we come back if that’s okay.

Rob:  Perhaps also Dutch auctions. They’re ugly, as well, Kevin.

Kevin:  Absolutely. We’ll talk about those next time we come back with Rob Balanda from MBA Lawyers. Thanks for your time, Rob.

Rob:  Good day to you.

 

The questions to ask a lender – Andrew Mirams

Kevin:  You know, sometimes it’s not about knowing the answer to questions; it’s knowing the questions to ask. I guess no truer word would be said then that when it comes to arranging your finance. Sometimes it’s a matter of knowing what questions to ask about the loan before you commit – certainly well worth doing. Joining me now, Andrew Mirams from Intuitive Finance.

Andrew, I’m putting you on the spot here a little bit. What are the questions that you think borrowers should be asking you before they commit to a loan?

Andrew:  Thanks for having me, Kevin. Look, I think, it really is quite specific and dependent on the client sitting in front of you. Obviously, a first-home buyer’s question is going to be quite different to an astute investor or someone who’s probably done it before, etc. But I think some of the real keys that they need to ask or that they need to know is who are they dealing with first across the desk? Are they in industry bodies and things like that, etc.? What’s their experience, etc. — along those lines?

Kevin:  This is the broker you’re referring to?

Andrew:  Absolutely. Yes. We get lots of questions. We actually get quite upfront with the information we give out to our clients or potential clients about us. We’re very active on the Internet and things like that.

So that people get a good feel of who they’re dealing with. Have they done it before? But then, I guess, for them more specifically, it’s who are we dealing with and the whys? And the real whys is we’re pretty intent here on making sure people really understand the process. Again, that comes back to whether you’re a first-home buyer or you’re a astute investor.

Kevin:  Quite often, Andrew, a lot of the lenders will be hybrids of other major lenders, so it’s a matter of knowing who you’re actually borrowing from, as well.

Andrew:  Yes, exactly. You need to be intent on making sure if you’re recommending ABC Bank over XYZ Bank, why are we doing that? And then you need to drill down. So for first-home buyer, it might be a lower mortgage insurance premium. It might be for an investor that they have a better fixed rate or a blend or a split rate, or there might be more features in the loan that we think based on the data we have that that’s a better fit for them.

We encourage the questions because it’s only when they’re really comfortable with the process that they’ll understand it now and also in the future.

Kevin:  What sort of disclosure do you as a broker have to give before someone commits to a loan, Andrew?

Andrew:  The rules have a changed a lot. We’re probably ten years behind the financial planning industry but we’re correlating down that path. We all now have either all brokers who operate under their own license or under their aggregators or who do they do business with under their license. We’re bound to give out a credit guide, which discloses our dispute resolutions, the top six lenders we deal with, how we’re paid, etc.

We also then make sure an information pack based on Intuitive Finance and Andrew Mirams goes out so that people know who they’re dealing with or has some comprehensive. Again, most of our leads or deals tend to come from a warm referral, so they’ve been referred by a friend, a family member, or someone who’s done business with us, another business partner, etc.

We give that sort of information. We are active in giving out a fact-find and making sure that people understand how they know that their data that they give us is also going to be protected. I think that’s very important in the modern day. People don’t want their privacy breached, as well.

Kevin:  That’s a very good point you make actually about the information you give the broker because you tend to think that you’re giving it to the bank but you’re actually pushing it through the broker, and I guess you’d have to be fairly careful about how they use that information, too, Andrew.

Andrew:  Correct. Again, it comes back to knowing who you’re dealing with. And we ask for a quite exhaustive information and research list right up front. We think that’s the best way to best assist the client in the least amount of time because by the time someone’s ringing us, e-mailing us, sitting in front of us, they don’t want to be sitting and umming and ahhing; they generally have a need and they want that need satisfied.

So for us to best assist them we think the more information we can, one, give out, but two, then get back, it helps us to do a better client deal in terms of what everyone gets from that.

Kevin:  Has consumer protection been beefed up in recent times in terms of how consumers deal with brokers and what protection they can get?

Andrew:  Yes. There’s a group called COSL, which is the Credit Ombudsman Scheme. Probably what you find against brokers and things like that, I think that the disputes or the complaints are lessening, so there was less last year than the year before.

