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The Property Purchaser’s Guidebook

Property Buying Fundamentals

Introduction

Owning a slice of the sunburnt country is a dream woven into the fabric of the Australian identity. From sizzling BBQs in the backyard, to the sense of accomplishment that comes with building a home and community for your family’s future, the Great Australian Dream is painted in shades of brick and mortar.

Millions of savvy Aussies chase the promise of property ownership, the opportunity to grow their wealth and secure financial security and freedom for their future. Yet, for many Australians, navigating the legal landscape of property feels like an impossible task. Why? Because it is, largely, an impossible task. Even the legally trained struggle to grasp the complexities of property legislation and practice – and to make it even worse, property law and practice is different in every state of the country. What should be a rewarding and fulfilling journey, is often a stressful and nerve-wracking experience where buyers are plagued with anxieties about the legal process. There are also a lot of bullsh*t resources out there that don’t really help either, making it hard to know what information to trust.

Our motivation behind this Guidebook, is to equip you with the knowledge and tools you’ll actually need to have a comprehensive, yet practical, understanding of the property buying process, regardless of where you are buying in the country. Our hope is to empower you, on your own journey, so you can make informed and strategic decisions about your real estate investments, to grow your wealth and secure your future.

In this chapter, we cover the basics of the property buying journey, the legal concepts you should understand, and the function of the contract of sale.

Here are the topics that we’ll cover in the Property Buying Fundamentals chapter

  • What is Conveyancing?

    Explains what conveyancing is, who is qualified to do conveyancing, and an overview of the electronic conveyancing landscape.
  • Glossary of common property terms

    Explains the meaning of some common property terms that you will come across on your journey, so you can better understand the process and the decisions you are making.
  • The buying process, from start to finish

    A simplified overview of the entire process of buying a property – from surfing realestate.com.au to picking up the keys ready to move in.
  • Land ownership in Australia
    • How the land-titling system works: Understand the land titling system in Australia and how this shapes the conveyancing process.
    • Types of property ownership – Freehold vs Leasehold: Understand the different types of property ownership interests.
    • Property titles and schemes: Understand the different types of property titles and property schemes.
    • Easements, mortgages and other encumbrances: Understand the different types of dealings or interests that can be registered on the title of land, and what it means for you as the owner.
  • The Contract of Sale

    Understand the purpose of a contract of sale, and the rights and obligations it imposes on you as a purchaser.

What is Conveyancing?

Conveyancing is the legal process of transferring ownership of land from one owner to another.

The terms ‘land’, ‘property’ and ‘real property’ are generally used interchangeably to describe a parcel of real estate (whether a vacant block of land, block of land with a single house, a townhouse, apartment, retail or office space, acreage, farmland etc.).

‘Real property’ is the legal term to describe real estate. It means any immovable property involving land (including the legal rights attached to that land) as well as everything that is permanently affixed to the land (such as the house, gardens, windows, carpet, toilet, kitchen etc.). This is different to ‘personal property’, which is all other property that is not real property (such as the furniture and appliances in a house that the owner takes with them when they leave).

Rules and laws governing real property

Real property in Australia is governed at a state level, meaning each state and territory set their own laws for real property, and real property transactions, in that state or territory. This has resulted in there being huge differences between the rules and practice that apply to property in each state and territory, creating a barrier for Australians to buy and sell property across the country.

Since 2011, Australia has been working towards aligning property law and practice across the country through electronic conveyancing. In 2011, all state and territory governments entered into an agreement called the ‘Intergovernmental Agreement for an Electronic Conveyancing National Law’ (the IGA). The purpose of the IGA was to formalise a plan to implement a single national e-conveyancing system for the settling of real property transactions in all Australian states and territories. This e-conveyancing system would provide a convenient and secure way for lawyers, conveyancers and financiers to settle transactions involving land, electronically.

The IGA established ARNECC (the ‘Australian Registrars National Electronic Conveyancing Council’), who is the body responsible for facilitating the implementation of the e-conveyancing system itself, and for the ongoing management of the regulatory aspects of it.

Rules and laws governing e-conveyancing

The Australian e-conveyancing system is governed by the Electronic Conveyancing National Law (ECNL), which has been adopted by every state and territory through legislation in each state and territory (visit ARNECC for info on the specific legislation). The ECNL sets out a detailed framework of how the e-conveyancing system is to work, and what rules and requirements must be followed by everyone interacting with it (e.g. the land titles offices, revenue offices, lawyers, conveyancers, banks etc.). The ECNL also provides that further rules can be made relating to the use of the e-conveyancing system – these are known as the “Participation Rules”, and they heavily govern the day-to-day use of the system.

The Participation Rules adopted by each state and territory are word-for-word the same as ARNECC’s Model Participation Rules for Electronic Conveyancing (WA has amended “Schedule 1 – Additional Participation Rules” but this has no effect on the operation of the rules as they apply in WA).

As of January 2024, all states and territories had implemented the e-conveyancing system, other than Tasmania and the Northern Territory. Under the IGA, Tas and NT have an obligation to use their “best endeavours” to implement the e-conveyancing system “as soon as practicable” (clause 5.2.1 if the IGA).

It is through this national e-conveyancing system, that the states and territories have made significant advancements towards aligning law and practice across the country. We are starting to see, however, that the national implementation of the e-conveyancing system is not going to be enough to align law and practice alone. More collaboration between jurisdictions will be necessary to address differences in property practice (referred to in a legal context as the “Prescribed Requirements”) that have deep-seated roots in each state/territory’s property system.

Who is qualified to provide conveyancing services?

You need to be suitably qualified to provide conveyancing services in Australia.

Below are the two types of professionals who are qualified to offer conveyancing services:

A lawyer who is currently permitted to practice law (i.e. because they hold a current practising certificate) is automatically qualified to provide conveyancing services. They will have completed at least 1 university degree in law, as well as post-university study specialising in legal practice. They will also be formally recognised as a Lawyer of the Supreme Court of the state or territory in which they practice, are required to maintain appropriate professional indemnity insurance, and everything they do is governed by strict solicitor rules.

