The ‘cooling off period’ is a window of opportunity for a property buyer to walk away from a previously signed contract. Legislation requires residential sales contracts to contain cooling off periods in all states except Tasmania and Western Australia.
“Cooling off periods essentially give the buyer the opportunity to think about their purchase and change their mind if they want to,” CEO of the Real Estate Institute of Victoria Enzo Raimondo says.
When does it apply?
The laws regarding cooling off periods vary from state to state.
“If you’re an interstate investor, always check the cooling off laws,” director of Right Property Group Steve Waters advises.
The cooling off period is not applicable to commercial property or property sold at auction. Certain sales that occur on days either side of the anticipated auction date will also be excluded.
New South Wales excludes properties in excess of 2.5 hectares, while farms of more than 20 hectares are excluded in Victoria.
The amount of time granted by legislation for ‘cooling off’ also varies, from five business days in Queensland, ACT and NSW to just two in South Australia.
Even where the legislation excludes a mandatory cooling off period, buyers can negotiate directly with the vendor to include a cooling off clause in the contract.
Cancelling a contract
To end the contract during the cooling off period, the buyer must provide written notice directly to the vendor or their agent. In NSW, the notice must also be signed by the buyer’s solicitor.
Pulling out during this time can be costly to the vendor, who may have to advertise for a new buyer. To discourage failed contracts, most states penalise buyers who walk away.
The highest penalties are imposed in ACT, NSW and Queensland, where buyers must pay the seller 0.25 per cent of the sale price.
Buyers in South Australia have less to lose, forfeiting only their holding deposit.
According to Home Loan Experts’ managing director, Otto Dargan, pulling out during the cooling off period may impact the buyer’s loan.
“Some lenders do a new credit check on you each time you find a property, so it could potentially damage your credit file and lower your credit score,” he says.
He also warns buyers might incur extra costs.
Cooling off periods essentially give the buyer the opportunity to think about their purchase and change their mind if they want to
“Some lenders may charge an additional valuation fee or a variation fee,” he says.
Despite the deterrents, there are various reasons buyers may choose to end the contract during the cooling off period: the building and pest inspection reports might highlight issues of concern, full finance may not be granted despite initial approval, or the buyer’s personal circumstances may change.
When the buyer ends a contract, the seller generally has no option other than to put their property back on the market, Mr Dargan explains.
This may be problematic if the seller intends to sell one property to purchase another. However, the seller can take steps to manage this situation, and these may include securing a bridging or guarantor loan, or using the ‘subject to sale’ clause.
“If they [the vendor] plan the process of selling one property and buying another well, then they shouldn’t have too many problems,” Mr Dargan says.
Mr Raimondo also suggests sellers protect themselves by keeping their property on the market during cooling off.
Waiving the cooling off period
Buyers in every state except Victoria are able to waive the cooling off period. However, to do so buyers must consult a lawyer and present a signed lawyer’s certificate.
While cooling off protects the buyer, it leaves the vendor in a precarious position. Some buyers therefore offer to waive the cooling off period to make their purchase offer more attractive.
Mr Dargan says cooling off periods are rare in ‘hot’ suburbs.
“The vendors/agents make the rules in these suburbs,” he says. “In Mosman or Sydney’s eastern suburbs, I haven’t seen a cooling off period in a long time.”
Mr Waters, however, says he would generally not advise his clients to waive the cooling off period as a negotiation tactic.
“Negotiation can only go so far,” he says. “You don’t want to put yourself in jeopardy.”
Cash buyers who complete their checks and approvals quickly could instead offer a shortened cooling off period to give themselves an edge over other potential buyers, he suggests.
Extending the cooling off period
The cooling off period can be extended if the buyer and seller come to an agreement.
Mr Waters says he always tries to negotiate at least 10 days for cooling off.
“In this space in the market, where financiers are very busy due to the sheer volume of mortgages they are writing, files are starting to stack up on desks. You might need 10 days just to ensure that finance is in place,” he says.
Mr Dargan similarly says he encourages customers to ask for a two-week cooling off period.
“Two weeks is always plenty of time and takes the stress out of the process,” he says.
Cash buyers who complete their checks and approvals quickly could instead offer a shortened cooling off period to give themselves an edge over other potential buyers
The seller may be reluctant to agree to an extension, particularly where other potential buyers are on the scene. However, finance approval and building inspections are likely to go more smoothly if everyone involved has sufficient time to complete their work.
The cooling off period can be a saving grace for buyers and a potential roadblock for sellers, but the more knowledge you have, the more you can use the cooling off period to your advantage.