Podcast: what happens between going unconditional and settlement? | ep. 206

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What's covered in the show?

In this episode, we discuss the steps between going unconditional on a property and settlement. These steps include:

paying your deposit into a solicitor's trust account. You solicitor will collect the funds to execute the transaction make additional payments to your developer if you are using a progressive payments model. You don't need to do this if you are using a turn key model conduct a pre-settlement inspection to make sure the property is presented as per the contract with all agreed chattels get a loan approved through your bank if your previous pre-approval has lapsed Receive a valuation or a certificate of completion receiving a chattel valuation to maximise the depreciation you can claim from the IRD (to decrease your tax). If in need of a reputable company, we often recommend Valueit.

Transcript of the podcast

Ed McKnight: Hello and welcome along to the Property Economy podcast. I'm your host Ed McKnight, and I'm Andrew Nicol, and today on the show we are questioning what are the steps between confirmation and settlement.

So what happens after you go unconditional on a property, but before you actually settle on it, because this is where the rubber kind of meets the road, and there are a whole lot of different steps between confirming on a property or going unconditional, and then actually coming to So Andrew, you've probably done this about 300 different times, across the years. Talk to me.

Andrew Nicol: A few more than that I'd say, but yeah, so I'll just take you through the processes. I'll do both if you're building a house, and if you're just buying a house that's already existing. So first thing you do when you go unconditional, is you pop open the champagne and you have a glass to celebrate.

The second thing, as you pay your deposit, now your deposit is there to protect both sides of the transaction. So you as the purchaser and also the vender whoever is selling the house as well. Now if you're borrowing the deposit, normally this will come out of that revolving credit or an advance from the bank. So you need to get organised to make sure that that's available.

Technically speaking, the deposit is usually due once you go unconditional, with a lot of our clients for example, there's a bit of wiggle room there. Sometime over the next couple of weeks is when a developer would expect it, but generally speaking, you pay the deposit where you go unconditional. And it's really important. You know where that money goes.

If you are doing a build, it is imperative that you make sure that that money is protected because if the builder goes under and you've paid them your deposit, you're probably not going to see that money again. So, any one that's by been in investment for say the last 15 years, might remember a company called Blue Chip, who existed in Auckland, they were selling major apartment complexes off plans. They took a whole lot of deposits, and not your usual 10%, more like 30% and they went broke and all of those deposits went with it. So it's really, really important that you make sure that money is held in a trust account, and ideally with a solicitor, if the money's held by a solicitor, and none of it's going to be released, it means that if anything happens to the house or the builder, if you're having a build, then it's protected, then you can get that money back.

The good thing about a trust account is normally it would be interest bearing. So if something does happen, you get the money back with the interest. Now, I'm just going to jump ahead now and just talk if you're buying off the plans if you're buying a house that isn't complete yet, then there are two types of builds: there's the turnkey, which is where you pay for it when it's finished and there's a progressive build, which is where you make payments along the way to the builder.

So turnkey, you don't have to do anything else. Basically, you sit back and wait for the house to finish. If it's progressive uh, progressive payment build, which is fairly common, if you own the land already that would be normal, then what you have to do is you have to make instalments to the builder throughout the construction phase. And usually that would be outlined, or sorry, it would be outlined by a building payment schedule, which you find in your bill contract, and let's say there are five payments of different varying amounts based on different stages of completion. So that's something to bear in mind. And of course, remember you had the service that loan as the build continues, so if there are any delays then that can obviously throw your numbers out again, if it's a turnkey, then you don't have to pay anything more until that house is finished.

With the bill, what the process is, um, often there's a title that needs to be issued at the start, not always, but in a lot of cases, and then the builder has to apply for consent, if they haven't already done that, and then the construction will start and then they'll be a number of months which the construction will occur over.

Now, fast forward a bit to the completion of the build, the way that a building is said to be complete is when the council goes in and issues what's called a code of compliance. So that's a certificate from the council to say that house is ready and compliant with the building standards. Now at this stage, you've normally got a couple of weeks before the full settlement, the full hand over takes place.

So it's really important that as you get closer to the completion of the build, closer to that code of compliance inspection, you're getting your loan approval updated. So if your bank approved your loan six months ago, it's likely that that loan offer might have expired. So it's really important that you go to the bank or go to your broker and you'll get your loan approved so that you're ready for settlement proceed on what you're ready for the advancement of those funds and meeting their conditions.

Part of that condition might be to get a property manager to give you an updated rental assessment, and this is a really good time to engage a property manager, to have someone come out and look at the house, make sure that, okay, we can probably get $500 a week in this market and get it advertised on the internet. You don't want to do it too close to, sorry, too far out from completion because otherwise that property can sit on the internet and become stale, you can actually lease it until you've got a settlement date. So it's really important that we do that in a, in a appropriate time, a time frame, and then once that completion comes out, certificate comes out and you sign it off of the bank, you probably also need what's called a value as completion certificate.

