Congratulations! You've put your house on the market, someone's made a great offer, and you've accepted it! Now what?
Exchange of contracts!
Exchange of contracts is a critical step in the house exchange process. Until you exchange contracts, you don't have a legally binding agreement. You've agreed on the price but you may not have the same ideas about the settlement date, the amount of the deposit, or about whether all the kitchen fittings are or aren't included in the sale. So all of these items remain negotiable. Once you've finalised your negotiations, the specifics will go into your contract, and once you sign, you're committed.
Your purchaser could also pull out, if all you have is a verbal offer. But once they've exchanged contracts, they're committed, too.
Exchange of contracts is also the time at which a buyer will have to come up with a deposit. That's normally 10%, though this is another thing that can be varied in the contract.
When does contract exchange occur?
Some estate agents will persuade a potential buyer who is making a serious offer to fill in the contract in their office. In that case, contract exchange can occur as soon as the vendor accepts the offer.
But more often, both parties will go through their solicitors. That can take a bit more time, but if the buyers have pre-qualified for finance, it might still happen the same day or the day after. A lot depends on how on the ball your solicitors are and how well they have been prepared for the transaction - if they know you have an open weekend, and might need their help on Monday, they'll probably get off to a quicker start than if you phone out of the blue asking them to remember the paperwork they handled two months ago!
Different Kinds of Contract
You might sign an unconditional exchange. This waives any cooling off period, and is legally binding. Technically, a 66W certificate needs to be signed by the purchaser's solicitor. If you've put a property up for auction, the contract will also be unconditional.
But most contracts are signed subject to a cooling-off period. The cooling-off period is only available to the purchaser, and the length of cooling-off depends on the state in which the property is located. For instance, it's 5 days in NSW. It may not be long, but it gives the purchaser time for home inspections and reports.
By the way, though the purchaser can withdraw during the cooling-off period, it will cost them 0.25% of the purchase price. For a typical house, that's $1500 or so. That penalty won't make you rich - though it will help defray your legal costs - but it's a good way to focus purchasers' minds. Few home buyers will readily take a hit of that size to their wallet unless the house inspection turns up an unexpected skeleton in the closet - or unless they are absolutely determined not to lose their chance at a highly sought-after property.
Other Contract Conditions
There may be other conditions in a contract for sale of property. For instance, buyers may insert "subject to finance" or "subject to building inspection" as conditions. This means they are obliged to purchase the property unless their finance falls through, or unless the inspection reveals problems that weren't apparent in the property description. There may also be a valuation condition - if an independent valuer says the house isn't worth the purchase price. That's usually there to protect buyers relying on finance, if their finance falls through because of a negative valuation report.
As a seller, you want to avoid conditions as much as possible. But if you're selling a typical starter property to move up the property ladder, for example, you're probably going to have to bite the bullet and accept a finance condition. Note that these conditions, unlike much of the contract, aren't standardised; wording can make a huge difference. So you might accept a condition, but for instance insist the valuation condition says "subject to a valuation within 5% of the purchase price" rather than "subject to a valuation above the purchase price."
How does Contract Exchange Happen?
Exchanging property contracts is actually a simple process. Two copies of the contract are normally prepared - one for you, and one for the buyer of the property. You sign your copy, and the buyer signs their copy. Then you send each other the contracts - that's the 'exchange' - for the other signature to be added.
Sometimes agents will arrange for the exchange of contracts, but this can also be handled by the vendor's and buyer's solicitors or conveyancers. As a seller, your solicitor should already have got all your paperwork ready, so it's easy to move on to exchange - providing the purchaser doesn't want to vary any of the terms in the contract. You don't actually have to go into a lawyer's office to sign the contract.
In fact you don't actually have to sign a piece of paper at all. Electronic signatures are now accepted for property transactions, so all you need to do is to have your smartphone or laptop on you - you could 'sign' from the café or even from the beach.
The process of property contract exchange is simple. What's not so simple is all the work that goes into ensuring the contract that's exchanged is exactly what both parties expect and covers all the legal bases. Much of the contract is standard, and if you're a seller you'll have gone over a lot of what's required with your lawyer and agent before putting the house on the market, so hopefully your paperwork is all in order. But if your purchaser has particular requirements, such as a particular settlement date, you're going to end up negotiating changes, and that could take some time.
What Happens After Exchange of Contracts?
When you're selling a house, getting to exchange of contracts is the end of your marketing process. You've hooked your fish, so to speak. But there's still a bit of work to do till you can sit back and take a rest.
The documents have to be stamped and duty paid (though the duty payment is usually deferred till settlement, technically it's exchange of contracts that make it payable). Enquiries have to be made of government departments to check on plans for the land. The buyer's solicitors will ask various questions about title to the property ('Requisitions on Title') and the outstanding amounts of rates and other levies and taxes will be checked so that they can be apportioned pro-rata between buyer and seller.
Can Either Party Withdraw After Exchanging Contracts?
There are a very few cases (other than during the cooling-off period) when a buyer can withdraw from the transaction.
One case is if you haven't fully disclosed all the relevant facts about the house, including attaching zoning certificates, property certificates, and any relevant covenants or restrictions. Failing to notify the purchaser about the statutory cooling-off period could also enable them to walk away - so make sure that the contract is drawn up by a professional and that all the right information is included.
A vendor has almost no way out of the contract, if the purchaser fulfils their obligations. However, if your purchaser doesn't pay the full deposit before the end of the cooling-off period, or doesn't come up with the agreed purchase price at settlement, you can withdraw from the sale.
Tactics of Exchanging Contracts
People often rush into an exchange of contracts because it gives them certainty. Buyers want to know they're not going to get "gazumped", because if they are, they'll lose their legal costs as well as their dream property. Sellers want to know their purchaser can't back-pedal.
But sometimes it's a good idea to wait. For instance, on an older property which hasn't had a home inspection, buyers might be better off waiting till they get their reports before hardening up that legal commitment. And a seller who has just heard from their agent that someone you thought had forgotten all about the property has just rung in, and asked whether it's still available? They'd be smart to back-pedal a day or two and not rush into the contract exchange.
You need to be very, very sure that you've got everything right before you exchange contracts. Because once you've done that, you're committed.