In saying that, I recognise that many vendors go to great lengths to leave the property in pristine order; often in better order than it was in when they lived in it.  So, we are dealing with a minority of cases.

There are things that you can do as a purchaser to make sure that, if the property is not up to standard, you have the right to ensure the issues are addressed.

Firstly, be aware that the vendor’s obligation under a standard Victorian contract is as follows:

24.2 The vendor must deliver the property to the purchaser at settlement in the same condition it was in on the day of sale, except for fair wear and tear.

Fair wear and tear means that, for example if the hot water system wasn’t working when you signed the contract (the day of sale) or breaks down after you sign the contract, but before you settle, then it is the purchaser’s problem/expense. Put another way, if an appliance isn’t working when you move in then you need to be able to prove that it was working on the day you signed the contract and that it broke down as a result of some unreasonable use of the vendor.

This is not easy to prove in practice.

The solution is twofold:

Firstly, you should turn on every light and appliance to make sure it is working before you sign the contract. If something doesn’t work you can include a special condition that requires the vendor to fix it before settlement.

Secondly, you can include a special condition that requires the vendor to ensure that the appliances are in working order at settlement and the property is left in good condition. We recommend the following special condition: 

“The Vendor agrees to ensure that the Property is in a clean and tidy condition at settlement and otherwise in the same condition as at the day of sale and all chattels (including rubbish) will be removed prior to settlement unless otherwise agreed.  The Vendor warrants that all appliances will be in working order on the Settlement Date.”

It is also worth mentioning general conditions 24.4 to 24.6. These conditions provide a mechanism to resolve minor (up to $5,000) issues about the condition of the property. In short, if you, as purchaser, are not happy you can insist that up to $5,000.00 of the contract price is paid into a trust account until the issue is resolved.  It is a requirement of the clauses that you, as purchaser, also pay an equivalent sum into a trust account.

Too often vendors delete these general conditions because they are inconvenient.  We recommend that purchasers insist that these conditions remain. Ultimately the cost of trying to recover a few thousand dollars after settlement is rarely viable – so without these clauses the purchaser is quite vulnerable.

The above provisions apply in Victoria.  However, Queensland and New South Wales have similar provisions.  That is, the vendor is obliged to deliver the property in the same condition, there is an opportunity for a pre-settlement inspection and issues can arise when the vendor doesn’t leave the property in reasonable condition.

However, I don’t believe that Queensland and New South Wales have a general condition that allows money to be withheld at settlement if there is an issue.  For that reason, I would add the following sentence to the above recommended special condition:

“If the Vendor is in breach of this special condition then the Purchaser may withhold at settlement the reasonable cost of any required repair or works.”

Naturally, if purchasing in other states you should seek specific advice from a local solicitor.

(With thanks to Russell Sparke of Sparke Legal for his comments in relation to Queensland).

The post Home Buyers – Property Condition at Settlement appeared first on PropertyInvesting.com.

It raises the question of ‘what might happen if a severe correction or crash was to occur in the property sector?’

Here are six probable outcomes:

1. Decline in value ‘feedback loop’

The saying ‘the bulls climb the stairs and the bears jump out the window’ is an apt way of describing how prices tend to rise gradually, but then fall suddenly.

It is true that bad news travels fast, and what causes rapid property value declines is a sudden spike in forced sales, at a time when there are fewer buyers looking to purchase. The result is sellers then outcompete each other in a race for financial survival.

More and more forced sales feed a whirlpool of declining property values, and as prices fall further and further, more and more property owners are drawn in via negative equity and loan margin calls.

2. Retirement Shock

Australian’s hold a large amount of their wealth in the value of their homes. If there is a value collapse then that will decimate retirement nest eggs, meaning those who are expecting to downsize to a comfortable retirement may need to reassess their plans.

The fall in values will reverberate through the SMSF sector too, where owning real estate has been increasingly popular.

3. Banking Shock

There will be an increase in mortgage defaults, which will require lenders to increase doubtful debts and ‘book’ losses. The value of their shares would be expected to fall. This will add to the erosion of further wealth for retirees and SMSFs.

4. Insurance Shock

The ability of mortgage insurers to payout large numbers of claims will be an interesting scenario. If they default, then lenders will be at risk of failing too, and Australia could have its own version of a domino-style financial collapse of brand name institutions. It is likely the Australian Government would have to step in to prevent a larger scale banking collapse.

5. Buyer Lock Out

Many people have mentioned to me that they’re waiting for a price crash, at which point they’re going to buy up ‘big’. This sounds like a nice plan in theory, but unless they’ve hoarded cash, it’s unlikely to work in practice. Why? Three reasons: the value of their homes and assets will be falling too, so their wealth will be declining; lenders will almost certainly stop lending to all but the most gilt-edged borrowers and properties; and the ‘blood on the streets’ psychology will make it hard to stomach risks.

6. Economic & Social Shock

Large scale job losses are likely as people stop spending and more staff are retrenched. Local tourism evaporates. Mental illnesses rise sharply, as do crime levels. Tragically, incidents of domestic violence and suicides rise too.

