Key Considerations Property Owners Should Know Before Signing a Settlement Contract

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August 19, 2024

Key Considerations Property Owners Should Know Before Signing a Settlement Contract

Settlement is a key part of buying or selling a property in Australia. It’s the legal transfer of ownership from the seller to the buyer and the exchange of money to complete the transaction.

As a property owner, understanding the settlement process and what to consider before signing a contract is crucial to a smooth and successful arrangement.

Why You Should Acquire Insurance Before Settlement

Many buyers think insurance should start on the settlement date—that’s a misconception that can leave them exposed.

In some states, the seller is technically the owner of the property until settlement. This can lead buyers to think they don’t need insurance until settlement.

In Queensland, buyers—in most cases—become responsible for the property from 5 PM until the next business day after the contract date; this is before the settlement date. Considering this, it’s still recommended to have insurance in place from the time the contract is signed to be fully covered.

While property owners can delay the start of their insurance until settlement, that short-term saving can cost them significant financial losses if any damage occurs to the property before settlement and they’re found liable.

Not Having Insurance Before the Settlement May Pose Financial Risks

Not having insurance in place before the settlement date can leave property buyers with significant financial risks.

If the property is damaged by fire, flood, or other insured events before the settlement, the buyer may have to pay for repairs or rebuild costs.

The property owner may also lose their deposit and all the other costs they’ve incurred so far, including legal fees and inspection costs, if they can’t complete the purchase because of the damage.

What Home and Contents Insurance Doesn’t Cover Before Settlement

While home and contents insurance is essential for your new property, it’s important to know what these policies don’t cover, especially before signing the lease. Here are some exclusions to be aware of:

  1. Pre-existing damage: Most insurers won’t cover any damage that has existed before the policy was taken out. This includes structural issues, pest infestations, or any other damage that occurred before settlement.
  2. Wear and tear: Home and contents insurance policies don’t cover damage caused by gradual deterioration, such as worn-out carpets, faded curtains, or rusty gutters. These are maintenance issues and the property owner’s responsibility.
  3. Unoccupied properties: If the property is unoccupied for an extended period (more than 60 days), your insurance may not provide full coverage. Property owners should inform their insurer or insurance broker if the property will be vacant for an extended time.
  4. Unapproved renovations or alterations: If the previous owner did any renovations or alterations to the property without the necessary approvals or permits, your insurance may not cover any related damage or legal liability.
  5. Termites and other pests: Damage caused by termites, rodents, or other pests is often excluded from home and contents policies. Regular pest inspections and treatments are the property owner’s responsibility.

It’s vital to review the Product Disclosure Statement (PDS) of your preferred insurance policy to understand what is and isn’t covered.

For any questions or concerns, contact our qualified insurance brokers at Duo Insurance. We are capable of assisting any concerns or questions regarding how insurance can assist in your property journey.

Checks That Need to Be Done Before Signing the Property Lease

Before signing a property lease, buyers can conduct a series of checks to minimise the risk of unexpected issues emerging.

Understand the Implications of Unconditional Contracts

An unconditional contract means the buyer agrees to purchase the property without any conditions or contingencies. Once signed, the buyer is legally obligated to proceed with the purchase regardless of any changes in circumstances.

Be aware of the implications of signing an unconditional contract and seek legal advice before doing so.

Factor in Insurance Costs

Insurance is a considerable expense for property investors; you must factor these costs into your investment property calculations. If the insurance premiums for a property are remarkably higher than similar properties in the area, it could be a warning sign.

Some reasons for high insurance costs include the following:

  • Bushfire risk: Properties in bushfire-prone areas may have higher insurance premiums due to the heightened risk of damage.
  • Flood exposure: Properties in flood-prone areas often have higher insurance costs due to the potential for costly flood damage.
  • Condition and age of the property: Older or unmaintained properties may have higher insurance premiums because of the increased likelihood of claims for structural issues or failing systems.

Before investing in a property, get insurance quotes and compare them to the expected rental income and overall return on investment. If the insurance costs are too pricey, it may be a sign the property is a high-risk investment and could mean lower returns or even losses long term.