I’ve known lots of people who have made a complaint because someone’s maybe recommended a fixed rate and they didn’t understand why. Again, it just keeps coming back to that why question. Keep asking the questions. But certainly, your money day lenders and things like that, they tend to get significant complaints and things like that – Office of Fair Trading, COSL, and all that sort of thing. It just depends how the promoters…

The legislation, and the regulations have tightened dramatically since the GFC and I think it’s a great thing for the industry as a profession.

Kevin:  Yes. You mentioned the payday lenders; they’re the real rogues of the industry. Well, I suppose that’s unfair to label them all like that, but they certainly don’t have a good reputation, do they?

Andrew:  No. They’re really servicing a need but the client who has that need is probably chasing from paycheck to paycheck, and you tend to see a lot of people actually just get themselves into more problems and troubles.

Unfortunately, trying to protect people from themselves… Desperate people do desperate things and when they think they’re in that situation they go to what they think at the time is a good thing but quite often is not.

Kevin:  Just to round out this conversation, too, Andrew. Sometimes attractive interest rates, they may be attractive in the short term but I guess you have to look long term. It could just be a little bit of bait to get into the loan to start with.

Andrew:  Absolutely. And that goes everywhere. We’re really active here in making sure we meet the client’s need first and then balancing that with features and interest rates and things like that.

If someone comes to me and says, “I saw this 3% interest rate advertised. That’s what I want,” and they don’t qualify, well there’s no point competing on rate because you can’t. So you need to make sure you’re going to be able to secure the client the money that they need for that purpose and then you work backwards with features.

It might be an offset account or redraw or a fixed rate or a line of credit attached to a credit card. They might need the whole banking package. What are the rates and fees that go with that as well as the interest rate? You might get a slightly cheaper interest rate, but if you pay mortgage insurance, there might be a significant increase in the premium that counterbalances that.

Kevin:  You talk about low interest rates. I remember that saying “The only free cheese is in the trap.”

Andrew:  Couldn’t agree more.

Kevin:  Andrew Mirams from Intuitive Finance. Andrew, great talking to you and thanks for your time.

Andrew:  Thanks, Kevin.

 

What holds people back? – Michael Yardney

Kevin:  A couple of weeks ago I had a really interesting conservation with Michael Yardney, where we actually talked about are great people property investors born? One of the things that you highlighted for us, Michael, was that great people actually take action.

I’m interested to know from you what actually stops people from talking action? What holds them back?

Michael:  Kevin, sometimes they think it’s lack of knowledge, sometimes clearly you haven’t got enough money or finances, but in general, what it is is fear. They worry about things, Kevin, and that’s what stops them taking action. That’s the big difference between successful people, investors, or in any other sphere, and an average person.

Kevin:  Are there a number of fears, Michael? I know the fear of success is one that you and I have talked about in the past. Are there others?

Michael:  Yes. Look, I think the big one is fear of failure, but different people treat fears differently. I read once that Tiger Woods keeps training, uses a coach continuously, plays his game at the intensity he does because of fear also, but his fear is of not being the best, that somebody else could actually catch up – and in fact, I think they have, haven’t they over time?

Kevin:  They have.

Michael:  That’s what drove him for a long time. So fear can drive you positively or it can drive you negatively.

One of them is failure, but in fact, as we said when we had that session a couple weeks ago, successful people expect it,  know it’s going to happen, and on that basis, it doesn’t scare them because they know it’s what has to happen along the way to learning the right way to do things, Kevin.

Kevin:  Quite often I’ve seen people where one of the irrational fears, I think, is the fear of being ridiculed. “I won’t give my opinion here because people will think that I’m silly,” or “I won’t do this because people will think I’m ridiculous.”

Michael:  Yes. Exactly right. There’s no doubt that people are concerned about what their friends, what their mates, what their spouse will say. The problem is you can’t control it, and you shouldn’t let other people stop you achieving your dreams because in this lucky country we live in, we all have the ability to become financially independent and use property as a vehicle to do that.

It’s sad that people let that happen to them. No one has ever died from embarrassment, Kevin, so tune out from the critics and focus on what you want to accomplish.

Kevin:  You mentioned earlier the fear of failure. On the flipside of that, people are also afraid of success, aren’t they, for what people will think of them and say about them, Michael?

