When people are upsizing, downsizing or just relocating from their existing homes, they may essentially be ‘buying and selling at the same time’. If this is the case, there may need to be a simultaneous financial settlement of both transactions.
For example: a family owns an apartment worth $1m, but may wish to move into a house worth $2m. They have secured bank finance for $1.5m and therefore need some of the proceeds of the sale of the apartment to make up the difference(including stamp duty of course) at settlement.
That kind of transaction may seem to require a simultaneous financial settlement (although other options are available, as we set out below).
Is it possible to settle a purchase and sale at the same time?
Yes- but not without a degree of risk which needs to be managed.
From a financial payments perspective, the advent of electronic settlements platforms (such as PEXA) means that you can ‘link’ multiple transactions involving multiple buyers/sellers and banks. So this part is not a problem providing your bank comes to the table and is able to fund on time.
The risk lies more with what is known as the ‘domino effect’ in linked transactions.
When you are buying and selling at the same time, if your purchaser (on your sale)is late to settle - or defaults all together - this will normally cause you to be late to settle or default on your purchase. In most Australian jurisdictions, it is no excuse for failure to settle if your own sale failed to settle on time.
To make matters worse, very often people ‘buying and selling at the same time’ are ‘upsizing’ which means the applicable late fees or the deposit you might lose will both be larger than the fees and deposit you might earn from your defaulting purchaser.
…but why would my purchaser be late or default? Isn’t that quite rare?
Firstly and to dispel a misconception, it is not at all rare for a purchaser to be late to settle.
Very often it is caused by disorganisation with their financier or themselves. Sometimes it is caused by a dispute under the contract (e.g. the purchaser alleges that something was not properly disclosed to them in the contract and they refuse to settle until properly compensated).
When the purchaser is late, it will domino and you will probably be late on your linked purchase and you will incur late fees and potentially wasted removalist fees etc.
It is somewhat rare for a purchaser to default altogether but it does happen and when it does the effects are catastrophic. A potential reason why a purchaser may default is their finance is declined, they lose their job or suffer other major misadventure (maybe even death). Or they may simply not want to purchase the property any more and are indifferent to the financial consequences.
So what exactly happens if my purchaser delays or defaults?
If you have no other alternative means to finance your own purchase transaction, your purchaser’s delay/default will first cause you to incur late fees on your purchase.
These fees are usually calculated at 6% - 10% p.a. on the unpaid balance of the purchase price.
You normally have a fourteen day period after that (while lates are accruing) to settle. If you haven’t settled at that point the vendor can take your deposit and even sue you for any additional damages that it can prove it suffered.
It is important to remember that even a delay of a day or two can involve other costs and inconveniences for you e.g. removalist rebooking charges or cancelling any trades that you had organised to attend you new property.
If this does happen, can’t I hold my purchaser liable for any damages I suffer on my own purchase?
In theory, maybe, but as the adage goes ‘you can’t get blood from a stone’. Your purchaser may be bankrupt or passed away or they may claim they have legitimate contractual claim against you for something you didn’t disclose.
And even if you purchaser is still a going concern, the late fees and deposit you may be contractually entitled to may not be equivalent to your own losses.
Is there anything I can do to reduce these risks?
There are certain things you can do to potentially reduce the quantum of risk you face when doing simultaneous transactions. For example, we might try to negotiate a numerically higher deposit on your sale than what you pay on your purchase. Similarly, we might try to receive higher late fees on your sale than what you pay on your purchase.
We can also try and be flexible with moving logistics. It is sometimes possible to arrange either early occupation of the property you are purchasing or late occupation on the property you are selling. That way if settlement is delayed a day or two, you’re not left temporarily stranded.
However, we cannot ever mitigate the risk of the buyer defaulting altogether unless we stagger the settlement dates or find alternate financing.
By staggering the settlement dates, we mean settling your sale first and leaving a gap of say 1-2 weeks (or even longer) to settle your purchase. That way, if something goes wrong with your sale you have some time up your sleeve to make alternate plans such as putting the property back on the market and securing bridging finance in the meantime. However, this strategy will normally require some form of temporary accommodation / storage to be arranged once your buyer settles.
In terms of “bridging finance” this is always a very sensible Plan B to have in the background. This is where a bank agrees to fund (on a short term basis) the gap between your purchasing a property and selling a property. A lot of clients baulk at this because of the additional cost but we think it is a very useful form of insurance for if things go wrong.
Buying and selling at the same time is entirely possible. However, while simultaneous transactions may sometimes be required, they do pose execution risks. You need to discuss these with your conveyancer and plan a strategy to reduce these risks.