So this is when a valuer goes out, because they're the eyes and ears for the bank and they look at the property and say, okay, it's finished to the specifications and it's now worth the 500,000 that the client paid for, or maybe more, and it's good to be settled.

Settlement, so this is when the actual house changes hands. So there are a few things to consider here. Firstly, you want to get your account set up, so you want to get you a rental account set up so that you've got rent payments that can go into a bank account, you want to sign your loan documents, which you do with the lawyer. Normally the bank would send the loan documents to a lawyer, you'll go and sign those. And then the bank will advance the funds to your solicitor. Now, if you're putting any money in yourself, you'll also pay those to your lawyer. If you're doing a split bank scenario, you might have two sets of loan documents, but the lawyer is the one that handles the money and transfers the lender or the developer and the transfers with title into your name.

And this is where you get your second bottle of champagne because you now own a house. Now, I wanted to also talk a little bit about an extra thing that lots of people miss out in this process, and that's getting a chattel valuation. So if you're building a property for a rental property or you're buying a property for a rental property, it's imperative that you maximise your chattel depreciation to minimise the amount of tax that you're going to pay. And you do this by getting a chattel valuation, and I highly recommend you don't use your valuer to do that because they have a very basic model that they will use.

You actually go and get a proper chattel valuation. The company that we use nationwide for this is a company called "Value It". They've been around for years, Ed can put the link and the in the notes to this podcast, but they will go out and tell you every item , within that property, and it's extensive, of what you can actually depreciate and the more depreciation you have, the least tax you pay, which I think everyone will enjoy.

Ed McKnight: And as well, Andrew talk to us about the pre-settlement inspection, when does this usually come about? Whether or not it's a new build or an existing property.

Andrew Nicol: Sure. Sorry, that's one thing I missed out there Ed. So, when you are ready to settle the property, it's really important that a day out or two days out you go and check the property. You make sure that if it's an existing house, there's been no damage done since you signed up for the property or there hasn't been something taken away from it that was considered chattels. That could be anything from, if there was a spa at the property, for example, I've heard of instances where people negotiated that as part of the purchase, and then the spa was gone, come move in day.

So it's really important you do an inspection, and if it's a new build, you go through and have a look for what we call a defects check. So you go through and make sure that, okay, if the painter has at left a few drops of paint on the carpet, you know that those have been noted so that you can either, a) retain some funds at settlement to make sure the builder goes back and fixes that, or you make an adjustment in the price or that it's done before settlement.

Ed McKnight: And Andrew walk me through as well, if there is a discrepancy between what you thought you were signing up for or what was actually agreed, and you go for your pre-purchase and a settlement, your pre-settlement inspection and things aren't quite right, how do you address that?

Andrew Nicol: So it's really important that everything's in writing, because if there is a discrepancy, it's going to come back to the contract. What is in the contract, or if there's been an email chain or something like that, if there have been some changes made throughout the build. I will tell a quick story, have we got enough time for a quick story Ed?

Ed McKnight: Yeah, we've got time.

Andrew Nicol: Okay. So one instance we don't really have this very often with our clients, because everything's well documented, but there was one instance where a client came to a settlement and, the house was built with an extra bedroom. So the project manager had gone through and, used the different set of plans to what was actually signed off. And so they'd built the wrong house on the section. So that was not that bad an issue for this guy because he got an extra I don't know, maybe an 18 square metres in the house, maybe not quite 18 square metres, but he got a whole lot of extra house for the same amount of money.

Now in that instance he was quite happy. The builder couldn't take any extra money off him, he just got extra house for the same amount of money, but you know, you might have an instance where, for example, if it was the other way round, say he turned up and there was three bedrooms rather than four bedrooms, then what we would do is we would go and negotiate that adjustment. Again, very, very rare that that would happen. But if it does, uh, then that's the course you go through.

Ed McKnight: Fantastic. Well, let's wrap it up there, but please don't forget to rate, review and subscribe to the show. It really does help us get the message out to more people and hey, if you're interested in property, why not come along to our webinar that we're holding this Tuesday, the 7th of April, where we digging into how COVID19 or coronavirus will impact New Zealand's property market.

We've got over 165,000 data points where we've tracked suburbs and their median value over the last 20 plus years, and we're going to show which areas of New Zealand are most likely to have the deepest downturns and in the speediest recovery. So if you're interested in that, want to come along, just to head along to the Opes Partners website, or I'm going to link to that webinar in the show notes as well, so just tap or swipe over their cover art, it'll take you right there. thanks for listening to the Property Academy podcast. I'm your host Ed McKnight, and I'm Andrew Nicol, and we're going to be back again tomorrow with even more daily strategies, tactics, and insights to help you get the most out of New Zealand property market.

Until next time.