All about Delayed Completion (also known as Delayed Settlement)
How does Delayed Completion work?
Time is more valuable than Money when it comes to buying and selling real estate.
Delayed Completion is the Vendor Finance strategy which gives a purchaser time to find funds to pay the purchase price or obtain approvals.
It can also help a vendor.
Delayed Completion makes sense for a vendor because it gives them a good price and they need time to find a new home or build a new home.
Delayed Completion makes sense for a purchaser because it gives them time to sell their own home or raise funds from other sources, or to obtain a loan to pay the purchase price.
The Delayed Completion period will end with a simultaneous settlement of the purchase and sale.
Delayed completion is used for commercial property, to give a purchaser time to obtain planning approval or to find a tenant.
Delayed Completion is documented either as a Contract for Sale or a Property Option.
When does Delayed Completion work?
There is no formula for Delayed Completion.
- Vendors might offer a property for sale with Delayed Completion.
- Purchasers might structure an offer to purchase with Delayed Completion.
These are some examples where Delayed Completion works for a Vendor, a Purchaser or often, for both.
- The property is an off-the-plan sale of an apartment or land - the purchaser has time until the building is completed to save up an extra 10% deposit on top of the 10% deposit paid when the Contract is signed, so that they have a 20% deposit and need a loan of only 80% of the purchase price on completion.
- The vendor needs time to buy a new home, build a new home or wind down their business.
- The property is a development site, and the purchaser needs time to apply to the Local Council or Planning Authority for subdivision approval, a development permit, approval for a new building or an extension involving structural work, or a new swimming pool.
- The property is damaged, and possibly unsafe, and the purchaser is given access and time to carry out renovations and repairs.
- The property is a commercial property purchased as an investment, where it can take six months to find a tenant.
- The property is a commercial property purchased to be owner-occupied, which needs a development permit for fit-out work and time for the fit-out work to be carried out.
More about how Delayed Completion works
Compared with a normal completion period under a Contract for Sale of Land, how long is the completion period for a Delayed Completion Contract?
The normal completion period varies according to the State where the property is located.
In New South Wales, the standard period is 42 days after signing the Contract;
In Queensland, the ACT, South Australia and Tasmania, the standard period is often 30 days;
In Victoria and Western Australia, the standard period can vary between 30, 45 or 60 days.
As a rule, the Delayed Completion period is longer than 90 days. More than 90 days suits situations where the purchaser adds value to the property, because after 90 days, their lender will obtain a fresh valuation and disregard the Contract price as the value for loan purposes.
There is no pre-set formula for how Delayed Completion works.
- If it is a normal Contract, the vendor remains in occupation until completion / settlement takes place.
- Either 5% or 10% of the price is paid as a deposit under the Contract for Sale, or a similar amount is paid as an option fee under a Property Option.
- If requested, the vendor consents to an Application for a Development Approval or Permit and the Application is pursued during the Delayed Completion period.
- If there is a damaged building which is unsafe, the purchaser can be given access to repair damage, and permission to carry out work, but not to occupy the property.
- If the property is a vacant building which is habitable, the purchaser can be given a licence to occupy and pay a licence fee or rent, as well as paying for all property outgoings, maintenance and repair.
- If the property is a regional property or vacant land, the vendor might agree to a Delayed Completion, with occupation rights given (with a licence fee) and price instalments payable, either as an Instalment Contract or a Rent to Own.
Delayed Completion can be documented either as a Contract for Sale or as a Property Option.
If as a Contract for Sale, a simple change is made to the standard clause to substitute the delayed completion period for the normal completion period.
If as a Property Option, the option to purchase must be exercised before the end of the agreed period (i.e. before the option expiry date).
If the property is to be redeveloped, clauses can be inserted to provide for access for property inspections and consents for an Application for a Development Approval or Permit.
If the property is vacant, a vendor might give a purchaser early occupation under a licence agreement. If so, they become responsible for outgoings (rates, levies and taxes), for maintenance and repairs and the insurance risk from that time.
The Sale of Land and Conveyancing Laws contain formalities for both Contracts for Sale and Property Options to comply with, so that they are enforceable. They include disclosures and cooling off rights.
The deposit paid under a Contract for Sale or the option fee paid under a Property Option is normally 10% of the price. Because of the delay, the deposit might be agreed to be 5%. If it is paid as a deposit, usually it is held by the deposit holder until completion. If it is paid as an option fee, usually it is released to the vendor immediately on payment.
Because the title to the property remains in the name of the vendor, the purchaser protects their interest by registering a Caveat on the title. A Caveat prevents the vendor from selling the property to anyone else or giving another mortgage over the property.
If the purchaser does not pay the balance price under a Contract for Sale, they are in default, and the vendor terminates the Contract and keeps the deposit. If the purchaser does not exercise a Property Option, the option lapses and the vendor keeps the option fee.
Usually, the vendor remains in occupation of the property.
Stamp duty (Transfer Duty) will be payable on the Contract for Sale within a set period after the Contract for Sale is entered into. This means that in most States (except in Victoria), stamp duty is payable before the purchase price is paid.
Property Options are preferred by many purchasers over Contracts for Sale for stamp duty reasons.
In some States, a small amount of stamp duty is payable on a Property Option (on the option fee). Of course, once the option is exercised by the purchaser, full stamp duty is payable on price payable under the Contract for Sale which comes into existence.
Property Options are preferred by many vendors over Contracts for Sale for tax reasons. That is, if the vendor is liable to pay Capital Gains Tax on the sale, then trigger for liability (the ‘disposal’) is deferred until the Property Option is exercised and the Contract for Sale is entered into. This does not apply to owner occupiers because they are exempt from Capital Gains Tax on their main residence.
Property Options are used by sophisticated investors for flipping properties.
‘Property flipping’ is way of making a property profit without ever owning the property. The way it works is that the ‘flipper’ takes an option to purchase a property at a fixed price with a long option expiry date, and then on-sells the option at a higher price. The flipper may simply buy well or adds value by renovation or obtaining a development approval/permit. The flipper’s profit is the difference between the option to purchase price and the on-sale price.
Property flippers can purchase the property in the normal way and pay stamp duty. Even if they move in and use the property as their home, the property flipper will be liable to pay Capital Gains tax if they buy the property to renovate and sell at a profit because the Australian Taxation Office regards this a as profit-making activity.
- The video and written commentary contain general information and examples – they are not legal or investment or financial advice.
- Do not rely on the video or written commentary to guide specific property purchases or investment decisions.
- Professional advice is necessary for specific situations because property purchases and investment requires a careful evaluation of circumstances as well as due diligence in selecting and evaluating a property for purchase.
- The paperwork for Vendor Finance needs to be prepared by a property law professional (a property lawyer or conveyancer). It is definitely not DIY (Do It Yourself).
- The word ‘vendor’ is used in some States and Territories in Australia, while the word ‘seller’ is used elsewhere. The word ‘vendor’ is used to refer to both ‘vendor’ and ‘seller’ in the videos and the written commentary.
- The same with the words ‘purchaser’ and ‘buyer’. The word ‘purchaser’ is used to refer to both in the videos and written commentary