You can check the law society register of the state or territory you are in to confirm if a person is a qualified lawyer:

State/ Territory Register
NSW The Law Society of New South Wales – Register of Solicitors
VIC Victorian Legal Services Board + Commissioner – Register of Lawyers
QLD Queensland Law Society – Register of Solicitors
SA The Law Society of South Australia – Register of Practising Certificates
WA Legal Practice Board of Western Australia – Find a Practitioner
TAS The Law Society of Tasmania – Find a Lawyer
ACT ACT Law Society – Find a Lawyer
NT Law Society NT – Current NT Legal Practitioners

What’s the difference between using a lawyer or conveyancer?

The main difference is that a lawyer has the ability to consider other legal issues that may arise in your transaction, whereas a conveyancer is restricted in the work they are allowed to do. Both are suitable to complete a conveyance, but engaging a lawyer can give you peace of mind that any legal risks or issues that arise during the transaction can be quickly considered and addressed, without needing to obtain further legal advice (reducing overall cost and delay).

With that said, competence in conveyancing is like any other profession – there will be good lawyers and not-so-good lawyers, good conveyancers and not-so-good conveyancers. The most important thing is to find a conveyancing team who are appropriately qualified, capable of looking after you and your interests and are experienced in the type of property transaction you are engaging them for.

Electronic conveyancing (e-conveyancing)

As discussed above, e-conveyancing has been in the works since 2011, with all Australian state and territory governments entering the IGA and agreeing to implement the national e-conveyancing system in their state/territory as soon as practicable. However, without any hard deadlines for the governments to implement, uptake by the industry was stagged, slow and quite frankly, painful.

The legal industry is notoriously resistant to change, but the slow uptake of e-conveyancing in Australia was expedited by the COVID pandemic. Prior to the pandemic, industry practice heavily favoured paper and manual based settlements, and the industry was very “stuck in its ways”. However, when we were faced with COVID lockdowns for months on end, it forced the industry to embrace e-conveyancing (or risk a prolonged pause in Australia’s ability to complete property transactions).

To date, all states and territories, besides Tasmania and the Northern Territory, have implemented the national e-conveyancing system, and it is mandatory to use in NSW, Victoria, South Australia, Western Australia and (as of February 2024) Queensland, for all mainstream transactions (meaning paper transactions in those states won’t be permitted). The ACT has not yet mandated the use of e-conveyancing, but it is now the primary method of property settlements in the ACT, nonetheless.

So, in short, a standard conveyancing transaction can be done electronically in NSW, Victoria, QLD, SA, WA and ACT. Tasmania aren’t too far behind (with The Law Society of Tasmania saying it should be introduced “in the second half of 2024”), but we are yet to see any substantial movement in the Northern Territory.

What is e-conveyancing?

E-conveyancing, put simply, is a conveyancing transaction where the settlement aspect of it is completed electronically.

This is a significant contrast to the former paper-based system, which was heavily reliant upon humans and manual processes. The ability to complete this type of transaction electronically means, not only a huge reduction in the time and manual labour needed to devote to the work, but a significant increase in the security surrounding those transactions, and the streamlining of the different parties involved.

How does e-conveyancing work?

Settlements take place via an internet-accessible platform, called Electronic Lodgement Network Operators (or ELNOs). Currently, there are two ELNOs that can be used – PEXA and Sympli. PEXA is the most popular ELNO at the moment (because it was the OG platform built by/in conjunction with the state governments and ARNECC). It doesn’t matter which platform is used, they are each interoperable (meaning they can work together, much like using Android and iPhones – it doesn’t matter if you have an iPhone, you can still call, text, access apps and websites in the same way as an Android user).

Settling through an ELNO means we don’t need to physically attend a settlement. It links directly with the land titles offices, state revenue offices, as well as the ATO, and has complete functionality to complete all aspects of the financial side of the transaction. This means that everything that needs to occur as part of a conveyancing settlement, can be done through the ELNO – revolutionary!!

I will say it again and again, but this dramatically reduces the time we need to spend per matter (reducing the costs of our services for clients), and provides a considerably higher level of security for property owners.

Features of an ELNO

Each ELNO:

  • uses a secure and encrypted platform;
  • links directly to the land titles office (allowing immediate access to property titling details, as well as the pre-acceptance of land title documents before they are lodged – reducing the risk of land title requisitions);
  • links directly to the office of state revenue (so transfer/stamp duty can be paid at settlement);
  • links directly with the banks (so your bank can easily provide your loan funds at settlement);
  • links directly with the ATO (so any GST or foreign resident capital gains withholding payments can be made at settlement); and
  • works in connection with the Reserve Bank of Australia (meaning all funds sent through PEXA are usually received same day – rev-oh-lu-shionary my friends).

Who can access an ELNO?

Those who can access and use an ELNO are called “Subscribers”. You need to go through an application process to become a Subscriber, and must meet the strict Eligibility Criteria (set out in section 4 of the Participation Rules) that requires, among other things, that you are of good character and reputation. This is to maintain that high standard of security.

Certain professions (such as lawyers, licensed conveyancers and banks) are deemed to be compliant with the Eligibility Criteria, so most Subscribers will be from these professions – people in these professions are often regarded as people of good character and standing in the community, and are in the business of following rules. Additionally, if anyone from these professions commits an act of fraud or material professional negligence, it will likely be career-ending for them (which is an added incentive to not be a sh*t person when using an ELNO).

Why is this restriction necessary?

The ultimate reason it must be this way is to free the bottleneck at the land titles office (LTO) whilst also maintaining the level of security and integrity required to protect property owners.

The nature of our land titling system (which we explore later in ‘Land ownership in Australia’) is such that mistakes and fraud in the land titling system can have significant consequences for property owners (and anyone else with an interest in land).

For this reason, the former system involved multiple levels of scrutiny of each (paper) land title document lodged with the LTO. This was 100% necessary because all land title documents lodged with the LTO were manually prepared by humans (who didn’t need to have certain qualifications), and it was much easier for mistakes to be made, or fraud to be committed. If the LTO was no longer going to be scrutinising every document in this way, there needed to be other appropriate checks and balances in place to maintain the integrity of the titling system. For example, when lodging a document through an ELNO, a Subscriber needs to make certain “certifications” to the LTO confirming that all laws and requirements have been complied with – if the person making those certifications (1) isn’t qualified to assess whether the laws and requirements have, in fact, been complied with, or (2) is not in a profession where there would be serious consequences for them if they make a false certification, then the giving of the certifications would not be sufficient to maintain the integrity of the land titling system, and the e-conveyancing framework wouldn’t work.

