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How to ensure funds have cleared before handing over keys/title?

Discussion in 'The Buying & Selling Process' started by shmoopty, 23rd Feb, 2016.

  1. shmoopty

    shmoopty Member

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    Hi, I'm a newbee so please be gentle ;)

    I am trying to understand the transaction process of funds/title/key transfer. My friends sold a property with settlement in a few weeks and they are worried about the following scenario:

    1. You sell your house and the property settles on the given day.
    2. Your lawyer is handed a bank cheque(s) for the sale price. They have someone deposit the check at the bank, and immediately make a claim on their conveyancing fees, agent fees, etc.
    3. Bank reserves 3 days to clear the check - ie to check it is valid and not fraudulent, stollen, cancelled, etc.
    4. Meanwhile your lawyers have handed over the title to the property and even given them the keys.
    5. The check is dishonored for some reason.

    In particular, the question is:

    How can one ensure that the funds have been transferred in full from the buyer before handing over the property?

    Potential further complication include:
    A. If one has a mortgage, the bank hangs onto the title, so when the buyer pays out the bank, say, but not the vendor, who really owns the house? Both the parties?
    B. The buyer is an international buyer.

    One proposed solution was, next time you sell a property tell your agent the purchaser does not get access to the property until the funds are cleared. Is that a valid approach?

    Many thanks in advance.
     
  2. DaveM

    DaveM Adelaide Buyers Agent & KFC Strategist Business Member

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    Bank cheques cannot be dishonoured as they are drawn from cash balance. They can be cancelled for specific reasons but this generally takes longer than clearance time.
     
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  3. JacM

    JacM VIC Buyer's Agent Business Member

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    The buyer generally does not attend settlement and is not the person that draws settlement cheques.

    The usual process is that in the leadup to settlement, the purchaser would put their purchase money into the conveyancer's trust account or provide their bank with authority to deduct funds from their account on settlement day to cover the purchase. The balance if applicable is a bank loan.

    Either way the bank cheque is normally drawn by the conveyancer or bank - not the purchaser him/herself.
     
    Last edited: 23rd Feb, 2016
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  4. shmoopty

    shmoopty Member

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    Thanks JacM. That is my understanding as well. But the key word in your reply is normally. I am trying to understand just how much this process can be bent. The point is, if everything does not go per the normal scenario, my friends don't want to end up without a property, fighting for months in courts for their dues.

    Are there no simple safeguards to ensure that the vendor gets his agreed payment before the property is handed over?
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Settlement happens when the money is handed over, not when cleared. There is a possibility of the bank cheque being fake though. If that were the case you could easily make a claim to unwind the transaction.

    No buyer would want to hand over money and then wait for 3 days to get the title deeds. You would need 2 settlements to do this. If they buyer was borrowing the money to buy then their lender would not be handing over money without title for security.
     
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  6. shmoopty

    shmoopty Member

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    Thanks DaveM. I may be using the wrong terminology. The concern is that under certain circumstances, the cheque may not be paid, e.g. fraud (refer to NAB's website Bank cheques).

    I would be happy with an answer that said that the money I'm due will be transferred into my account, no matter what, and it is up to the bank to chase the problem (fraud in this example). However, if it is my responsibility to ensure that I get my dues, then I would want to see the funds in my bank account before handing over the keys.

    When my friends queried their lawyers on this, the reply on who is responsible for the vendor getting their dues in the abnormal scenarios appeared to stay with the vendor, leaving them to fight it out in court...
     
  7. JacM

    JacM VIC Buyer's Agent Business Member

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    Hi @shmoopty

    Best your friend talk to their conveyancer who can in turn discuss the $$ plan with the buyer's conveyancer. That will put minds at ease about this specific sale.
     
  8. shmoopty

    shmoopty Member

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    Thanks Terry_w. Who would you be making the claim with? How long would it take? Who owns the house in the mean time?