How To Avoid The Carnage

To ensure you don’t get caught up or wiped out in a severe property downturn, you really only need to avoid being a forced seller, and that means:

1. Have no or low debt

Leverage is your friend when prices are rising, and your enemy when prices are falling.

Having low, or ideally no, debt means you’ll have ‘margin’ to soak up falling property values without having to sell.

2. Maintain appropriate insurances

If losing your job means you couldn’t afford to make your loan repayments, then you ought to see an expert about the merits of getting income protection insurance as soon as possible.

3. Avoid buying in investor-rich areas

Avoid areas where there are a high percentage of owners who are investors, as these locations tend to fall faster in value and it can take a lot longer to sell. For more on this topic see this article.

4. Keep cash reserves

Cash reserves will provide breathing room in a crisis. The more cash you have, the greater your margin to ride the rough economic waves.

The Financial Storm Won’t Last Forever

While a severe property correction or price crash will be a horrible and bleak time, it too will pass – eventually. Prices will rebound and sentiment will recover, which is why the ones who stand to lose the most are the poor folks who will be forced to sell at distressed prices.

Application

Have you stress-tested your property portfolio recently to ascertain how well you’d survive if property prices fell a little or a lot? For instance, how would your wealth scenario look if you lost your job and/or property prices were to fall 10%?  What if they fell 25%, or even 50%?

Let’s hope a severe property correction or property crash doesn’t happen, but it would be wise to have a financial survival plan in place, just in case it does.

The post What If the Worst Happens? appeared first on PropertyInvesting.com.

During the morning session, I provided a comprehensive snapshot of the WA property market using six ‘market snapshot optics’ so as to conclude whether current economic conditions were favourable (i.e. a tailwind), unfavourable (i.e. a headwind), or neutral, to rises in property prices.

The conclusion: While there were green shoot signs of a recovery underway, until jobs and migration improved, headwind conditions were likely to cause property prices to stagnate in WA.

(Although my remaining seminars in Brisbane, Sydney and Melbourne are all now sold out, for a limited time you can purchase the full audio of the Melbourne event, and the market update sessions from Sydney, Brisbane and Perth here).

The morning session concluded with my brand new ‘Six Rules For Investing In Headwind Conditions’, and in this article, I’d like to flesh out Rule #3 – Buy the cream, not the crap.

Fort Myers – 2009

The genesis of this rule stems from my experience buying cheap ‘crappy’ properties (see below) in Fort Myers, Florida in 2009, in a region called Pine Manor (which the locals nicknamed ‘Crime Manor’). Prices were low (duplexes that were once $150,000 were now selling for $15,000+), and yields were as high as 20% or more.

While I had to pay cash because I couldn’t borrow in the US, I bought as many of these properties as I could afford, and I ended up with about 60 plexes that were forecast to deliver a huge annual net income on paper. Life was good… until you factored in the extra aggravation of dealing with properties with deferred maintenance, and tenants and management that were all in the category of ‘extra grace required.’

Six or so years later, those properties had increased in value three or four fold, which sounds impressive, but when you factor in the initial repairs, the turn costs every time a tenant moved out, and the aggravation, it wasn’t quite as glorious as it seems.

Good Advice From Uncle Zally

Reflecting upon this with my real estate mentor – Stu ‘Uncle Zally’ Silver, he observed, “You know 9-Cup (that’s what he calls me, after the nine cups of tea he claims I extract from each tea bag), you’d have been better off buying fewer better quality properties in better quality areas.” 

“How so, Uncle?” I replied.

“Well, those better properties have now appreciated more in value, and you wouldn’t have needed to carry a gun to collect the rent.”

Once again, Uncle Zally was right. While those ‘cream properties’ (in Cape Coral) were dearer than the crappy cheaper ones in Crime Manor, the yield I’d have sacrificed to buy middle class houses, in middle class Cape Coral would have been more than offset by the additional capital appreciation earned over the time I owned the property, plus the tenants would have been much less aggravating. 

The Lesson

When the property market is experiencing headwind conditions, real estate prices are soft and it’s easier to negotiate substantial discounts. In such times, I urge you to learn from my mistake, and seek to buy cheaper ‘cream properties’ that will be periodically on sale than the ‘crappy cheapies’ which may look enticing on paper, but will come with additional aggravation.

No, I’m not talking about multi-million dollar mansions, just nice houses, in nice suburbs, where nice people like to live. 

You’ll find that, as the market recovers, those with good jobs will be able to borrow more money, which will facilitate well-located and quality properties to appreciate quickly, whereas cheaper areas will remain the domain of investors and affordable house buyers – both of whom are always hunting for a bargain.

Do you have a question, a thought or a tip of your own to share? Join the discussion here by leaving a comment now. 

Until next time, remember that success comes from doing things differently.

Regards,

– Steve

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Want the rest of Steve’s rules for investing in a headwind, along with his rules for investing in a tailwind, and also the full recording of his Melbourne 1-day event AND the market update portions of his Sydney, Brisbane and Perth events? These are on sale now here for a limited time

The post Buy The Cream, Not The Crap appeared first on PropertyInvesting.com.