Michael:  Very much, Kevin. In my study of the wealthy people – and I’ve mentored over 2000 people in the last ten years – surprisingly, this fear of success can almost be as paralyzing as the fear of failure. It often follows on: once you’ve conquered that fear of failure, now, ironically, they worry that they could be successful and what will other people say?

In general, it comes from a feeling of being uncomfortable. It comes from a fear of not being worthy. It comes from the things that they learn when they’re a child about not being greedy and about rich people are ugly, greedy, slum landlords.

I don’t believe it’s a fear that should be founded. We should feel value in ourselves and understand that if you’re successful, you’re not actually going to stop other people being successful. If you’re successful in an honest way, what you’re going to do is provide good accommodation as a property investor, to give good housing to other people. In the process, you’re going to make some money, you’re going to get some financial independence, and it’s not going to stop anyone else in Australia doing that, Kevin.

Kevin:  It’s interesting that, the fear of not being worthy. I’ve been to a number of your conferences, and that’s one of the telling things, I think, when people start to talk about this. It is a fear that most people have, isn’t it? It seems to be born in us.

Michael:  It is, Kevin. A lot of people sabotage themselves in the process of that. They don’t feel that they’re worthy of it. “I’m not one of them. I’m not those rich people over there.” And so it actually stops them taking the steps, it stops them taking risks because they feel that they don’t deserve it.

Kevin:  It’s interesting, Michael – and you touched on it there – I want to stay on this fear of not being worthy just for a moment because I think it’s a key point. One of the ways to overcome that, it would seem to me, is that if you give back to a community, in other words, you invest in your own worthiness.

Michael:  Kevin, that’s a great point because I must admit when I first started investing, I chased money for all the wrong reasons and sabotaged the first half of my life. In fact, it does go back to that, when I’m being honest; I didn’t feel I was worthy because some of the things that my parents – my father in particular – said to me when I was young. Therefore, I tried to prove him wrong but if you do that without feeling worthy, when you get the money, you don’t really know the right things to do with it, either.

When I found a more important valuable cause for becoming wealthy, for giving to my family, for giving back to the community, for giving back to charity, that made it my obligation to become rich because I had a really good purpose for it and I had to follow through.

Kevin:  It is like investing in your own worthiness. Michael, obviously, the fear of debt is one thing, but I’m interested to know from you is it necessary to get rid of all of your fears to succeed?

Michael:  No, it’s not necessary to get rid of all of your fears to succeed. Rich and successful people also have fears, Kevin. They have doubts, they have worries, but they don’t let them get in the way. They don’t let them stop themselves.

Basically, the big difference is unsuccessful people have fears, doubts, and worries but they let those feelings stop them while the successful investors, businesspeople, entrepreneurs keep going.

See, the thing is that it’s normal for your brain to bring up fears. It’s your brain protecting you. It’s doing its job. It’s keeping you in your comfort zone. I guess it’s what protected us when we were cavemen living in the caves there and things could maybe attack you, so it keeps you in your warm, fuzzy, comfort zone.

What I’ve realized over the years, though, is you actually have to learn to be comfortable with being uncomfortable. If you stick and persevere with what you’ve always done in your comfort zone, you’re never going to get to the next level. So what this means is you have to feel comfortable feeling uncomfortable instead of retreating back into your cave, Kevin.

Kevin:  Well said.

Michael:  Pat yourself on your back and say, “Hey, that’s great. I’m moving forward. I’m going ahead. I now have got these little funny knots in my tummy but that means I’m actually extending my comfort zone.”

Kevin:  Yes, I love that saying – and we’ll leave you with this thought – become comfortable with being uncomfortable.

Michael Yardney, thank you so much for your time.

Michael:  My pleasure, Kevin.

 

Negotiation tips from top negotiators – Nguyen and Armstrong

Kevin:  Welcome back to the show. Top negotiators are always great people to talk to, especially if you want to get a bit of an edge when negotiating to get the best deal. I’m going to feature two tips from one of Australia’s top negotiators, Nhan Nguyen from Advanced Property Strategies, about the tactics he uses to get the price right when he’s buying a property.

Thanks for agreeing to do this today, Nhan.

