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What does “under conditional contract” mean?
The words “under contract” don’t necessarily mean that a property sale is a done deal.
Just because a property is “under conditional contract” doesn’t mean that the sale is finalised, as there’s still a chance the contract could fall through and the property put back on the market. So let’s take a closer look at the definition for this real estate phrase.
What's in this guide?
- What does "under conditional contract" mean?
- What should the sale and purchase agreement contain?
- Conditions you may have to comply with
- Agreeing on deposit payment
- Payment of the real estate agent's fee
- Settlement by the buyer
- Why are under contract properties still listed?
- Buying a property when a contract falls through
What does “under conditional contract” mean?
If a property is described as being under “conditional contract”, it means that the vendor and the buyer have agreed on a price for the property and signed a “sale and purchase agreement”.
However, that contract is still subject to conditions and could fall through before the sale is completed. Contracts offer a measure of protection to both parties, whether you are the seller or the buyer. Besides protecting both parties, contracts can also legally bind you, which means you can incur legal penalties for breaching the terms of the contract. Therefore, be very sure that you understand all the legalities and procedures before affixing your signature.
A property can only be listed as “sold” once all the conditions of the contract have been satisfied. Until then, it is either “under conditional contract” or “for sale”.
Prior to signing a sale and purchase agreement, you need to provide your agent with written confirmation that you have read REA’s New Zealand Residential Property Sale and Purchase Agreement Guide, so make sure they provide you with a copy.
What should the sale and purchase agreement contain?
Aside from making sure that it is drawn to your name, your sale and purchase agreement should include the following:
- Names and addresses of both the seller and the buyer.
- The title type, eg leasehold or freehold.
- Things that are included or excluded in the sale such as furniture and lighting fixtures.
- The total purchase price, which includes the deposit the buyer must pay.
- Inspection reports and necessary inspections that are to be performed by the buyer before closing the deal.
- Details of the settlement, ie the settlement date when the buyer pays the remaining amount due for the property.
- Any conditions that need to be satisfied (by the buyer or the seller), plus the number of working days you have to complete these.
Conditions you may have to comply with
The sale and purchase agreement may contain one or more conditions, possibly from either party, that need to be met by a specific date. The contingencies stated in the agreement are usually categorised under “subject to” clauses. A good solicitor can draw up a contingent contract that maximises your rights and protection as a buyer or seller.
Once you meet these conditions, the sale becomes “unconditional” and you must complete it. Some typical conditions include:
- Subject to inspection. A subject to inspection clause is written into a contract when a buyer informs a vendor they want to buy a property subject to a building inspection. However, unless the property is likely to fall apart because of a major defect, this clause isn’t enough to allow the purchaser to get out of the contract.
- Subject to finance. You need to be careful of any finance conditions included in the contract. Buyers often think that they can sign a contract subject to finance, then if they encounter difficulties or if they change their mind, they can simply cancel the contract because they don’t have finance approved. However, this is not always the case. Subject to finance concerns the buyer arranging payment, eg a mortgage. Some sales and purchase agreements may state that if the buyer can’t secure finance and satisfy this condition, they must provide bank evidence stating that finance was declined. If they can’t provide this evidence, they may need to proceed with the sale.
- Sunset Clause. A Sunset Clause is the date and time a buyer’s offer expires. Buyers add this clause to allow them to make offers on other properties if a seller is taking their time responding to their offer.
- Sale of the purchaser’s home. A buyer may have a home they need to sell to buy another. They may want a clause added to the agreement that includes that it is subject to an unconditional contract on the sale of their own home.
Agreeing on deposit payment
The vendor and purchaser have to agree when the buyer is to pay the deposit.
This could be when they sign the sale and purchase agreement, or when it becomes unconditional. Typically, the buyer’s real estate agent holds the deposit in its trust account for approximately 10 working days, then release it to the seller.
Payment of the real estate agent’s fee
You pay the real estate agent for their services when the sale is complete. They generally take the commission from the deposit they hold in the trust account, so the seller needs to make sure the deposit amount is sufficient to cover the commission.
Settlement by the buyer
The outstanding amount on the property is paid by the buyer on the day of settlement, which is typically done through their lawyer.
Why are under contract properties still listed?
Under contract properties are still featured in online property listings because sale contracts can fall through. For example, a home loan rejection could be a reason why a buyer may pull out of a property deal, so keeping an active listing offers a form of protection for the vendor (and the real estate agent).
If the conditions of the current contract aren’t met, the real estate agent needs to find a new buyer. Maintaining a listing on popular property websites and continuing to hold open-house inspections makes it much easier for the agent to track down another buyer if the first contract falls through.
Buying a property when a contract falls through
In certain circumstances, a previous contract falling over may increase your bargaining power when it comes to making an offer, such as when the vendor is keen to sell as quickly as possible. However, keep in mind that the real estate agent does not have any obligation to tell you why the previous contract was cancelled. So, if there was something in the building inspection that scared the first buyers off, you have to arrange your own inspection to find out what that was.
Even if a property is listed as under contract, it’s still a good idea to attend an inspection and let the real estate agent know you’re interested. Not only does this action help you form a clearer picture of what’s available in your price range, but you are also one of the first people the agent calls if the current contract does fall through.
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