The risks of signing unconditional contracts for property purchases
In a tight property market the temptation to sign an unconditional contract to buy your dream home can seem necessary. A shortage of properties on offer and a tribe of buyers, can make this seem like your only option. If you need a home loan to complete the purchase, be aware of the risks involved.
The risk with signing unconditional contracts increase as the size of your deposit decreases.
Why?
It’s related to the approach banks or lenders take in determining the value of the property. The bank receives the contract of sale and an independent valuation is completed. If the valuation is lower than the contract price, they use the lower of the valuation or the purchase price.
If you got carried away with your offer, or there are other issues, the valuation may come back lower than the contract price.
Having a small deposit and being at the limit of the percentage of the property value that can be borrowed, you may have a problem. All of a sudden the amount you need is above the bank or lenders policy limits. Given the contract is already unconditional you don’t have a finance clause to fall back on to exit the contract.
You’re only option is to raise more cash and make up the shortfall. Not a good situation.
A large deposit and borrowing a conservative percentage of the property value, will not create the same issue. But, for those not in this situation problems can arise.
Buying at auction is the same, when the hammer goes down the contract is unconditional . Whilst you may be willing to take this risk, do so having a back up plan if the valuation comes in lower than the contract price.
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