Nhan:  Thanks, Kevin, and thanks for having me. The thing I love about property is that it is a game – it’s like chess – and you have to treat it like that. One of the best tips I can give people when they’re buying a property or selling a property is asking for more than what they’re willing to accept.

I’ll give an example. Let’s say a property is asking for $300,000 and you’re happy to pay $260,000; you might offer them $240,000 or $230,000. Why you ask for more than what you’re willing to accept is that it gives you room for leeway in negotiation. If you’re happy to pay a $5000 deposit, maybe you just offer them a $1000 deposit.

If you’re happy to settle in 30 days, maybe offer them a 60-day settlement. You’re always wanting to ask for more than what you’re willing to accept because people, when they come back to you and say, “We don’t want 60; we want 30,” which is what you’re happy with originally, then they feel like they’ve had a win.

Another big tip when you’re negotiating is try to leave the negotiating table with the other party feeling like they’ve had a win. Whether they have or not is another story, but if they feel like they’ve had a win and they feel like they’ve been able to have the final say, that’s definitely a win-win.

I’d say that the last tip, if you can, in a negotiation is aim for win-wins. It might be their price and your terms or your price and their terms.

Kevin:  Nhan Nguyen there from Advanced Property Strategies. Nhan, thanks for your time.

Nhan:  Thanks, mate. My pleasure.

Kevin:  In a strong market, many buyers fear the auction process because competition drives prices out of their reach. Auction clearance rates, of course, are high, so there’s no doubt we’re going to see a continuation of a large number of buyers trying to avoid the auction process.

What happens when you’ve been through a property a few times and you absolutely love it and then comes the call from the agent: the vendor has received an acceptable offer? What do you do? What are your options?

Mark Armstrong has faced this on a number of occasions and has written some articles about it as well with some really good advice. He joins me.

Hi, Mark. Thanks for your time.

Mark:  Hi, Kevin.

Kevin:  That must be the dreaded call for all property buyers – when their agent calls with that information.

Mark:  Yes, it really is. Buyers are out of their comfort zone anyway when they’re buying property via the auction process, but when you get that phone call, there are a lot of unknowns around what is going on. You don’t really know how many people have an interest in the property. You don’t really know exactly where their offers are.

At least, in an auction process, you can see every buyer and you know what’s going on, but when you get that phone call to buyers prior to auction, it can be very difficult.

Kevin:  There’s a temptation, too, for many buyers to not believe the agent and believe it’s really just a ploy on their part to try and pump them up or to get an early offer.

Mark:  You have to be careful. I think that the key to it is to make sure that the agent tells you that the offer on the table is acceptable and that the property is going to be sold.

I think in some instances, an agent can ring up and say, “Look, we have interest in the property and it might be sold, so we encourage you to put in an offer.” That’s the instance where they may not have any other offers and they may not have any other interest in the property, but they’re just trying to force your hand to do something prior to auction.

Kevin:  Yes, in some states of Australia, agents actually put out what they call a multiple offer form, which indicates and asks the buyer to sign a form saying they’ve been advised that there are other offers and they’ve been encouraged to put an offer forward, which could be their only opportunity to buy.

I think when you see those sorts of forms, you know that the agent is pretty much on the level.

Mark:  Absolutely. There are a lot of agents around who have a very clear system that they use for dealing with acceptable offers and they really have an obligation. I think there’s the perception that someone who puts in an offer before auction and their offer is accepted, they have the impression that they’ve won and the property has now been sold, but it really just triggers a process where the agent has an obligation to call anyone else who has seen the property and who has registered an interest in the property to give them the right to try and buy the property, as well.

Kevin:  When you find yourself in that position, let’s step through the process now, Mark. Your advice is the first step is to fast-track your preparation.

Mark:  Yes. Buying before auction is usually unconditional just like buying at auction, so you have to make sure that you have all of your finances approved. You have to make sure you get your building inspections done, contracts checked, and really make sure you’ve done all of your due diligence before you put in any offer. That’s really, really important.

Kevin:  Also important is the second step of that, which is determining your spending limit and then being pretty well fixed on that.

Mark:  That’s right. You really have to do your work on what the property is worth and really have done your research and know exactly where your upper limit is. Usually with the buying prior to auction, you have one shot at it. You have one opportunity to put an offer on the table and you usually find out whether you’ve won or not won.