Investors should also be aware that insurance costs can skyrocket over time—especially in areas prone to natural disasters. In some cases, insurers may even refuse to insure properties in high-risk areas, making it difficult or unfeasible to protect your investment.

Do Your Due Diligence

Conducting comprehensive due diligence is critical when purchasing a property. This involves various inspections and searches that could affect the property’s value or suitability.

InspectionPurpose
Building and PestIdentifies any structural issues or pest infestations
Strata ReportsProvides information on the strata scheme’s financial health and any potential issues
Title SearchesConfirms ownership and identifies any encumbrances or restrictions on the property
Planning and ZoningEnsures the property complies with local planning regulations
Local Authority RatesDetermines any outstanding rates or charges owed on the property

Conduct Building and Pest Inspections

Building and pest inspections are vital, as they can reveal any hidden defects or structural issues with the property. If significant problems are found before settlement, the buyer can terminate the contract or negotiate repairs with the seller.

Know the Risks of Buying in Strata

A strata report is needed when buying a property in a strata scheme.

This report provides valuable information on the strata scheme’s financial health, any defects or issues with the property, and any disputes or legal matters affecting the scheme.

Buyers should read the report carefully and assess the risks and costs of owning a strata property, such as high strata levies or upcoming special levies for major repairs.

Conduct a Final Inspection

The final inspection—also known as the pre-settlement property inspection—is done by the purchaser just before settlement to ensure that the property is in the same condition as when the contract was signed.

Here’s a checklist of items that property owners should keep an eye out for when doing the final inspection:

  • Flooring: Look for stains, cracks, or damages
  • Lights and electronics: Test light switches and any attached electronics in each room
  • Plumbing: Turn on taps, check drains and hot water
  • Heating and cooling: Test air conditioners and heaters to ensure they’re functioning normally
  • Doors and windows: Check the handles, locks, and glass for damage
  • Appliances: Ensure included appliances, such as stoves and dishwashers, are in working order
  • Window coverings: Test blinds and curtains
  • Pool and spa (if applicable): Examine the filters and equipment to see if they are working
  • Smoke alarms: Ensure there are sufficient alarms and they are operational
  • Cleanliness: Check for rubbish removal and general tidiness

The seller or solicitor must be informed if any issues are found during this inspection. The seller is responsible for repairing any damage before settlement day. If they can’t make the necessary repairs before the deadline, the buyer’s solicitor may negotiate an agreement to reduce the property’s sale price.

Take Note of the Cooling-Off Period

In some states and territories, buyers have a cooling-off period after signing the contract, during which they can withdraw from the purchase without significant penalty. However, it is important to note that this cooling-off period does not apply to properties purchased at auction.

The cooling-off period varies by state and territory. For NSW, it’s five business days, but for Victoria, it’s only three business days.

Don’t Overlook the Settlement Period

The settlement period is the time between the exchange of contracts and the final settlement date. During this period, the buyer’s solicitor or conveyancer will arrange all the necessary documents and resolve any outstanding issues.

On the settlement date, the buyer takes possession of the property, and any tenancy agreements concerning the property come into effect.

Seek Professional Assistance

Engaging Duo Insurance’s services can provide you with valuable guidance and support throughout the settlement process.

They can help organise an insurance policy tailored to a property owner’s situation—considering the property’s location, construction, and the buyer’s personal circumstances. Should you need to make a claim, they can liaise with the insurance company to get it processed quickly.

Key Takeaways

  • Be informed of what it means to sign an unconditional contract.
  • Get insurance in place before the settlement to protect your investment and reduce risk.
  • Do your due diligence; get building and pest inspections and strata reports.
  • Be aware of the buyer’s liability during the final inspection.
  • Consider insurance costs when calculating your return on investment and be aware of factors that can increase insurance premiums, such as bushfire risk, flood exposure, and the age and condition of the property.
  • Buyers may be liable for damage that occurs before settlement, depending on the contract and state.
  • Know the cooling-off period and its implications.
  • Take note of the settlement period, possession date and any tenancy agreements on the property.
  • When buying in strata, get a strata report and consider the risks and costs of owning a strata property.
  • Get insurance to protect your property, mitigate risks, and comply with lender requirements.
  • Seek assistance from your insurer and insurance broker to guide you through the settlement process and look after your interests.

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