Conveyancing Summary

  • Conveyancing is the legal process of transferring property ownership from one person to another.
  • Conveyancing services can only be offered by lawyers or licensed conveyancers.
  • The COVID pandemic expedited Australia’s move to electronic conveyancing, but we love it because it makes for a more efficient, secure and streamlined transaction. Settlements of conveyancing transactions now take place electronically via an Electronic Lodgement Network Operator (ELNO), such as PEXA or Sympli.
  • An ELNO connects all parties involved in a traditional conveyancing settlement (such as the land titles office, office of state revenue, ATO and banks) and means that we no longer need to attend a physical settlement.
  • Not everyone can access an ELNO – access is mostly limited to lawyers, conveyancers and financial institutions (i.e. banks). This restriction is necessary from a practical perspective to maintain a high standard of security, while taking the burden off, and reducing the bottleneck caused at, the land titles office.

Glossary of common property terms

Knowledge is power – this glossary explains some common terms you may come across on your property journey.

Adjustments

There are various expenses that come with owning a property, such as council rates, water rates, body corporate fees, rent, utility bills and (in some cases) land tax. When you are buying a property, the seller is responsible for these costs up until the property is transferred to you, following which you are then responsible.

Adjustments refers to the adjusting of the purchase price to split these costs – i.e. they are apportioned so the seller pays for them up until the date of settlement, and then the purchaser pays for them thereafter.

ARNECC

ARNECC stands for the Australian Registrars National Electronic Conveyancing Council, and is the body responsible for facilitating the implementation of the e-conveyancing system in Australia, as well as the ongoing management of the regulatory aspects of it.

Auction

There are a few different ways you can sell a property – the most common being by Auction or by Private Treaty.

If a property is sold by auction, it means that it is sold at a public event where potential buyers gather to bid to buy the property. The property is sold to the highest bidder at the auction if the price has reached or exceeded the Reserve Price. If the highest bid is less than the reserve price, the seller does not need to sell the property. If this happens, it is called being “passed-in”.

The buying process, from start to finish

1. Loan pre-approval

Before you start seriously looking to buy a property, first speak with your bank (or mortgage broker) to get pre-approval for the loan you plan to get. This will help you work out how much money you can borrow, and therefore how much you have to spend on a property.

There are lots of costs to plan for when buying a property, including:

  • Conveyancing costs – these include the professional fees charged by your lawyer or conveyancer, as well as the third party costs they must incur on your behalf (such as title and other due diligence searches, ELNO fees and land titles office lodgement fees, etc.).
  • Settlement costs – these are the third party costs involved in completing a transfer of title. These will include costs such as the ELNO service fees, land titles office lodgement fees etc.
  • Adjustments – this is the splitting of property ownership costs such as council rates, water rates, body corporate fees, land tax etc. The final purchase price you pay will be adjusted to account for these costs so that the vendor pays for them up to, and including, settlement, and the purchaser pays for them thereafter.
  • Transfer/stamp duty – the tax payable on the purchase of most properties in Australia, paid to the state/territory government’s office of state revenue. This is usually a significant cost.
  • LMI – if you are borrowing money from a bank, and they require an LMI policy (because the LVR is above the bank’s risk threshold, usually 80%), you as the purchaser will be required to pay the LMI policy premium. It is paid upfront in full for the full term of your loan (even if you repay your loan earlier), and is a huge expense.

Once you have your loan pre-approval, and you have budgeted for all the other costs, set yourself a realistic property budget that takes into consideration your life after the purchase. You want to make sure that you can continue to live comfortably after you buy the property (financial stress is one of the leading causes of stress in Australia and can impact every aspect of your life). It is easy to get caught up when you find a property you love, but if you stretch yourself too thin, you won’t enjoy the life that comes with owning that property.

Once you’ve set your realistic budget – stick with it!

2. Find a property to buy

This part is the fun part – get online and do some research; shortlist the properties you like; attend open inspections or arrange private inspections with the real estate agent selling the property.

Start your search on realestate.com.au and domain.com.au – these are the two market leaders for online listings. Make sure you search both because not all properties are listed on both platforms (it costs the seller a pretty hefty fee to list on them, so most usually just choose one).

For properties that you are serious about, undertake the following due diligence at this stage:

  • Location research – do your research on the location of the property to make sure it is suitable for what you are buying it for. Look at its proximity to schools, public transport, amenities, and future development plans in the area – these factors will influence the value of the property long term. Even scope out the streets and talk to neighbours to get a feel for what it would be like to live there (this is a useful exercise even for an investment property, would tenants want to live there long term?).
  • Physical inspection of the property – do a thorough physical inspection of the property yourself, to make sure you are happy with the quality of the inclusions, fixtures and overall condition of the property before you commit to it. You will usually be buying the property in the same condition it was in when you inspected it.

New properties pop up every day, so don’t let FOMO make you settle for one that doesn’t feel right. Trust the vibes.

3. Float an offer

Once you find a property that interests you, it is a good idea to float the offer you want to make by the real estate agent before you incur the cost of a lawyer or building/pest/strata inspections. If you and the vendor are too far apart on price, then it’s going to be a waste of your time and resources to undertake any substantial due diligence (DD) if the vendor won’t accept your offer anyway.

If the real estate agent indicates that your offer (or something close to that offer) would likely be accepted, you can consider making a formal offer to the seller. Remember not to sign anything until you have spoken to your lawyer.

How do you work out how much to offer?

First, determine the property’s market value by looking at recent sales of similar properties in the area. Using this as a benchmark, consider whether the seller’s asking price (or auction guide) is fair, or if it is above market value. This will be a useful guide to help you decide how much to offer – you don’t want to overpay, but you also don’t want to under-offer and risk losing the property to someone else. At the end of the day, market value is whatever someone is willing to pay for it.