Kevin:  We’ll talk about price in just a moment, but I think the next step then, you say, is to call the agent. Is it fair that the agent would give you an indication about the other buyer’s offer?

Mark:  They can’t tell you exactly what the offer is. In some cases, they do, but I don’t believe it’s ethical to say exactly where the offer is. But they’ll certainly give you an idea of saying, “You’ll need to be above $500,000,” or “You’ll need to be above $600,000” or whatever the case may be. The agent can give you guidance as to where you need to be.

It’s really important. The agent is there working for the vendor, so their job is to get as much money as possible. They also have an obligation to their vendor to guide any buyers through the process to still try and maximize that sale price.

When we’re stuck in this process of buying before auction, we talk to the agent as much as possible, find out a little bit more information, find out how many other buyers have an interest in the property. Really get as much information as you can before you put in that offer.

Kevin:  Yes, and I think, too, remember, it’s not all about price. Sometimes it’s good to ask the agent, “What’s the motivation of the seller? Do they actually want a settlement earlier if they’ve purchased somewhere else?” because those things can actually help in your offer.

Mark:  Absolutely. We’ve bought property in the past where our offer has actually been slightly lower than the best offer but our settlement terms were 30 days as opposed to 90 or 120 days. When you’re buying a property that’s worth hundreds of thousands of dollars, the interest savings that the vendor gets by selling and settling earlier can run into $5000 or $10,000 or even more, so it’s not all about the money.

Kevin:  From there, the offer must be submitted in writing, Mark?

Mark:  Yes, it must be submitted in writing. It’s a binding offer. You have to put a check on the table, as well. If it’s acceptable and the vendor countersigns, then you’ve bought the property and it’s a binding contract.

Kevin:  Yes, and the reason you’d would want to put in writing, too, is to show the seller that you are serious. Verbal offers really don’t carry any weight at all.

I guess the bottom line, too, just to finish this conversation off, is to always remember to make your best offer, sit back and wait, but remember, there’s always another property.

Mark:  Yes, that’s right. I think people buying properties before auction, the motivation to do it usually is born out of frustration because they have been to so many auctions and they’ve missed out so many times. You can often make a mistake buying before auction because you do get too emotional and do get too carried away.

But you’re right; there is always another property around the corner. You have to go through the process methodically, understand what you’re buying, understand the price point, and follow that sort of routine.

Kevin:  Good advice from Mark Armstrong. If you’re going to be out shopping around for an auction this weekend and you want to make that offer, there’s a great guideline for you.

Mark, thanks for your time.

Mark:  Thanks, Kevin.

 

Don’t get caught with gazumping – Rob Balanda Part 2

Kevin:  Earlier in the show, I was talking to Rob Balanda from MBA Lawyers about “time is of the essence” on contracts. In that chat, Rob talked about tow things. One was gazumping and the other one was Dutch auctions. I thought we might explore that a little bit more.

Welcome back to the show, Rob. Thanks again for your time. Let’s talk about gazumping. How does that happen?

Rob:  That’s pretty ugly. It comes from the Yiddish word “geezump,” meaning to cheat or overcharge. It flows from the system of conveyancing that’s used in the big eastern seaboard states, Victoria and New South Wales.

In those states – unlike Queensland and Western Australia where you make an offer in the form of a live contract and once accepted by the seller, you have the property locked down, you have a live active deal, and the property is off the market – in Victoria and New South Wales, they start with a quaint thing called a sales note, which buyers usually do think is binding. They sign it, the seller signs it, but it’s nothing more than an expression of interest or some form of preliminary agreement.

It doesn’t become binding, lock the property down, and take it off the market from your perspective as a buyer until some three or four weeks later when the buyer’s and the seller’s solicitors agree on the wording of the actual contract, which is what we sign up here in Queensland and WA when we make the offer. They take three to four weeks to get to that stage, so sale note first, three to four weeks later, then they do an exchange of contracts, and then the property is off the market.

When a market is moving, Kevin, the unfortunate fact is that sellers will gazump buyers. That is, I’ve found in previous moving markets, you see sellers working on sometimes up to three or four buyers at the same time, playing one off against the other, and when they attract the highest offer out of those three or four, then that’s the one they accept and the other three are left high and dry. Each of them thought they had the property tied up, but they’ve been gazumped.

