Navigating a tough market requires more than just matching a buyer with a property; it demands a sharp understanding of the legal and financial mechanisms that hold a deal together.
The safeguard and the timeline
At its core, a subject to finance clause means the buyer’s purchase is entirely contingent on their bank appraising the property and formally approving the loan. Many novice agents mistake a pre-approval for a guaranteed sale, but Stasi points out that a pre-approval is merely a conditional green light.
“What happens is they have a pre-approval that the bank has given them saying, you know, ‘you can spend a million dollars as an example,’ subject to us looking at the property, making sure it stacks up,” Stasi explains.
This distinction is vital because banks get incredibly protective over valuations, particularly when dealing with less experienced buyers.
“The biggest thing we see here with first-time buyers is that they buy something just because they can afford it, not what it’s actually worth.”
“And then the bank takes over these properties, and they’re actually worth less than what they were purchased for. This kind of puts a safeguard in for banks.”
The prevalence of this clause depends heavily on the price point of the market you operate in.
In a $700,000 market predominantly driven by emotional or naive first-time buyers who might be borrowing up to 95% of the purchase price, the clause is standard practice.
In contrast, it is far less common in a $2,000,000 market where buyers are typically making non-first-home purchases, bringing substantial equity, or borrowing smaller percentages. Once an offer with this condition is accepted by the vendor, the property effectively transitions to an “under offer” status. The clock then starts ticking on a strict timeframe – typically 14 days.
“Some people might already have everything ticked off and say, ‘look, I only need seven days, I’ve spoken to my broker,’ but typically, it’s a 14-day clause.”
During this window, the property is locked in, and the agent cannot sell it to another party, making the accuracy of that 14-day period crucial for both the buyer’s protection and the vendor’s peace of mind.
Risk management
In a shifting financial landscape marked by interest rate reviews and budgetary adjustments, the risk of a finance clause collapsing is remarkably high.
Banks utilise this 14-day window to meticulously re-review the buyer’s financial health, looking for any recent, unannounced changes in circumstances.
“Only other common reasons are generally if their circumstance change and they haven’t notified the bank,” Stasi says.
“What if that person’s lost their job in between this pre-approval period and haven’t declared that? So they’ll check their bank accounts again and check that they were paid.”
Furthermore, in tougher markets, banks may take longer to reassess serviceability.
“We see a lot of it at the moment where they’re asked for an extension because of interest rates changes.
“So they just want to re-review that person and make sure that they can get the money and they can do the servicing.”
For real estate professionals, the real danger lies in failing to adequately explain these risks to the seller. An agent might think they are walking away with a win by presenting a high offer, without recognising the volatility of the finance clause attached to it.
“A seller is going to go, ‘well, hang on, I hired you as a professional to give me the right advice.’ And you’ve given me this offer, you’ve told me it’s a good offer’… when, technically, the owner needs to know what the risk is involved,” says Stasi.
He notes that vendors will frequently pass on a higher, finance-contingent offer in favour of a lower, unconditional offer just to secure a guaranteed, rapid sale. Ultimately, the best agents are the ones who deeply comprehend the mechanics of banking valuations.
“Agents need to get their head around how the finance works …. there are many agents that don’t actually understand that the bank’s valuing the property.
“And if that valuation comes in low based off other properties that have sold in the area, and you believe you’ve sold it for a great price, there’s every chance that the finance on that property won’t pass.”