Once you have an idea on the property’s market value, but before you start negotiations, it is a good idea to determine the maximum amount you’d be willing to pay for the property, and keep this in your back pocket. This is your “bottom line”. It is especially important if the property will be sold at an auction, in case you come down with a serious case of FOMO and accidentally overbid.

Considering your market research, the seller’s asking price and your bottom line, float a reasonable offer past the agent to gauge how flexible the seller is on price. Then, using your own judgement, you can then decide how much to submit to the seller as a formal offer.

A real estate agent is not allowed to lie to you about other offers received for the property, however some still do. Why? To encourage you to make an offer at a higher price (remember that they do not work for you, they work for the vendor – and they get paid a commission based on a percentage of how much they sell the property for, so it’s in the real estate agent’s best interests to get the highest offer out of you). If you suspect an agent is being dodgy, take extra precautions when making an offer so you don’t overpay.

4. Make a formal offer

Once you’ve found a property that you love (and that fits within your budget), go ahead and put in your formal offer! Make sure to do your market research so your offer is competitive, but that you don’t overpay.

If the seller doesn’t accept your offer, you can proceed to make further offers until you and the seller agree on a price (or you reach your bottom line). Remember that the seller may also be receiving offers from other buyers, so be as efficient and reasonable as possible so you don’t miss out.

If your offer is accepted, you might be asked to make an initial deposit of 0.25% of the purchase price. This is to show the vendor that you are serious about buying the property, and they will take it off the market while the contract negotiations take place. This initial deposit is always 100% refundable. If you end up proceeding with the purchase, it will go towards the full deposit that you need to pay (see step 8). If you decide not to proceed, you will get this money back in full.

This step could also occur after step 5 (contract negotiations) or step 6 (preliminary due diligence), depending on the type of property you are buying and, as such, the risk of you uncovering issues during those steps (i.e. you may need to do some further DD before being able to determine an appropriate offer).

5. Contract negotiations

If you and the vendor are on the same page about price (whether you have formally agreed on a price, or you’ve received positive feedback from a floated offer), now is the time to get your lawyer to review the contract.

Ask the real estate agent to send a copy of the draft contract to your lawyer. Your lawyer will review, negotiate any necessary amendments, advise you on its terms and then give you the go ahead to proceed if it all looks good to you. The contract sets out the terms and conditions of the sale, and also reveals important details about the property. See section 5 (Property Contracts of Sale) for an overview of the contract of sale.

When your lawyer reviews the contract, make sure you’ve discussed with them how you plan to use the property, or if you want to do any substantial renovations. This is important so they can identify anything in the contract that will prevent you from using the property how you intend. Be cautious when engaging conveyancers who offer “free” contract reviews, as they are not likely taking into consideration your individual circumstances when undertaking their review.

6. Preliminary due diligence

At the same time as contract negotiations take place, you should also commence your due diligence investigations (DD).

Timing is important here – you are eager to keep the property off the market (in case someone else swoops in and makes a higher offer), but you also need to allow yourself (and your lawyer) enough time to make those important DD inquiries, to avoid a scenario where you become locked into a contract to buy a property, and then discover issues or concerns that make you think twice about it. Don’t rush this process, give yourself and your lawyer enough time to investigate properly.

If you will have a cooling off period (i.e. a period after exchange where you can pull out of the contract), you will have a bit more time after contracts are exchanged for DD (but remember that you will lose a small portion of your deposit if you pull out of the contract during the cooling off period – see section 9 below to work out how much. In NSW, QLD and ACT this is 0.25% of the purchase price, so if the property price is $1M, you would lose $2,500).

The types of DD inquiries and investigations you should make will depend on the nature of the property itself, but will usually include the following:

You should make sure you review/consider the following:

  • Title search and title plan – these will confirm who owns the property, the property’s boundaries, and if there are any registered encumbrances (such as mortgages, easements, covenants, restrictions on the use of land etc.). Encumbrances may limit what you can do with the property, so if you have plans to put in a pool, build a shed etc. it is important to consider if there is anything that will prevent you from being able to do this. Remember to tell your lawyer if you have any plans for the land, so they can specifically review the contract with this in mind.
  • Zoning and planning regulations applicable to the land – this info is obtained from the local planning authorities (such as the council) and/or by conducting specific searches. This will tell you how the land is allowed to be used and developed, and any environmental matters of note such as if it is located in a flood or bushfire zone area, or if the land has any contamination.
  • The inclusions and exclusions set out in the contract – this tells you what other items are included with (or excluded from) the property purchase. You should always review this list to make sure nothing is “excluded” that you are expecting to be included.

7. Sign and exchange contracts

If the vendor accepts your offer and contract terms, you can sign the contract and exchange with the vendor. This is also when you will pay the deposit (see next step).

Unless you will have a cooling off period, or your contract is conditional upon another condition being fulfilled (such as you obtaining finance), this is the point where you become legally bound under the contract and obligated to buy the property (and when the vendor becomes legally bound and obligated to sell you the property).

If you pull out of the contract after this date without a contractual reason, you will lose your full 10% deposit (even if you have not paid it all yet). This is very important – imagine giving your full deposit away to a stranger for free (*shivers*).

8. Pay deposit

When do I pay it?

You will need to pay the deposit at the same time as you sign and exchange contracts. Check with your bank to see if you have any limits on the amount of money you can transfer at a time, so you can make alternative arrangements if necessary (i.e. increasing the limit or attending a branch to make the transfer).

Where do I pay it?

You will usually pay the deposit to the real estate, but sometimes to the vendor’s lawyers. In either case, you must ensure that you pay this money into a trust account. This is to keep your money safe.

When money is held in a trust account, it means that the owner of the trust account (i.e. the real estate agent or lawyer) is not allowed to do anything with that money without your consent (unless the contract otherwise tells them they can). So basically, means they can’t run off with it, unless they want to ruin their business, reputation and career.

How much do I need to pay?

The amount of deposit you need to pay will be set out in the contract – the default amount is 10% of the purchase price, but is often negotiated to paying 5% on exchange of contracts, and the remaining 5% on settlement (or if the contract is terminated and the vendor is entitled to your deposit, on termination).