So all of the time and money they’ve spent with lawyers, doing due diligences and stuff, it’s all just thrown away, and it leaves you very upset and really out of pocket. It can’t happen in Queensland and WA because we have a different system of conveyancing.

Kevin:  Is it actually outlawed in those two states?

Rob:  No, it’s not outlawed. It’s just the conveyancing…

Kevin:  It just doesn’t happen?

Rob:  Yes, it’s just how it all flows.

What you need to do as an investor is move yourself into the Queensland/WA position as quick as you can because in a moving market, you will be gazumped. You’ll also be Dutch auctioned.

That’s a similar sort of thing where a seller uses your offer… Once they have that from you, Kevin, then they come to Balanda and get that to force him to push his offer up. When they have Balanda up, they take that offer back to you and get you up, so up and up it goes. Once again, very ugly.

It can’t happen in the big resource states. It can happen in the other states, so you have to move, in New South Wales and Victoria, to the Queensland position as soon as you can.

Kevin:  How do you do that, Rob?

Rob:  One of two ways. You can tell your solicitor/conveyancer that you want to sign up and exchange contracts now, because what they do is do all of the searches first and then three or four weeks later, sign the contracts. In the resource states, they sign the contracts and then do the searches on the basis that you’re protected because of the clauses in the contract.

All you need do in Victoria and New South Wales is just to tell your solicitor to sign up subject to a due diligence. That’s the basis you want to make an offer. Then you can do all of the searches with impunity, without any risk, or alternatively, that little sales note you sign, have your solicitor draw that up – it’s not hard – so that it is legally binding.

What you normally sign in an agent’s office is just something that’s a preliminary agreement that’s not legally binding. You can draw up a one-pager that is legally binding. One of those two things.

Also, tell your solicitor to move faster because if you just get caught once as an investor being gazumped or Dutch auctioned, I can assure you it’ll leave such a nasty taste in your mouth and you don’t want it to burn you for the market, do you?

Kevin:  You have to be on side with the agent, too, and just express to them the desire that you don’t want to be caught up in that sort of awful backwards-and-forwards situation.

Rob:  The argy-bargy. People unfairly blame the agent too for fueling the fire. But you know what? It’s not usually the agent; it’s usually the seller. Of course, the seller today is the buyer tomorrow.

So what’ I’m saying here is this is human nature. You just need to be aware of it and protect yourself about it. It doesn’t happen in a falling market. It doesn’t happen in a flat market. It happens a lot in a moving market, and that’s the market we’re moving into in pretty well all Australian states.

Kevin:  Another thing that happens in a moving market, too, is multiple offers, when an agent will genuinely get more than one offer on a property before they can actually present it. There is a process in place, I know, in Queensland. Is that similar in other states as well for presentation of multiple offers?

Rob:  Yes, there’s protocols as real estate practices where you have to be advised as the buyer that you are now in the position of competing multiple offers and therefore, put in your very best offer.

There is a way that you can get to the head of the queue nine times out of ten. If you find yourself an agent’s office on a Sunday morning and you pick up there are four or five other sales people who are going to put in an offer on this property you now want to buy, how do you get yourself to the head of the queue when there are competing offers? Add a little clause to your offer that says, “Unless your offer is accepted by 5:00 today, it’s automatically withdrawn.”

Putting that clause in will eight or nine times out of ten move the power from the seller who is just playing like they’re the prettiest girl in the class at school – sit on all of these offers over the weekend and make a decision Monday. If you put a deadline like on it and a little clause…

Agents will rarely recommend or promote such a clause to you because they operate on the principle that less is less. The less clauses you have, the more chance the seller will go “yes” to the offer. It’s for you to be educated about this stuff. It’s for you to drive this to yourself. It’s only a little two-line clause but it sure swings the power back to your side of the table.

Kevin:  Wonderful talking to you too, Rob. Rob today in the show has taken us through quite a number of aspects: time is of the essence, gazumping, and the Dutch auction.

Rob Balanda from MBA Lawyers, thanks for your time.

Rob:  Thank you, Kevin.

 

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Kevin Turner
kevin@realestatetalk.com.au
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