Lets be perfectly clear about this. Once the Cooling Off contract is exchanged the seller is "locked in" but the buyer is not. At a cost, the buyer can walk away.

The origin of this law was the practice of gazumping. "Gazumping" is the practice where a seller verbally, but in a non binding fashion, accepts a buyer's offer but later changes his mind and sells to someone else or withdraws the property from sale or increases the price. The Cooling Off system was designed to cure these problems.

The Cooling Off system works well to achieve this but it can have annoying effects. It means a buyer will usually enter into a Cooling Off contract BEFORE carrying out pest and building reports. If the reports are bad, it still costs the buyer 0.25% of the price to terminate the contract. Nothing annoys a buyer more than paying $500 plus for pest and building reports and then losing about $1,000 plus to terminate the contract if they are unsatisfactory.

So the system is not perfect. But if a buyer wants to lock a seller in [ie he is worried about competing buyers or a change of mind in the seller], the Cooling Off exchange will serve that purpose.

Note the following:

• To exercise the right to terminate the contract [to "Cool Off"], a written notice has to be served on the seller, his lawyer or the seller's agent. Faxing it is effective. Just ringing up to say, "I don't want to go ahead" does not achieve that end.
• Usually, the deposit paid on exchange of a Cooling Off" contract is the 0.25% amount of the price with the balance of the 10% deposit being payable by the expiration of the Cooling Off period. Make sure the balance is paid by that expiration; otherwise the buyer will be in default of the contract with potentially disastrous results.
• Almost always, 5 days is not enough for the Cooling Off period. Very few finance applications are approved, these days, in five business days. Almost all Cooling Off periods require an extension of the period to be agreed. Ten days is quite normal these days. It is a good idea to negotiate this with the agent at the time the buyer first signs the contract. Otherwise, make sure your lawyer knows you need an extension.  He will normally arrange it.

It is not compulsory to exchange using the "Cooling Off" system. If the buyer is not worried about the seller changing his mind [and in a recession market that is often not a threat - it is often more likely the seller is worried about the buyer changing his mind], the buyer may prefer to obtain pest and building reports FIRST and to have the contract checked by his lawyer BEFORE the buyer exchanges a contract. The benefit of this method is that if the pest and/or building report is bad [ie the house is full of termites], there is no loss of the 0.25% of the price if the buyer simply does not proceed from there.

It is matter of which benefit a buyer wants as to which method the buyer uses. If the buyer wants the seller committed early, then exchange early on the Cooling Off system. If the buyer wants to check out the contract and/or have pest or building reports done before committing any money, the buyer will not sign a Cooling Off contract but will ask for a verbal commitment, then obtain his reports and will only then exchange after reading the reports. This is how the system used to work many years ago all the time.

Agents love the Cooling Off system. Like all good salesmen, agents like a signature on a contract as soon as possible. Agents do not always advise that a Cooling Off contract is not a compulsory system.

WHAT PRE CONTRACT REPORTS CAN I GET IF I BUY A HOUSE?

OR DUE DILIGENCE ENQUIRY MATTERS TO CONSIDER PRIOR TO YOUR PURCHASE CONTRACT BECOMING UNCONDITIONAL

There are four key matters to consider before you become committed to complete the contract you have signed. They are:

• Whether the property has damage caused by pest (mainly termite ) infestations
• Whether the structural condition of the property is adequate
• Whether there are any issues as to the location of improvements (the main structure/outbuildings/swimming pools/fences) being properly within the boundaries and
• Whether any part of the improvements of the property are illegal or have not been constructed (or are not being used) in accordance with Council approvals or regulations.

These are all matters as to which there are substantially no guarantees in the contract if it is subsequently discovered are a problem. You therefore must be satisfied with these issues before you are committed to the purchase. If you have already exchanged contracts with the agent with a Cooling Off period (normally five business days) this means before the Cooling Off period expires (or any extension of it which might be granted) OR if a contract is to be exchanged as to which no cooling off period will apply, this means before such a contract is exchanged. 

The method of checking the above matters before the contract becomes unconditional are as follows:

PEST INFESTATIONS:

You can obtain a Pest report by a qualified Pest Inspector. This takes about two days to obtain and costs from $200 as a separate report.

STRUCTURAL CONDITION:

You can obtain a Building Report by a qualified Building Inspector. This takes about two to three days to obtain and costs from $350 as a separate report. 

We have an inspector who will carry out a combined Pest and Building Report for properties with a price under one million dollars for $495

LOCATIONAL ISSUES:

You can obtain a Survey Report if you consider there is any doubt as to whether the improvements on the property are not within the boundaries. Consider the possibility that the fences may not be erected on the actual boundaries. A survey takes about three days to obtain. However, surveys are expensive and cost about $650 to $680. A survey will also reveal structures which are built too close to lot boundaries and encroachments onto adjoining land or by structures on adjoining land encroaching onto the land you are buying.

