Understanding the Contract of Sale

Purchasing a property involves more than simply agreeing on a price. Often, there is back and forth regarding price, condition of the property and any other compromises required.

Once an agreement is reached, these details are formally documented in a contract of sale and reviewed with the help of solicitors or conveyancers to ensure both parties are protected. Having your own legal representative is essential, as property transactions can vary depending on the circumstances of the sale and the state or territory in which the property is located.

Once both parties have signed the contract, it is ‘exchanged’, which means it is now a legally binding agreement, committing both the vendor and the purchaser to the sale. It is at this time, as well, that the buyer will have to provide a deposit.

Understanding how the contract of sale process works and what to look out for can help buyers avoid costly mistakes and proceed with greater confidence.

What is a contract of sale in real estate?

In real estate, a contract of sale is a legally binding document that sets out the agreed terms and conditions of a property purchase. It governs the relationship between the buyer and the seller, including details such as the purchase price, deposit, conditions and settlement timeframe.

A contract of sale becomes legally binding once both parties have agreed to the terms and the contract has been signed and exchanged. Because buyers are committed from this point, it is critical to have the contract carefully reviewed by a solicitor or conveyancer before signing to ensure the terms align with what has been agreed and to avoid unexpected risks.

Who prepares the contract of sale?

The property sale contract is prepared by a conveyancer, solicitor or real estate agent. Who actually prepares it largely depends on how the property is being sold and how complex the requirements are. For example, if the property is being sold privately, the real estate agent generally drafts the contract, which is presented to the potential purchaser to make an offer. This is why it is so important to choose the right real estate agent, who has the experience to draft and deal with a solid contract.

Contracts are checked and approved by solicitors or conveyancers for both parties, and negotiations are usually carried out by the legal representatives, together with the real estate agent.

What is included in the contract?

A contract of sale must include several key details to clearly outline the terms of the agreement and protect both the buyer and the seller.

These include:

• The names of the vendor and purchaser. This should also include the addresses of each party
• The address of the property
• The deposit amount and due date
• The sale price
• The date of the property settlement and whether there are any conditions. Conditions may include finance or any additional inspections. Each condition needs to be numbered and initialled by both parties
• Whether the property is available as ‘vacant possession’ or ‘subject to a lease’
• Any other property that is being sold as part of the deal
• Inclusions and exclusions. These may also be referred to as the ‘chattels list’. Inclusions and exclusions cover things such as fixtures and fittings, carpets, curtains etc.

It’s important to remember that requirements can vary between states and territories, so buyers should ensure they understand what must be included in the contract of sale for their specific location. And if in doubt, consult an expert. It’s a legally-binding agreement after all, and once signed, it can’t be undone. This means you need to ensure it includes all the correct information.

Key things to remember

Even after signing the contract, there are still important steps to follow before the purchase is finalised. There are still things both the vendor and the purchaser need to organise between exchange and settlement.

Finance

Before exchanging contracts, buyers should have a clear indication of how much they can borrow from a lender. Once the contract is exchanged, you will need to contact your home loan lender and officially organise finance for the property. Whether it is taking out a new loan, using a loan portability feature or organising bridging finance, buyers should act promptly to ensure the payment is made within the required timeframe.

Conditions

A contract of sale may include conditions such as inspections or valuations. Any special conditions outlined in the contract need to be fulfilled between exchange and settlement. This includes any work required by the vendor.

Handover

A pre-settlement inspection will need to be organised, and once the purchaser is happy that everything is in the required state, the vendor will need to organise the handover. This means providing the keys to the real estate agent for the purchaser on settlement day.

Cooling-off periods in the contract of sale

To give buyers time to carry out due diligence (such as building and pest inspections or finalising finance approval), the cooling-off period allows them to withdraw from the purchase within a set timeframe without losing their full deposit.

As a buyer, you are entitled to a legislated cooling-off period when purchasing a property. The length of this period, as well as the rights and conditions that apply, can vary between states and territories.

Can a buyer or seller cancel a contract of sale?

It’s important to note that real estate contracts are legally binding. Once a contract has been signed and exchanged, withdrawing from the agreement can result in penalties or legal consequences.

In many cases, a buyer or seller may cancel the contract before exchange without penalty. However, after the exchange has taken place, ending the agreement is far more complex and often carries financial or legal risks. For this reason, it’s essential to seek professional advice before attempting to cancel a contract of sale to fully understand your obligations and avoid unexpected penalties.

Key things to watch out for

While many property transactions proceed smoothly, issues can arise if certain details are overlooked. Before signing any contract, both parties should do their due diligence. Some of the most common mistakes buyers make during the contract of sale process involve missing key warning signs or not carrying out proper due diligence before signing.

Things buyers should watch out for include:

• A party is unwilling to negotiate on the property price. This may indicate limited flexibility, which can become an issue if conditions change during the process.
• No disclosure about the condition of the property by the vendor. This includes the history of the property. Remember, without this knowledge, a purchaser is essentially entering the contract blind, as there is no prior knowledge of what the property has gone through.
• A bank valuation coming in lower than the asking price. While this cannot be predicted, a purchaser has the right to ask for an upfront valuation first.
• Unclear possession conditions. Buyers should confirm whether the property will be sold vacant or subject to a lease, and whether this aligns with their plans for the property.

It is a good idea to check the contract of sale towards the beginning of the property search process. Many potential purchasers will only look through the contract once they have fallen in love with a property. However, there may be conditions in the contract that don’t suit your requirements. If these clauses cannot be negotiated on, there is no point prolonging the process or getting invested in the purchase if it is not going to suit your needs.

Sign away with LJ Hooker

As a purchaser, if you are happy with the contract and all the conditions, sign on that dotted line. Before, though, remember to check every clause and ensure negotiations are carried out accordingly. Having a thorough understanding of what a contract of sale is, what it should include and how to make it a seamless process as possible is crucial. A property transaction is one of the largest financial decisions many people make. Why make it harder than it should be?

And when you need a helping hand, whether you are a vendor or a potential buyer, our experienced LJ Hooker agents are waiting to assist you. We offer you experience alongside excellent market knowledge that helps make the buying or selling process as smooth as possible. Voted Australia’s number one real estate brand, a little help from the team at LJ Hooker can be invaluable when it comes to buying or selling your home.