Important precautions if exchanging without a mortgage.
This article is particularly important if you are ever going to consider exchanging without a mortgage in place.
If you plan to buy anything off plan you will most certainly face the potentially scary task of exchanging before you have a mortgage in place.
Let’s consider the risks first. As a worst case scenario the developer will take any monies you have paid as deposit and potentially sue you for the loss they have incurred. The solicitor will charge you abortive fees and you will lose your reservation and finders fees that you have paid.
Remember that at exchange of contracts you are exchanging equitable title to the property which means that you own any increases or decreases in the capital value of the property. At completion you effectively exchange legal title to the property.
I have never had worst case happen in all my time of doing property, although developers and solicitors are always quick to threaten this. I will explain why soon.
A more practical outcome is that you will lose your exchange monies and be charged abortive fees as well as having paid your finders fees. I think most developers realise its easier to resell the property than sue for extra money.
Regardless my advice is, do not buy the property unless you are prepared to complete it. This includes if you are planning to flip prior to completion, you must always be prepared to complete.
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Precautions you should take before exchanging.
Credit checks – If you are not sure what your credit reports say about you then order your credit report from Experian, Equifax, and Call Credit. These 3 reports will give you an accurate picture of what the lender will see.
Monies to complete available – too many times I hear of investors that either never had the funds to complete and were relying on selling before completion, or worst they had the funds but spent the money between exchange and completion. I recommend my clients quarantine any funds which are allocated and put them into an offset mortgage or a high interest account. This way you will always have certainty.
Awareness of time lines – this is vitally important as build programs can go ahead of time as well as over time. Keep in contact with your club or developer, they can give you estimates but remember they need only give you 10 days notice to complete once they receive final approvals.
Future market predictions The main two things that you must consider heading into the future is the value and rent. As long as you have a valuation at the time of reservation the value at completion should be fine. The other dynamic is the rent. This is the area that often presents a problem for investors wanting to part with the least amount of money.
In recent times a lot of places have undergone huge build programs and this has had a negative effect on rentals and valuations in the area. Overcoming this comes down to good due diligence on your part.
Solicitor Advice I love my solicitor because she will always make me painfully aware of the worst case scenario because that’s her job. It’s what I pay her to do. Me being me (the pig headed optimist balanced with experience) tells me that somewhere between what the solicitor says and the salesperson says is about what usually happens. So just remember that solicitors have to tell you about any potential outcomes not what is likely to happen. They are covering their positions and making you aware of potentials. You must always decide what is most likely to happen.
Mortgage time lines A mortgage takes between 4 and 6 weeks to process to completion. Don’t leave applying for your mortgage to the last minute, you are far better to begin the process a year or more out and repay for a valuation than to leave it to the last minute. With our clients we now have them apply for a mortgage at the time of reservation so you at least have some certainty that you will have a mortgage waiting. They will however redo a credit check and charge you for a re-inspection on the property prior to completion.
Personally, I don’t have a problem exchanging without a mortgage. I monitor my credit file regularly and am notified as soon as changes happen. I also have quarantined money that allows me to fund my purchases. I work in the industry so I keep up to date with timelines and the market and finally I am very stringent in my due diligence on the properties I buy.
Live with passion,
Brett Wood
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