Deposit bonds

A deposit bond is a different way to “pay” your deposit. It is a type of guarantee issued by a third-party (such as Deposit Power or Deposit Assure) on your behalf, that is given to the vendor to guarantee that you will pay the deposit to them when it is due (i.e. either at settlement, or upon termination of the contract in circumstances where the vendor is entitled to keep the deposit). Then, if you don’t pay the deposit when it is due, the vendor can make a claim against the deposit bond, and that third-party provider will pay them the deposit money instead.

The third-party will then sue you for the deposit they had to pay on your behalf.

Using a deposit bond is handy for a purchaser who doesn’t have enough cash to pay the full deposit. However, you can only use one if the vendor agrees to accept it. The contract will tell you whether the vendor agrees to accept a deposit bond or not. This can usually be negotiated if you have no other way of paying the deposit (it is low-risk for a vendor to accept so they will often agree, but involves a bit more admin on their side if they need to make a claim against it – however, it is better to have a purchaser and a little more admin, than no purchaser at all).

Early-release of my deposit

A special condition may sometimes be included in the contract to allow the vendor to request the early release of the deposit. This means that your deposit, which is usually held safely in a trust account until settlement, can be withdrawn from the trust account and given to the vendor before settlement (and, as such, before you have received transfer of legal title to the property). A vendor will usually ask for this option if they are planning to use the money they receive from the sale to buy another property, but are short on cash for the deposit for that other property.

The risk to you of releasing the deposit early, is that it is no longer safe and secure in a trust account. If the contract falls through for whatever reason, and you are entitled to your deposit back, it can be difficult to actually get the money back because it will be tied up elsewhere. Sure, you may legally be entitled to get it back, but if the vendor does not have the cash to give back to you, you will need to go down the legal process of suing etc. to get it back. This is further complicated if the vendor has gone bankrupt or becomes insolvent, because a lengthy formal legal process will need to be followed by external administrators/trustee in bankruptcy to liquidate the assets of the vendor and pay back the people they owe money to. This also usually means that you will not get all of your money back (and will only get a percentage of it back, if you are lucky).

The reality is though, you will be a more attractive purchaser to certain vendors if you agree to release the deposit early (and the vendor may be inclined to accept a lower offer from you in these circumstances). Especially in a competitive market, your hand is often forced into agreeing to an early release.

How can I get comfortable with the risk of releasing my deposit early?

In the grand scheme of things, it is not the most likely scenario that the sale won’t proceed as expected, and your deposit will be lost. However, it is still a real risk that you need to be smart about.

Your lawyer can take certain steps to minimise the risk to your deposit if it is released early by (1) ensuring certain clauses, with specific drafting, are included in the contract, and (2) by undertaking additional due diligence on the vendor to get a better idea of their financial circumstances.

The following is a list of the potential steps that can be taken to help mitigate the risk:

Your lawyer should ensure that the special condition giving rise to the early release right is limited as follows:

  • can only be released if being used to pay a deposit on another property;
  • must provide a copy of the contract of sale for the other property;
  • the funds must be transferred directly to the trust account of the agent or lawyer representing the seller of the other property; and
  • funds must not be removed or released from that trust account until settlement of your purchase has completed, or otherwise with your consent.

9. Cooling off period

A cooling off period is a period after you exchange contracts, where you are allowed to pull out of the contract if you change your mind, without losing your full deposit (instead, you pay only a small penalty – see table below).

Not everyone is entitled to a cooling off period, so it is important to be aware of whether you have one before you sign a contract.

Who gets a cooling off period?

It is different in every state and territory. In general, a cooling off period:

  • applies only to residential property purchases;
  • does not apply if you are buying a property through a company or a trust;
  • does not apply if you buy the property at an auction, or on the same day as an auction is passed in (in QLD this also extends to the 2 business days after the auction date for registered bidders; and in VIC, extends to the 3 calendar days before and after the auction date for all bidders);
  • does not apply if the purchaser has waived their right to the cooling off period in accordance with the procedure set out in the legislation; and
  • does not apply if the property is purchased by exercising an “option to purchase”.

How long is the cooling off period and what is the penalty?

The cooling off period and penalty is different in each state/territory:

State/ Territory Cooling Off Period Penalty
ACT 5 business days 0.25% of the purchase price
NSW 5 business days for standard contracts, 10 business days for off-the-plan contracts 0.25% of the purchase price
NT No right to a cooling off period unless included in contract (standard contract allows 4 business days, but only if the purchaser does not have a conveyancer involved at the time contracts are exchanged) None, unless the contract specifies otherwise
QLD 5 business days 0.25% of the purchase price
SA 2 business days $100
TAS No right to a cooling off period unless included in contract (standard contract allows 3 business days). None, unless the contract specifies otherwise
VIC 3 business days 0.2% of the purchase price
WA None None

10. Final due diligence

Undertake any final due diligence before settlement (ideally before the end of the cooling off period, if you have one).

It’s important not to leave too much DD to be completed at this late stage, as you may discover issues with the property that do not give you a rescission or termination right under the contract (meaning you will be stuck with buying the property regardless).

11. Organise insurance

It is absolutely prudent to have insurance for the full replacement value of any real property you own (and this is a non-negotiable requirement if you will be getting a loan to buy the property, as it will be a condition of any lender providing you the loan). This is called home insurance.

As a buyer, you will need to understand at what point you become liable for the risk to the property – this is when you need to make sure you have your insurance in place. The point when risk is transferred to you is different in each state (so this will depend on where the property that you are buying is located).

You will generally not need home insurance for a strata unit, as it is usually the responsibility of the owners corporation to insure the entire building (you will get a copy of the insurance for the strata building when you obtain a strata report). If you are getting a loan from a bank, they will also require a copy of the insurance for the strata building.

The following sets out when risk to a property will pass to you as the purchaser for each state and territory. This is when you need to have your insurance in place:

State/ Territory When to have insurance in place
NSW, NT, WA Upon the earlier of:

  1. settlement; and
  2. the date the purchaser takes possession of the property (or is entitled to take possession of the property).
ACT, SA, TAS Upon exchange of contracts.
QLD From 5pm on the first business day after exchange of contracts.
VIC From settlement.