LEGALITY ISSUES:

You can making an application to the Council for a Building Certificate if the nature of the property you are purchasing warrants further enquiry on legality issues. This involves an inspection by a Council Officer who will then certify whether or not Council have any grounds to issue any rectification orders (or demolition orders in extreme cases) and whether any part of the property is being used contrary to regulations (eg a garage being used as a flat). Examples of problems of illegalities are converted non-living areas to living areas without approval, structures erected without approval, structural changes without approval, building approvals not fully completed with work still to be carried out and swimming pool fences not complying with safety regulations.  There is a Council fee (which is usually about $210) to carry out such an inspection. However, most Councils will require a survey to be submitted with the application. (refer above). As a result, it is quite expensive to obtain a Building Certificate as you must obtain a survey first ($650) and pay the Council fee ($210). However, if you have any serious concerns as to whether all parts of the structural improvements of the house are Council approved, a Building Certificate is the only way to obtain a complete certification. Obviously, some houses, such as houses which have had renovations or additions or obvious structural changes, will cause more concern. Other houses without such a history are of less concern. Also, sometimes the vendor can provide evidence of Council approval of structural changes (copies of approved plans or approval letters, copies of final Council inspection certificates or Council Certificates of Occupation).

WHAT ARE FIXTURES AND WHAT ARE INCLUSIONS?

Fixtures are permanent parts of the property. Inclusions are "chattels" which are not a permanent part of the structures on the property. Fixtures come with the land, ie there is no need to describe them as being sold as well as the land. Inclusions do not come with the land and if they are to be sold with the property must be listed on the contract.

Fixtures are the house itself and parts of the house which, when annexed or built into the house, were so annexed or built as to be considered to be a permanent part of the house.

Inclusions are things which might easily be removed and taken from one house to the next.

There are items which fall into a "grey area" as to which category they belong. Examples are dishwashers built into their own cabinet, some light fittings and  air conditioners.

The simple solution is to make sure anything which might be debateable as to which category it falls into is listed in the list of inclusions on the front page of the contract.

Examples of inclusions to be listed as such are light fittings, floor coverings, blinds, curtains, TV antennae, air conditioners, dishwashers, stoves, hotplates, range hoods, built in wardrobes, clothelines, screen or security doors, insect screens on windows, ceiling fans, garden sheds, BBQ's and BBQ fittings, swimming pool filtration equipment, garage door openers and remote controllers and alarm systems. In short, anything which you want to stay with the house as part of the sale which could be easily removed and taken.

WHAT IS A DEPOSIT BOND?

A Deposit Bond is a substitute for paying cash for the deposit. It is a guarantee issued by a bank or insurance company that, if the purchaser defaults under the contract, the vendor will be paid the amount of the bond (usually 10% of the price) by the issuer of the bond. IT IS NOT MONEY. It is used when a purchaser does not have enough cash to pay the deposit at the time when contracts are exchanged. This is especially the case for first home buyers borrowing 90% plus of the price and relying on a Home Savings Grant for the rest or investor buyers who are borrowing 100% of the purchase price. The fee to obtain a bond is commonly about $600 plus payable to the issuer bank or insurance company. A Deposit Bond is usually arranged by the buyer's finance broker. Check the website  of Vero Deposit Bonds, http://www.depositpower.com.au/  for more information.                        

 WHAT HAPPENS ON SETTLEMENT?

SETTLEMENT, or COMPLETION, takes place usually about 4 to 6 weeks after contracts are exchanged and is the time when the property you have bought becomes yours and you can move in. Settlement usually takes place in a city location at the offices of the bank for the seller or at a settlement agency. There are commonly four parties present - the lending bank for the seller who is receiving money to discharge the seller's loan, the lawyer for the seller, the lending bank for the buyer to make the new loan and the buyer's lawyer.

Neither the seller nor the buyer have to be present personally. They hire their lawyers for this purpose. At the settlement (which usually takes place between about 11 AM and 3:30 PM on a business day) the seller for the bank receives the money to payout the seller's loan and hands over the title deed and a discharge of mortgage form [to be registered at the Land Titles Office or LPI]. The seller's lawyer takes in any surplus and hands over a transfer form signed by the seller, the buyer's bank advances the loan money and takes possession of the title deed, discharge of mortgage and transfer documents. The buyer's lawyer brings any additional money needed to pay the seller the amount he is due to be paid on settlement.

