As house sales move away from auctions in Auckland, buyers and sellers in the city are having to learn quickly about conditional contracts and what it means to be in a chain of such sales.
While many sale and purchase agreements are conditional on finance or building inspections, this year buyers are adding a new clause: that the sale becomes unconditional only when they have sold their old property. Once the sale has gone unconditional, some buyers also add longer settlement times to be sure funds from their sale have arrived in the bank account.
These types of sales can create chains, and have the potential to slow down or derail transactions.
Real estate chains are a common feature of the UK housing market and describe a line of buyers and sellers whose sales and purchases are all linked. Each transaction in the chain, apart from the first, is dependent on the preceding and succeeding purchase.
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Linked transactions can be problematic because their pace is dictated by the slowest link in the chain, and if one sale collapses, it will affect sales further along the chain.
Property lawyer Joanna Pidgeon, director of Pidgeon Judd and a member of the Auckland District Law Society’s property law committee, says her firm is seeing a lot more of these deals.
“We are seeing much longer conditional periods in some contracts, up to say six weeks or two months for some,” she said.
“There can be a lot of juggling to protect people, ensuring clauses and dates align, and with making sure timeframes are realistic.”
Lawyer Joanna Pidgeon: "There can be a lot of juggling to protect people." Photo / Supplied
Harcourts agent Matt Winiata says that in his area of South Auckland, a good 20% to 25% of properties are selling with such conditional contracts now.
“That’s a pretty high number,” he says, adding that auctions have dropped to just 20-30% of sales from last year’s 60-70% of sales. An auction sale is unconditional as soon as the hammer comes down.
“We’ve even had one three-part chain, where one of the sellers was conditional on finding a new place, the other buyers on selling their own. That's the first I’ve seen for a while.”
Winiata says the time periods for contracts becoming unconditional were stretching out to four to six weeks, from two or three. Agents were having to give vendors more information on buyers, particularly developers, to help them understand the implications of their contract conditions.
“We’re doing a lot of due diligence on buyers. For developers, we’ll know their strength and reputation and will only go with large ones we know.
"We have to have tough conversations with vendors ‘what is your absolute fire sale price’ and ‘how realistic are you?’ Stress and desperation can lead to bad decisions for vendors, and a lot of buyers are waiting for that,” Winiata says.
Ray White agent Garry Singh says that 10-20% of his office’s sales in Takanini, Karaka and surrounds are now conditional on the sale of another property, up from last year when 30-35 properties a month were selling by auction.
“A lot of the rest are first-home buyers so they don’t need to sell first or buyers who are smart enough to know that you can negotiate better if you’ve already sold and are a cash-buyer,” he says.
Houses in Remuera. Ray White agent Steve Koerber says conditional sales in the suburb have more than doubled in the last 12 months. Photo / Chris Tarpey
Singh says that the market still has momentum, so he is not seeing a chain of conditional sales fall over because one of the parties was not able to sell their house.
In Remuera, Ray White agent Steve Koerber says that sales conditional on the sale of another property have more than doubled from 5-10% last year to more like 25% this year.
“The period between contract and going unconditional has really stretched out from three weeks to six or eight, and settlement times out from two months to six or even 12 months.”
Koerber says that a larger deposit helps the risk for the vendor, but they are still nervous as the months tick by until settlement.
Pidgeon says some buyers are giving themselves time, say a three or four-month settlement date, and then trying to renegotiate the settlement date if they sell their house earlier (or if the vendor has purchased another property).
“Having a chain of sale and purchase agreements makes it trickier to pay the deposit on time as there is a waterfall effect for payment of deposits,” she says.
Mortgage Lab' founder Rupert Gough says vendors are more hesitant. Photo / Fiona Goodall
“Parties are best to arrange a short-term loan for the deposit to ensure they can pay on time – or put in early deposit release clauses in the agreement so they’re not held for 10 days.”
Things can get costly if a buyer then can’t settle earlier, and vendors might need bridging finance.
But Koerber says some people are “too nervous” to ask for bridging finance.
Rightly so, says Mortgage Lab founder Rupert Gough, as banks are reluctant to offer open bridging (that is when there is no contract on the sale of the old house yet).
“People are more hesitant, they’re supposing they won’t sell whereas last year it was the opposite,” he says.
“In a hot market, your property will sell, it’s in sync, but now you’ll only do it if you consider bridging.”
Gough explains that closed bridging, usually for up to 12 months, is when the borrower already has a sales contract on their property.
“But for that you need a fair amount of equity – usually 80% of the value of both properties.
“You need to investigate right at the beginning whether that is even an option, and build that cost [of finance] into your calculations. It may be worth it because you don’t want to sell under duress,” he says, adding that bridging finance for 12 months generally gives plenty of time to sell.
“The additional cost of holding may be $35,000, if you’re buying a house for $1.5m. I ask ‘would you have been happy to pay $1.535m?’ And they say yes,” he says, adding that banks are very careful about the risk.
While Gough and the agents told OneRoof they had so far not seen chains fall over, they expects there might be cases later in the year as the market tightens.
“Have a back-up strategy,” Pidgeon says. “If you can’t settle your purchase without selling your house don’t go unconditional without bridging finance approved in principle.”