12. Final inspection

You are entitled to a final inspection of the property prior to settlement. This is usually done about 3-5 days before settlement is scheduled. You will need to arrange this yourself with the real estate agent selling the property.

During this inspection, check that everything is in the same condition as when you last inspected the property. If anything has been damaged, or is otherwise not in the same working order as when you last inspected, you can ask the vendor to fix it.

What should you look out for?

  1. Cleanliness – make sure the property is reasonably clean with all rubbish removed.
  2. Damage – check for damage to any parts of the property that were not present previously.
  3. Electrical – make sure all electrical aspects of the property are working (for example, light switches, power points, exhaust fans, ceiling fans, automatic roller doors or blinds).
  4. Plumbing – make sure all plumbing is in working order and no leaks are apparent (for example, check that taps, showers and mixers work properly, toilets flush, hot and cold water are both working).
  5. Fixtures and fittings – make sure all fixtures and fittings are in the same working order as when previously inspected, and that all items that are to be included in the sale are present at the property (for example, door handles, locks, windows, kitchen appliances (stove, cooktop, oven, dishwasher), air conditioning, water heater, flooring, lighting, blinds, curtains, smoke alarms).
  6. Outdoors – make sure that all outdoor aspects of the property are in the same condition as when previously inspected (for example, make sure all bins are present, doorbell is working, and letterbox is undamaged).

13. Settlement / payment of stamp duty

Settlement is the day that you pay the rest of the purchase price to the vendor, and receive legal title to the property (thus becoming the legal owner of the property). In all states and territories (other than TAS and NT), settlement will occur electronically via an ELNO. Your lawyer will organise and attend to settlement on your behalf.

Things you will need to arrange before settlement:

  • How you will pay the amounts due on settlement – your lawyer will tell you how much money you will need to pay to fully complete your settlement. This will include the balance of the purchase price, as adjusted in accordance with the contract (i.e. for charges such as rates, water, strata fees, etc.), as well as transfer/stamp duty and settlement costs.

    If you will be getting a loan from a bank, your bank will provide the loan funds directly at settlement via the ELNO – your lawyer will liaise with your bank to make sure they are lined up for settlement to be able to do this.

    There will usually be a shortfall of funds between how much your bank is loaning, and the balance of the money you will need to pay at settlement. You will need to cover the shortfall, and make arrangements for it to be available at settlement. You can usually do this by either:

    • ensuring your shortfall funds are held in a bank account with your lender, and authorising your lender to provide these funds at settlement, together with the loan funds; or
    • transferring your shortfall funds to your lawyer’s trust account, who will provide them at settlement for you.
  • Your insurance, if not already arranged earlier.
  • Appointment to pick up keys – if the property will be sold to you with vacant possession (i.e. it won’t have a tenant living in it), you will need to arrange a time to pick up the keys from the real estate agent after settlement has completed (see next step).

Your lawyer will pay your stamp duty at settlement on your behalf.

14. Pick up keys / receive rents

If the property was sold to you with vacant possession (i.e. it doesn’t have a tenant living in it under a lease), you will be allowed to pick up the keys from the real estate once settlement has completed.

It is important that you organise this with the real estate agent BEFORE settlement, as the real estate agent is not always in the office or available, or the keys may be held at a different office location. This is especially important if you are planning to move into the property straight away after settlement (as you may lose valuable time if the real estate agent is not able to give you the keys before you planned to commence your move). Imagine settling on a Friday afternoon, with removalists booked for Saturday morning, and you can’t pick the keys up until Monday!

If the property was sold to you subject to a tenancy (i.e. it has tenants living in it under a lease), you will be entitled to receive all rents paid by the tenant on and from settlement.

Land ownership in Australia

This section explains how land ownership works in Australia. It will give you a basic understanding how legal title to property is held, as well as the different types of property titles that can be held, so you know your rights and responsibilities of (as well as the benefits and liabilities associated with) owning certain types of land in Australia. This will help you make smarter investment decisions about the types of property you want to invest in to get you closer to your investment goals.

It will cover:

  1. How the land titling system works in Australia;
  2. The two types of property ownership types – freehold and leasehold;
  3. The different types of property titles that can be owned, and how titling schemes work;
  4. Company title and how it differs from strata title; and
  5. Encumbrances – easements, mortgages, covenants – and what they mean for a property owner.

How the land titling system works in Australia

The land titling system used in Australia is called “Torrens Title”, and it regulates how property is owned. In a nutshell, it works like this – if your name is registered as the owner on the title to a property, you own it.

Prior to 1858, the titling system in Australia was different (called Old System Title). Rather than relying on your name on the title, you had to prove you owned the property by producing a chain of title deeds (which evidenced the transfer of title between all previous owners) dating back to when the land was first issued by the Crown. If there were any documents missing, you ran the risk of someone else coming along later (with those documents) claiming that they, in fact, owned the land. You’d then have a legal dispute with that other person and need a court to decide who had the better title to the land, running the risk of outright losing your property (and incurring considerable legal expenses along the way).

The current Torrens system is based on what is called “indefeasibility of title”. It means that, it doesn’t matter if someone comes along with earlier title documents and tries to claim that they have better title – ownership belongs to whoever is named on the title in the Torrens register.

Paper certificates of title no longer exist in most Australian states and territories, instead there is an electronic register maintained by the land titles office of each state/territory which houses all the ownership information. You can get a copy of your electronic title (also called a “title search”) for around $40 through a search provider (such as InfoTrack). The title search will also tell you if there are any encumbrances registered on the land (such as easements, mortgages, restrictive/positive covenants, etc.).

Types of property ownership - Freehold vs Leasehold

People are often curious about what freehold and leasehold mean in the context of property ownership. These are complex legal concepts that describe the rights associated with, for lack of a better description, the “levels” of ownership you can have to property. My view is that it’s not necessary to have a thorough understanding of these concepts to be an informed property investor, but will explain them here anyway for the curious ones.

You can “own” an interest in property in various ways, and multiple people can own different interests in the same property. You don’t have to be the absolute owner of land to own/hold an interest in that land (this is where the concept of leasehold comes in).

