Long settlement considerations

Most properties I look at have the standard 30-60 day settlement included in their contract. I have recently found a few properties where the vendor is looking for a 6 month to a year plus settlement.

This got me thinking, if you purchased with such an arrangement, what items do you have to consider that would be different to a 'normal' settlement?

At what stage is the property yours? Is it different in the eyes of the law vs as an taxable item?

If the house burns down during settlement, from my understanding is that the purchaser is responsible for the insurance under the law.

When does the property expenses, such as insurance and building inspection reports become deductions from your tax return?

When should you get a quantity surveyor to look through the property for a depreciation report? Can you claim this when you are 6 months plus away from settlement?

Anything else you should consider with a long settlement?

Thank you for any replies

Shane

 

Hi Shane

The Quantity Surveyor will ask for all relevant dates - contract date, date you went unconditional, date you settled, date the property first became available for rent.

The big issue you will face however is the most loan offer docs will expire 90 days from the date of issue. As such after the 90 days they'll start the process all over again and you must hope and pray you are still eligible for finance if they've changed the serviceability calcs etc. This is a problem because this point you'd no doubt have gone "unconditional". Chat to your broker... it might make a difference as to which lender he/she goes to for such a deal.

 

Also, watch out when S/D is due.

In QLD, it is due 30 days after the property goes unconditional.

 

Spot on. So often missed and UTI (Unpaid Tax Interest) is not fun.

 

Your biggest (in a rising market) is risk is that any penalty clause for failure to perform is too small.

For example if penalty clause is 5% of total value you have effectively given the seller an option to default if prices rise more than 5% during the period before settlement.

 

Finance & seller reneging.

I would be ok with whatever time frame the financiers are happy with, usually that is less than 3 months, but check.

 

From a capital gains tax perspective you acquire the property on signing he contract (their is an exception for conditions precedent but I will ignore that).

You generate income from the property once settlement occurs; otherwise the rental income belongs to the owner (assuming it is rented).

You could consider a short settlement and then renting back. But this can create problems if you want it to be your main residence for tax purposes.

Thanks

 

Thanks for all the replies - Definitely a few things to consider before entering into such an agreement.

In regards to the finance approval - If you can comfortably meet the serviceability criteria now, what are the chances of the financial institution dramatically changing the terms of the approval?

 

In the current climate of changing bank policies - I don't think anyone really knows.

 

They not likely to change from a conditional approval if you can meet the conditions, if you did 3 month settlement, they may ask or check on employment, they can do tha t anytime though, even in normal 42 days etc

 

Interesting, any contract entered into would have to be in favor of the purchaser.
For me, in this example it would go like this,

Agree on price firstly, then terms, "you want a 6 month settlement" (rent of $600pw =$15,600) so minus that off the purchase price, and throw in a 30% default if they reneg on the contract, along with they are responsible for all maintenance and outgoings until settlement in addition to the fact the property must be in the same/similar condition as when first inspected (photo's) !
Deducting the would be rent will save you on stamp duty and income tax, and you may see an increase in value.
Doesn't seem so appealing for the vendor now though does it ?

 

Hmm it sounds like a great deal from an investor's pespective, but is it legal to deduct 6 months rent off the purchase price? Wouldn't ATO consider this capital gain tax and stamp duty and income tax evasion? @Terry_w ?

 

Sure it would be legal. But duty would, or should be calculated at market value. Income tax and CGT would be more complex.

 

And like Govco aren't already going "KA CHING"

Biggest driver of housing prices is Govco

Increase immigration and limit subdivisions, creates demand, increasing prices = duty's and taxes = "KA CHING"

(I consider "market value" to be the price paid )

 

Many thanks @Terry_w.

 

I prefer to get agreement on terms first and then base the price off that.

Because if you lead with 500k and then ask for 50k reduction because of 6 month settlement + lease back + xyz the vendor can say I think they are being unreasonable asking for 500 pw in rent it would be more 450 pw. Also to me the vendor has 500k in their mind.

Where as getting everything down to what the terms are you are left with price so you could ask for it at 420k and may get it for 450k still but you are working out the price after you have sorted everything out.

It is much easier negotiating with someone who feels they have had little wins (e.g. their settlement date) than with someone who feels they are being screwed over because you keep asking for a reduction.

I recently had a contract for a purchase where we agreed on price (with conditions) and asked for 60k reduction after a B&P issues (cost was 50k) and the vendor came back with 20k because they don't think the issues are there. It is more difficult to negotiate as they thought the place was worth however they recently sold the same property for 50k less than their reduced asking price but the purchaser knew the issues and they had felt the pain of it being on the market for months.

Changing settlement doesn't really effect you as a investor but it can make the world of difference to the vendor as they need the money or are ready to move out on x date.

 

this is very common nowadays. 2 houses sold side by side as one over the weekend had bids up to 1.45 million before stalling and the auctioneer going to speak to the vendors. After coming out, they said settlement terms can be extended to 12 months and bang suddenly it went to 1.6 million sold, purely because permits take time and hence this was a good option for investors or developers to buy.

You get insurance once you get your contract signed (no issue, recently had a claim for a property I have yet to settle).

Rest is after settlement. I would just get the QS in june when the tax year is abt to end.
Also as others have mentioned before, finance is another option.