In comparison to the purchase of a property in your personal name, when you purchase a property through an SMSF, there are a number of additional considerations. These extra steps in the process mean that the period between signing a contract and settlement will usually be longer than it would be if you were purchasing in your name.
As a general rule, settlement for an SMSF purchase will take between three and four weeks longer than a standard conveyance. This time is necessary to meet the criteria that apply only when you decide to purchase a property through an SMSF.
However, by understanding the various stages involved in purchasing a property through an SMSF, and the time involved in completing them a little better, it might be possible to streamline the process and get to settlement as soon as possible.
Usually, the following steps in the SMSF settlement process are most likely to cause delays to settlement.
Process of an SMSF property purchase
Setting up your SMSF
If this is your first SMSF purchase, it is likely that you will not yet have set up your SMSF. If this is the case, you will need to speak to accountant who can set up the SMSF structure for you. Part of this process will involve setting up a company to act trustee of the fund.
An SMSF cannot borrow money to own a property, so if you are planning to borrow for your purchase, you will also need to set up a company to be the registered owner of the property on behalf of the SMSF. This company is usually known as the custodian trustee.
Establishing and structuring your SMSF can be a time-consuming process as there are a lot of special requirements with which you have to comply. Having your SMSF set up before signing a contract to purchase a property is one way to save time during the settlement process.
If you have signed a contract of sale in your personal name, but you intend to purchase the property through your SMSF, you will need to nominate the contract to the SMSF once it has been set up.
Nominating the contract to your SMSF is usually a simple process that requires the consent of the vendor. It usually involves completing a form signed, signed by you both as purchaser and as director of the SMSF trustee, and serving it on the vendor.
The nomination process should not add too much time to or delay the settlement process, although there may be time limits for nomination that you will need to be aware of.
Obtaining finance approval
Perhaps the most time-consuming aspect of an SMSF settlement is the process of obtaining finance approval. There are strict rules around lending money to an SMSF, which means that there are a number of hurdles when it comes to being approved for finance. The approval process generally takes longer for an SMSF loan than if you are lending in your personal name.
SMSF loans are usually structured in the form of a limited recourse borrowing arrangement (LRBA). You can find out more about LRBAs here. Structuring an LRBA usually takes some time as there are a number of forms and documents which need to be completed correctly. This process could cause delays to settlement.
Lenders may also require you to personally guarantee the SMSF loan. As a result you will need to obtain a solicitor’s certificate (further explanation here). This involves meeting with a solicitor to explain your obligations as a guarantor to you.
In order to meet these particular criteria it will usually be necessary to allow more time than usual to obtain finance approval for an SMSF loan.
Given the added complexity of the settlement process for an SMSF purchase, you should allow more time for settlement to be completed than would normally be necessary. Although there are more steps to the process than in a normal conveyance, by understanding the process it is possible to complete as soon as possible and without any unnecessary delay.