The “absolute owner” of property is called the owner of the freehold interest, that is, their interest in the property gives them ultimate rights to that land of the highest level, forever (or until they choose otherwise). These rights allow them to do whatever they want with the land (subject to relevant restrictions such as council planning, laws, encumbrances on the title etc.), including the ability to sell or transfer it, or create lesser interests in the land in favour of others (such as leasehold interests).

A leasehold interest is a “lesser” interest in land – it gives the leasehold owner the right to exclusive possession of the land for a specific duration of time. It is considered lesser because it doesn’t confer the same ultimate rights on the leasehold owner as the freehold owner, and the rights of the leasehold owner will always be subject to the rights of the freehold owner. The nature of exclusive possession to the property means that the leasehold owner is entitled to possession of the property to the exclusion of the freehold owner (i.e. the freehold owner is not allowed to have possession of the property until the leasehold interest has come to an end).

Some examples

The following are some examples of how these concepts operate in society:

  • Residential lease: a common everyday example is that of a residential lease. The freehold owner is the landlord, who has created a leasehold interest in their land in favour of the tenant. The tenant is entitled to exclusive possession of the property on the terms set out in the lease agreement, and the landlord is not entitled to possession of the property until the term of the lease has come to an end.
  • Retirement communities: another example is seen in retirement communities where the homeowner will “own” their house or unit, but lease the land it sits on under a detailed long-term lease. In this scenario, the operator of the community retains ownership of the freehold interest in the land, and grants the owner of the house a leasehold interest in the land. The lease agreement sets out all the terms that govern this relationship, including the right of the homeowner to renew the land lease when it expires.
  • ACT land ownership: in the ACT, all land is owned by the ACT government and is leased to homeowners in a similar way to the previous example. These are called Crown leases. The ACT government owns and retains the freehold interest, and grants the homeowner a long-term leasehold interest in the land. The rights of the homeowner to the land are set out in a crown lease agreement.

The terms of a leasehold interest will always be set out in an agreement between the freehold owner and the leasehold owner. These terms can be completely different depending on the type of property, relationship and the purpose for which the leasehold owner is taking that interest.

We will explore the different types of property titles (i.e. standard title, strata title, company title, neighbourhood and community schemes) in the next sections, but it is useful to understand the difference between property ownership and property titles. You can own the freehold interest in a standard title, strata title, community title etc., and you can also own a leasehold interest in a standard title, strata title, community title etc.

Property titles and schemes

Lots

Each individual parcel of land (including an apartment or unit) is called a “lot”. A lot can exist on its own, or within a “scheme” (or a number of schemes).

Schemes

A scheme is a particular type of property development, where a large lot (called a “development lot”), or a number of development lots, are subdivided into smaller individual lots within a defined community framework. These smaller individual lots can be blocks of land for standalone houses, a building of apartments or commercial spaces, or for shared spaces such as for recreational facilities. The idea is to create a community.

The individual lot owners within a scheme have shared ownership and responsibility for any designated common areas, and must adhere to the rules and regulations that apply to the scheme (or schemes) that their lot resides within (known as “by-laws”). This is to maintain the community structure long-term.

The use of property schemes has become increasingly common in modern residential property development, and you will often come across lots that sit within multiple schemes. If you are buying a property in a scheme, you may wish to understand how they work and what it means for you as a lot owner.

We explore each scheme type below, using this diagram to illustrate:

scheme-chart

The types of schemes that exist in Australia are community schemes, neighbourhood schemes, strata schemes and precinct schemes:

Community Schemes

The diagram illustrates a community scheme, which we will call “Community Scheme A”. A community scheme initially comprises at least 2 development lots that are intended to be developed into smaller “subsidiary schemes” (such as neighbourhood schemes, strata schemes or precinct schemes) and/or or shared community property (such as recreational facilities like pools, gyms, green spaces etc.).

Within each community scheme is a legal entity called the “community association” (akin to an owners corporation in a strata scheme) and is made up of the owners of the development lot(s) and the associations/owners corporations of any subsidiary schemes within the community scheme. The function of the community association is to hold and maintain the common property of the scheme as agent and trustee for the association members, and to ensure the by-laws of the scheme are being complied with (to maintain that community vibe in the long-term).

The community association usually elects an “executive committee” (akin to a strata committee in a strata scheme) to assist the community association carry out its functions.  They may also engage a licensed professional (akin to a strata manager in a strata scheme) to assist the association carry out certain accounting and management functions, such as collecting levies.

Within Community Scheme A, there are a number of subsidiary schemes (namely, 3 x neighbourhood schemes, 2 x strata schemes, 1 x precinct scheme, and some communal property). This is what is meant by a layered scheme, or a lot within multiple schemes.

Levies – strata schemes, community schemes, neighbourhood schemes

It is the collective responsibility of the individual members within a scheme to manage and maintain the common property, so members are required to pay “levies” towards these costs. The amount of levies will depend on the overall cost of managing and maintaining the scheme (e.g. servicing lifts, maintaining gardens, lawns and pools, paying a scheme manager, building up some cash in the bank to fix any future structural issues, etc.). The total cost will then be divided amongst the members on a proportionate basis, which is calculated based on the size of each lot (called a “unit entitlement”) – i.e. the bigger the lot, the higher the levies paid by that lot owner.

When a lot sits within multiple schemes, levies are paid in a hierarchical direction. That is, individual lot owners pay levies to their neighbourhood association / owners corporation for the subsidiary scheme that their lot is located within, and then the neighbourhood association / owners corporation pays levies to the community association of the community scheme that their subsidiary scheme is located within.

For example, using our illustration, the individual lot owners of Neighbourhood Scheme 1 would pay levies to the Neighbourhood Association of Neighbourhood Scheme 1, and the Neighbourhood Association would then pay levies to the Community Association for Community Scheme A. Therefore, when calculating the levies that need to be paid by the individual lot owners of Neighbourhood Scheme 1, the total cost to run the scheme would take into consideration the levies that the scheme is liable to pay to the larger community scheme. Individual lot owners do not pay levies directly to the community scheme.

Company Title

Company Title is similar to strata title, but it is a different structure in a legal sense. In a typical example of an apartment building, rather than buying a lot in that building’s strata scheme, company title means you buy shares in the company that owns the building. The company is the legal owner of the building in full, and the “lot owners” are the shareholders of that company. The “classes” of the shares held by shareholders will determine which lots/carparks etc. the owners are entitled to, as well as providing a right to use communal areas.

