Conditional Finance Approval & Bidding at auction

When buying properties, it is prudent to have your finance conditionally approved ahead of making an offer. You then make an offer ‘subject to finance’, and use the next period (with the CoS in hand) to move your bank from conditional to unconditional approval. All good.

In Victoria however, many in-demand properties are sold through the auction process, where cooling off periods don’t operate, and vendors will general not accept bids which are ‘subject to ....’.

Assume you already have conditional approval. Is it possible to move a bank to unconditional approval ahead of the auction day so you can bid with absolute confidence? That is, you have the property identified (ie the one you intend to bid on), you have the price (ie your proposed limit on auction day). Will a bank unconditionally approve on this basis, or do you require a formal CoS to move a bank to that point?

 

No, that's no possible. A formal contract of sale is required and the final purchase price must be known.

I think you're concerned about the bank not valuing the property at the purchase price. In my experience, valuations are rarely a problem with a purchase. Almost all of the properties purchased (especially at auction) are valued at the purchase price.

Of the properties that have problems, they tend to be significantly unusual in some way and it's usually easy to identify up front. Some examples include:
* Properties on large development sites.
* House and land or off the plan properties that took a year or more to be completed and settled.
* Properties completely over-hyped in their marketing. I financed a property on the 2012 "The Block" reality TV. That was a challenging deal.

In all of these cases, a bit of research and a valuation from a different lender has solved the problem.

 

Thanks Peter. I thought as much. I once purchased a property with conditional approval and the bank would not proceed once I had a CoS as the electricity had been disconnected to the property. It was deemed uninhabitable and therefore was not an acceptable security. Once I settled, a sparky fixed the issue and had the power working in 1/2 a day. I financed with another bank and it was all good in the end, but created a lot of headaches at the time as I needed to go through the whole process again with another bank. The Val issue can always be sorted with more money and not going to 80% so I have never been particularly concerned with that. More concerned with issues like the one I described above, and other things such as changes in internal policies at the bank.

 

It is generally not possible because
a) you won't have entered into a contract of sale, and
b) without COS the financial would be subject to valuation and valuers need a COS to value for finance purposes.

It is a big risk buying at auction for these reasons.

 

A real life one happened to one of my clients. she bough a property at auction which was a former boarding house. It had about 7 kitchens in it and 7 bathrooms and the bank wouldn't lend because of this. They were worried she was going to use it as boarding house even though she had no intention.

 

Another related issue.

You can always put in offers ahead of the auction ‘subject to finance’. Provided the period you ask for (to get full approval) does not run into the actual auction date, the agent would be otherwise ok. However, I understand they need to notify people (ie. statement on the property ad) that the property is now ‘Under Offer’. This will just kill the marketing campaign, so is not something most agents will accept.

 

In Victoria, many in demand properties go to auction, which makes it difficult to bid subject to conditions (eg. subject to finance). I say difficult as anything can be agreed if the vendor is willing. The reality is that most vendors will not accept such conditions if they know multiple parties will attend the auction.

It is a given that having pre-approval in place with the bank ahead of the auction (and staying within your limit) is a key strategy to reduce the financing risk. However, this does not of itself guarantee that a bank will lend, and they are under no legal obligation to do so, as the Banks point out quite clearly in their documentation.

So, if you are bidding at an auction, what strategies are available to reduce risk (of the bank not completing). A key one would be to agree upfront to a lower deposit amount + other conditions if you are bidding. Say:

1) 1% down on the fall of the hammer,
2) remaining 9% in 20 days business days (allowing time to move your bank form conditional to unconditional approval), and
3) for your liability for not completing to be capped at the initial 1%.

Condition 3 is required as failure to complete would not by itself limit you to a upfront 1% loss given vendor can sue for damages.

For context, assume the person is bidding for a fairly high end property ($4-5m), so the 1% would aim to make the vendor reasonably whole for the costs and hassle in the unlikely event the sale does not complete.

Legal advice is a must but thought to also get some ideas from the PC community.

 

You could set up a $2 company and bid as director of the company. Hopefully there will not be a condition in the contract saying directors of the company are personally liable or give a personal guarantee. To avoid stamp duty issues the company could potentially act as bare trustee for the real owner. But this may not be necessary in VIC.

If you cannot complete the contract you could be liable to much more than the initial deposit.

 

I suppose you could sign the contract as XYZ Pty Ltd and/or nominees to allow the property to go into different names at settlement.

 

No need

 

Terry, if the company buys, you are still required to pay 10% on fall of hammer, so liability still quite high (you will lose at least your 10%).

I am not sure why this is not a more widespread issue, especially in Vic where auctions are very common. Perhaps most people just take the risk and rely on the strength of the pre-approval and assume all will be sweet with the bank.

 

That is up to negotiation, before auction