    Fully agree from the buyer's perspective. What strikes me is that the vendor seems to be at a disadvantage here.
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    You would make a claim against the person you sold it to. You would remain legal owner until the title is transferred and this takes weeks usually. Even if the purchaser managed to get their names on title they would hold it as trustee for you under a constructive trust. You would lodge a caveat and get a court order to transfer title back.
     
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  10. shmoopty

    shmoopty Member

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    Thanks @JacM.

    The conveyances apparently said "don't worry, she'll be right". Guess what that did to my mates stress levels :)

    So I'm trying to create a clear process map for my friends that shows the decision points, the normal path, the abnormal paths, and how to protect against them.

    I was hoping that the abnormals don't all go to "Abort sale" :/

    And many thanks for everyone's inputs so far!

    PS. Can probably tell I'm an engineer ;)
     
  11. shmoopty

    shmoopty Member

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    Terry_w, this sounds like there are proper processes in place to protect the vendor. Could you point me to any references that your comments are based on?

    It does appear strange, however, why the purchaser (I assume that's the "they" in the quote above) would hold the title in vendor's name as trustee in a constructive trust, given:

    Also, is it expensive to lodge the a caveat and a court order? Is it 100s of dollars, 1,000s, 10,000s, more? And how long does the title of transfer take? If the vendor is strapped for cash, and has all additional expenses of moving, rent, etc, costs in the 1,000s, it may not be a walk in the park.

    Again, thanks for the help. I hope that these questions are not unreasonable. I am surprised that my friend's conveyancers could not provide these simple answers.
     
  12. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Transfer is handed over at settlement. But this is not effected until registered. Legal title will still be retained by the person on title till this occurs. But equitable title will transfer at the settlement.

    I cannot give references as I am not a property lawyer and this is not my field. There would be legislation, common law and law of equity involved in this sort of thing.

    caveats cost about $100 to lodge, court orders many thousands.

    This sort of advice is probably not something a conveyancer could manage as it is more complex and involves equity. You should speak to a property lawyer.
     
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  13. shmoopty

    shmoopty Member

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    Thanks Terry_w. Your input has been invaluable.

    I also found a discussion on electronic transfers here: Buying a property.. what happens in the background?

    I like the Welcome to Property Exchange Australia | PEXA web service mentioned in the above thread. Their promotional video states that "in most cases, payment is received within 24 hours of final settlement".

    Again, giving the vendor more assurance of the sale going through properly.

    I'll try to dig up the relevant legislation re settlement. Surely, it cannot be this hard this day and age (but please don't hesitate to chip in with any info you may already have :) )
     
  14. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    I've played a part in over one thousand property transactions, I've never seen anything like this happen. I think you're seeing problems where there aren't any.

    ** As has already been stated, the funds are paid via a bank check. As long as the bank cheque is genuine the funds will be paid as these funds are drawn from the buyers account when the check is created. The odds of the bank check being fraudulant are miniscule, but let's acknowledge that it could happen (never heard of it happening though).

    ** My understanding is the title is transfered and registered sometime after the actual settlement. It's not an instantanious process. I imagine that the process could be stopped or delayed if something went wrong.

    ** Then there's the paper trail. If you're borrowing money, there's been a requirement for lenders and brokers to appropirately identify the borrower for many years now. I believe that similar requirements are being introduced for other points of contact such as solicitors, conveyancers and real estate agents.

    If you're going to steal someones house there's a few ways it could be done, but in each case the first step would be to hide your identity otherwise you will be caught. Identity theift is an ongoing concern but it has been identified for the threat it is and there are protections in place.

    In most cases of this type of fraud, it's far more common for it to be committed by the vendor. Essentially someone sells a property and receives payment, yet the property doesn't belong to them. The title was stolen before they sold the property.

    The other more common type of real estate fraud is where someone borrows money against a property that doesn't belong to them. They never actually own the property however, they don't buy it or try sell it. They present themselves as the existing owner and try to get money from the bank by financing against it.

