You know about the legal issues when buying property? Sure you don’t. If you’re like anyone else, you accepted the first what’s-his-face & Partners the banker pointed at. Or maybe your buddy’s a lawyer, and you thought why not give him some business? Problem is, picking the wrong law firm can result in an unexpected “lock-in”. In this article, we look at how your choice of law firm can trap you:
Where Does the Law Firm Come In?
Buying property involves contracts. And in case you didn’t notice, lawyers and contracts go together like skin rashes and Chinese moisturisers.
So when you buy property, the bankers and lawyers get together (you can tell; the sky goes dark and small animals die) and “help” with your purchase. This happens early on, sometimes right after viewing the showflat.
After paying your 1% deposit, the banker will direct you to a legal establishment. An honest banker (stop laughing, I’m sure there’s one) will let you know there’s a choice. Most bankers will just give you a firm’s name, and tell you “Pick this one, they’re great for property issues and only devours children’s souls. Sign here.”
Well stop. Picking the wrong firm can trap you, because:
- It becomes costly to change banks
- It wastes your time
- It might mean no legal subsidy
1. It Becomes Costly to Change Banks
Every bank has it’s own panel of law firms. Your legal fees are only subsidised if you choose a law firm on your bank’s panel. However, there are a handful of firms that are on the panel of every bank*, such as:
(*As of May 2012)
So, why wouldn’t a banker just direct you to one of these?
Because it’s his chance to lock you in, that’s why. Rather than direct you to one of these firms, a banker might direct you a firm that’s exclusively on the panel of his bank. Once you pick a firm that’s only on the panel of OCBC, for example, you’ll be unable to change your mind and go to DBS later. Not unless you’re willing to pay for it (about $1000 – $2000).
So always insist on one of the “universal” firms listed here. If you visit home loan comparison sites like MoneySmart, their staff can also warn you if a particular law firm is exclusive (i.e. specific to a particular bank’s panel).
2. It Wastes Your Time
So, let’s say you picked the wrong law firm, but you really want a package from another bank. You’re even happy to pay the $1000 – $2000 to change law firms.
Well, it’s not over yet.
In order to proceed, you still need a law firm. If you’re lucky, a firm on your new bank’s panel will take over. If you’re unlucky, they’ll refuse to carry on the work of the previous firm.
According to one of the lawyers I spoke to, this has to do with different clauses. Since the only clause I understand involves chimneys and flying reindeer, I won’t even attempt a deeper explanation. Suffice it to say that sometimes, you have to pick a new firm and wait while they start over.
Several inconveniences are involved at this point:
- Calling each firm on the new bank’s panel and begging them to take over
- Possibly getting rejected, in which case you pick a firm to start over (and fill in the forms all over again)
- Waiting for the new firm to do the work.
It may take you a day, it may take you a week. Whatever the case, it’s a complete waste of time.
3. It Might Mean No Legal subsidy
If you insist on sticking with a particular law firm (maybe you’re in a serious hurry, or you really hate filling in forms), you’re going to pay for it yourself.
The cost should come to around $3000 – $4000. The only discernible advantages here are speed and clawback issues. If you have one of those my-life-depends-on-it time frames, you’d better go ahead and waste the money; it puts an end to the whole muddle.
Another advantage is that, should you refinance before the end of the third year, you won’t have legal subsidies to repay (you paid it yourself).
But under most circumstances, just make sure you pick a law firm that allows you to change banks. Flat out insist on it when you’re speaking to the banker; you want to keep your options open when picking a life-changing loan.
Do you know anyone who’s been trapped by picking the wrong firm? Comment and let us know!