Rather than being regulated by strata legislation and strata by-laws, the building is regulated by the company’s constitution. This is an important distinction because no two company title constitutions will be the same, and they do not need to follow any specific rules. Your lawyer will need to review the company constitution in full and advise you of its terms. The shareholders (i.e. the lot owners) will elect a board of directors (similar to the strata committee, but with more legal authority) who will carry out the management functions of the company/building in accordance with the company’s constitution.

The most important distinction between strata title and company title is that, when you acquire a company title lot, you don’t become the registered owner of the title to the lot with the land titles office. Instead, you are issued a share certificate by the company for the shares you own in the company. The land titles office has nothing to do with the transaction. This means you aren’t afforded the desirable protections under real property legislation (i.e. indefeasibility of title), and for this reason, lenders are often reluctant to approve finance for these properties (or will only lend at a much lower LVR (meaning you will need a larger deposit), and at higher interest rates).

Easements, Mortgages and Covenants – what are they?

An easement is an interest in land that gives someone else a right to use that land for a specific purpose. For example, a “right of way” easement granted by one property owner (the “burdened” land) in favour of the owner of a neighbouring landlocked block (i.e. land that doesn’t have access to a road) would allow the neighbouring owner the legal right to drive across the burdened land to access the road.

When you are buying property, it’s important to understand if any easements exist, so you can make sure they won’t prevent you from using the land in the way you intend (for example, if you want to put a pool in the backyard, but an underground easement cuts through the backyard, you would want to know this before committing to the property as you would not be allowed to put in a pool).

The seller is required to disclose all easements affecting the property in the contract of sale. Your lawyer will review these and let you know how they impact the property. Make sure to advise your lawyer at the contract review stage what your plans are for the property, so they can assess the impact of the easements with your plans in mind.

The Contract of Sale

The “contract of sale” is the official, legally binding agreement between the seller and purchaser of a property. It contains the important details about the sale and purchase, including who the parties are, what property is being sold, the purchase price, the date of settlement etc. It locks the seller into selling the property, and locks the buyer into buying the property.

The contract of sale will be different for every sale, as it will include information specific to the property being sold. The form of contract, and disclosure requirements, are also very different between states and territories, so advice on the specific terms of the contract will need to come from the lawyer or conveyancer you are engaging to act for you.

For a residential property sale, the contract of sale will generally be in a standard form contract that has been accepted by the industry in the state or territory where the property is located. The form and terms of the standard contract differs between each state and territory, however largely consist of the following structure:

Front pages

This part sets out the main details of the transaction, including the property details, seller, buyer, purchase price, real estate agent, inclusions and exclusions, body corporate details (if applicable), if GST is payable, if land tax is adjustable etc.

General / standard terms and conditions

Each state and territory have a standard set of terms and conditions that are used in each property sale. These are produced and maintained by private industry bodies in each state/territory.

In each case, the standard contract terms are drafted to be fair and balanced between the purchaser and seller. However, these terms can be (and are often) amended by the parties to the transaction by including special conditions that specifically amend the standard terms.

The general terms and conditions deal with all the usual parts of a property transaction such as payment of the deposit; the procedure to be followed for an electronic transaction (i.e. party responsibilities); the rights of the purchaser if it has a claim against the vendor under the contract; the rights of the vendor if the purchaser defaults under the contract; how adjustments are to be calculated and made; how GST is to be treated; what each party needs to do on settlement; when and how possession of the property is to be handed over (or, if the property is sold subject to an existing tenancy, the process for transferring any bond/updating records as to ownership, over to the purchaser); specific provisions for strata or community title properties; how FRCGW is to be treated; and specific provisions for residential off-the-plan purchases.

Special conditions

These are a set of additional terms and conditions that deal with issues specific to the transaction on a case-by-case basis. The purpose of special conditions can be to amend the general/standard conditions, make relevant disclosures on behalf of the vendor, or impose additional rights or obligations on the parties to the contract (such as giving the purchaser a termination right if they are unable to obtain adequate finance).

Industry practice for drafting special conditions is very different between states/territories. For example, in NSW, it is standard to include an excess of special conditions (that are often unnecessary) to re-balance the contract terms in favour of the vendor.  Whereas in QLD, special conditions are only included when absolutely necessary for the specific transaction (e.g. where the parties have agreed that the contract will be subject to the purchaser obtaining finance, or a satisfactory pest and building inspection).

Your lawyer will review the special conditions and let you know if there are any unusual conditions that should be considered and/or amended. It is best practice to keep special conditions brief and on an as-required basis only.

Disclosures

Each state and territory have different requirements for what information must be disclosed by a vendor about a property, and how. There are often different disclosure requirements for different property types – commercial, residential, off-the-plan and options to purchase land – and disclosure requirements are wildly different depending on the state/territory of the property (with some states/territories having no disclosure requirements at all).

In each case, disclosures are usually made by either attaching certain documents to the contract, or providing the purchaser a disclosure statement in a form approved by that state/territory’s law. Disclosures usually provide information such as ownership, boundaries, encumbrances that will be transferred with the property, planning and zoning information, pool safety, and body corporate information (for strata or community titled property).

Your lawyer will review the disclosure material, and make sure all disclosures that are required to be made, have been made. If a vendor fails to make the required disclosures, the purchaser generally has the right to terminate the contract and/or sue for damages

Warranties implied by legislation

Legislation in most state and territory implies certain terms into a contract in the form of vendor warranties. This means that the vendor makes certain promises to the purchaser about the condition of the property and the title. It protects a purchaser from buying a property with material defects that were deliberately concealed by the vendor in the sale process. The vendor has an obligation to disclose in the contract if any of these warranties cannot be given. If no such disclosure is made, the purchaser is entitled to rely on the warranties.

Given that the position in each state/territory is different, your lawyer will advise you on the warranties you are entitled to rely on depending on the location of the property you are buying, and together with any disclosures made by the vendor in the contract

Guidebook Author

Shauna Mainprize

Founder & Principal Lawyer

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Financial Readiness in Property Buying

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