    Frankly there's far easier ways to commit fraud than to buy a property but not pay for it.

    What I have seen occur is everyone showed up to settlement, but the final cheque from the purchaser didn't show up. The settlement was delayed until the cheque was made available. I've also attended a few settlements to actually deliver that cheque.

    Is the purchaser residing in Australia? Are they borrowing money? Are they represented by a solicitor or conveyancer at settlement? If any of these are the case, the odds of this being a fraudulant transaction that can't be recovered from are incredibly remote.
     
    Last edited: 23rd Feb, 2016
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  15. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    At settlement the bank cheque will be checked by the solicitor for the vendor and also the mortgagees - so they will also possibly bear some responsibility if it is a dud as they have handed over their money on the basis that the cheque is valid.
     
  16. Perthguy

    Perthguy Well-Known Member

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    They are not unreasonable questions but I'm not surprised that a conveyancer would not be able to answer them... they have probably never thought about it. Oversimplifed but basically, the cheque gets handed over, the application to transfer the title gets exchanged, the application to transfer the title gets lodged, the cheque clears, the title gets transferred. If the cheque did not clear, you would contact your conveyancer and they would take the steps required to make sure the title doesn't get transferred. I don't see this as a risky transaction for the vendor.
     
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  17. jim1964

    jim1964 Well-Known Member Premium Member

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    Yeah mate,picked it a mile away!!!
     
  18. shmoopty

    shmoopty Member

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    Thanks Peter. I concur with your thoughts on the probability that things will go wrong is very small. The other part of the risk equation is the severity of the outcome. I am trying to establish what the real severity of the outcomes can actually be for my friends (vendors). However, given it's their pockets, they imagine a prospect of not getting their dues as high enough to rate the risk panic worthy. My attempt to calm them down is to objectively present how the system is set up to ensure a normal transaction, and how it will correct abnormal situations, in the event (however improbable), that it may arise.

    Re the points you reiterated
    - Is there a way to determine if the bank check is genuine?
    If we can verify the cheque is real - no more worries (but it seems it takes the bank 3 days to do this).
    - What is the process for title transfer? In particular does it include a check that the right funds have been properly transferred?
    Maybe there is a gate that ensures the transfer has been made with a clear statement of who is responsible for it. If they are capable and insured - no more worries.
    - The paper trail is nice, but if one is trying to reverse a dodgy deal, then they're pushing the proverbial up-hill. I think that anyone would want want to be there in the first place.

    Another question springs to mind, if everything is so hunky-dory, why do the banks take 3 days to check the validity of the cheques?

    I do like your comments on stealing the house though. It puts things in perspective. I'll use that on my mate :)

    Out of interest, what happens if the buyer provides less money than agreed, e.g. they "fall" short by $5,000. Would the lawyers push settlement through? I hope the answer is no.

    To answer your questions re buyer,
    - I believe that the buyer is from overseas hoping to reside in Oz.
    - Don't know if buyer is borrowing money.
    - I think the buyer is using local lawyers/conveyancers.

    I find it interesting that the responsibilities for completing the transactions, etc, are not clearly defined (that I can find to date) - e.g. as Terry mentioned, conveyancers handling the bank cheques, issuing banks doing the due checks, etc...
     
  19. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Transfer is based on the transfer documents. The land titles office doesnt verify or care if money has changed hands as that is between the parties.

    If there is a shortfall at settlment time then the lawyer would not allow settlment to happen unless the vendor agrees to take the risk of not getting the money.

    The steps are clearly defined and conveyancing has been happening for hundreds of years though things are changing rapidly.

    With electronic conveyancing the process will be more stream lined and i think bank cheques may no longer be needed. But i have never done an electronic settlement so dont know how it works.
     
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  20. shmoopty

    shmoopty Member

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    Thanks @Perthguy. Makes good sense. Will use that for my flowchart :)

    Do you have any references I can use to verify those steps and/or provide further details?