The buyer's bank will then add its mortgage document it has had the buyer sign before settlement and then registers the documents at the LPI usually shortly after settlement. By this process, the buyer will become registered on the title and the buyer's bank will have its mortgage also registered on the title. A new title deed [called a Folio Identifier] will issue to replace the previous title containing the new information.

The seller receives the balance due plus or minus adjustments less the deposit on settlement. On settlement, the buyer's lawyer gives the seller's lawyer an ORDER ON THE AGENT. This is then sent to the agent [or anyone else holding the deposit if it is not the agent], usually the day after settlement, and the agent then accounts to the seller for the deposit he holds after deducting his selling commission. Thus the seller receives his money for the sale in two stages - most of it on settlement and the net deposit after settlement.

ON SETTLEMENT, WHAT DOES THE SELLER DO?

• Vacate the property leaving it in a clean condition, free of rubbish, and with no damage caused since the date contracts were exchanged [ie in the same condition it was in at the time of exchange of contracts] and leaving all the inclusions such as light fittings, blinds and curtains which the seller contracted to sell with the property.
• Keys should be left with the agent or some other arrangement should be made with the buyer to give the buyer the keys. If there are remote controllers for automatic garage doors or security alarm codes, these should be handed over.
• Cancel services such as gas, electricity and telphone. No action is required for Council rates or Water rates
• DO NOT make any last minute payments of Council rates or Water rates. This will only invalidate settlement adjustments [see the FAQ on SETTLEMENT ADJUSTMENTS]
• After settlement [usually the next day] arrange to collect the net deposit from the agent if the deposit was paid to the agent
• Cancel house insurance, but only after you are certain settlement has taken place

• Arrange for electricity, gas and phone accounts to be put in the buyer's name. In fact, you should do this a few days before settlement to start on the settlement date. Don't worry about council rates and water rates. These need no action from you [see the FAQ on SETTLEMENT ADJUSTMENTS]. The settlement process will result in your name being recorded with the Council and Sydney Water as the new owner soon after settlement.
•  Make sure you have normal household insurance in place [and contents insurance also if you want]. If it has been arranged you move in before settlement [see FAQ on EARLY POSSESSION], insurance must be taken out when you move in under any such arrangement
• Carry out a pre completion inspection as close to the time of settlement as reasonably possible. You should check for the matters referred to in the FAQ above ON SETTLEMENT, WHAT DOES THE SELLER DO?  as to the seller's responsibilities to leave the property in a good condition and that these matters are in order. If there is a problem, ring your lawyer quickly. It is usually too late to try to fix problems after settlement has taken place. Find out the time of settlement from your lawyer [eg 2PM on the appointed day].
•  Arrange to collect the keys, remotes etc from the agent. Check he has them to hand over. The agent should be able to confirm settlement has taken place about 15 minutes after it takes place. He has to check with the seller's lawyers. Then he must give you the keys.
• Take possession of the property as soon as possible. This is especially important with new houses as there is a high incidence of theft of new appliances like stoves and hotplates often installed just before settlement. If a house looks empty, it is more susceptible to theft. Make any new house look lived in, even if you are not moving in for a while.

WATER USAGE CHARGES complicate matters. Water usage meters are read on an irregular basis. In our example, the last meter reading might have been done on 15 Janaury 2012. A sum is done to calculate the average previous usage in the previous metered period and it is assumed this usage rate continues from 15 January 2012 to the date of settlement 31 March 2012 in our example] and the vendor allows the buyer the cost of that volume of water usage as an adjustment so that when the buyer next receives a water bill, the buyer pays for it all as he has been given on settlement the amount for the pre settlement period back to the last date of the meter reading.

NOTE: This system is not perfect if there is a suddenly high water usage change after the last meter reading and before settlement. Examples are taps or toilets left running in vacant houses, taps damaged and left running, even water theft [the neighbour filling up his pool from a garden tap in the house you are buying where it has been vacated].  It is possible to arrange a SPECIAL METER READING near the date of settlement at a cost of about $35 if there is suspicion such a problem might exist. Commonly though, if there is no special higher usage, the cost of the meter reading is not justified.

Another common VENDOR ALLOWANCE is the cost of registration of the sellers mortgage discharge form at the LPI. This is $102 [as at 1 July 2012]. This is because the buyer's bank will pay this fee with the other registration fees and will charge the buyer. A transfer costs $199.00 [as at 1 July 2012] and the buyer's mortgage will cost $102 [as at 1 July 2012] so a typical set of registration fee charges to a buyer by his bank will be $403.00 [ie $199 + $102 + $102] of which $102 will have been given to the buyer by the seller as a settlement adjustment.

Other settlement adjustments, less common, might be if the seller's land tax is adjusted like Council rates or if the parties agree to some price rebate or adjustment before settlement or for penalty interest if the buyer is late to settle.