While a big price reduction is sure to tickle your greed gland, the discount may not really be genuine. It could be ‘deal bait’ – something savvy sellers use to attract buyers.  

For instance, one of the deals I’m weighing up purchasing at the moment is a 500 square metre office and warehouse commercial property. It was originally listed for $600k+, but the agent let me know on the sly that his seller is becoming more and more motivated and that $425k would probably buy it now. Oh! Oh! Oh! A $175,000 discount! That’s got my attention.

Loading up my due diligence number-crunching spreadsheet (find out how you can get a copy here) I quickly inserted the variables. I was a little crushed when the ‘bottom line’ revealed the most I should pay and still expect my desired profit is $400,000. So I wrote back to the real estate agent saying that I was close, but that the best I could do was still $25,000 less than what his seller might accept. He said that that was too low for his seller to consider favourably.

This short case study reveals the following six learning points:

1. A discount does not guarantee a great deal.

Property sharks love to smell blood in the water, but a discount in and of itself doesn’t guarantee a good deal. In most cases, a big discount simply reflects that the seller started at an unrealistically high list price and the subsequent adjustment is the equivalent of the market saying, “Tell him he’s dreaming.”

2. A discount should not stop further negotiation.

Just because a property has already fallen in value shouldn’t stop you trying to negotiate an even bigger price reduction. Yes, you may hear the agent say “But they’ve already dropped their price by <insert amount>!” However, the price you pay should be what you need in order to make your desired profit, not what the seller needs to feel good about their sale.

When I make an offer that is less than the asking price I often say, “Don’t make it personal and don’t take it personally.”

3. A discount does not subvert the need for due diligence.

If you think you’re getting a great deal, you may be tempted to fast-track or hijack your pre-purchase due diligence in your haste to stitch up the sale. Don’t! You may think you’re buying cheap, but if you rush and miss something important, then once you’ve paid to fix it the deal might not be nearly as good as first thought. As the old adage says: Hasten slowly!

4. A discount does not mean you’re buying under market value.

Sometimes a buyer will mistakenly think a big discount means they are buying below market value. Oh please! Think about that for a minute… you are the market, so what you pay will be the market price. While you can purchase below replacement cost, or below the independently appraised price, you cannot ever buy below market price.

5. A discount does not mean you’ve made money from day one.

A discount is not the same as a cash profit. Think of buying as opening the investment position and selling as closing the investment position. It’s what you do after you’ve bought and before you on-sell that unlocks the profit. In order to convert your discount to cash, you will need to find someone willing to pay more for it than you did. Being able to do that requires that you know a thing or two about the art of investing.

6. A discount does not mean the deal is problem free.

On the contrary – a property that must be discounted tends to have one or more problems that need to be fixed before the property will be profitable. A good example that comes to mind is a large discount I negotiated (equivalent to one year’s rent) on a two-tenant commercial property. When I purchased the property, it was 50% occupied. A year later and, despite my best efforts, it is still 50% vacant. It seems I overestimated how easy it would be to fix the problem.

Don’t misunderstand me… getting a discount is usually better than having to pay a premium. Just be careful that you aren’t being distracted by pretty plumage on what is otherwise an ugly property duck.

Have you ever received or negotiated a big discount on a property that you thought was great, only to later discover it wasn’t as good as you hoped?

Be brave and share your story by posting a comment.

Steve McKnight will soon be releasing a brand new product he has been working on for the past two years – something so valuable that it will be a total game changer for every property investor. <Find out more here>.

The post Why Big Price Discounts Don’t Always Make Great Deals appeared first on PropertyInvesting.com.

With the economy showing signs of tightening and banks already creeping interest rates up, it’s time to start thinking creatively when financing your property deals. Joint venturing and money partnering is often overlooked by property investors, normally due to the fear of the unknown and the inherent risks associated from working with other partners.

Let’s manage that fear by increasing confidence through building our knowledge base around this strategy. The first thing to get clarity on is why you might need a joint venture or money partner, and what resources that party could contribute.

To do that, we need to understand the four key components of a profitable property deal and which ones you might be missing. Take a look at my ACSS formula to get a better understanding of this:

• Ability – The ability to find a profitable property deal.
• Cash – Having cash in the bank, or accessible equity.
• Servicing – The ability to borrow money.
• Skill – The know-how to manage a project to achieve a profitable outcome.

Together, A+C+S+S equals access to a solid deal.

Most investors will lack at least one of the above four components, in fact, some may not have any of them, but the most common is points two and three being Cash and Servicing, respectively. No matter where you are in your property investing journey, having access to more cash and/or borrowing capacity will always provide more opportunity to leverage.

This is where joint venturing can transform your property investing journey and take it to a completely new level.

I’m here to tell you that there is a phenomenal amount of money sitting dormant just waiting to be put to good use. In fact, once I started looking, I couldn’t believe the amount of untapped private funds that were available.

However, it won’t just fall in your lap.

You’ll need to start doing as I did when I ran out of options to finance my projects, and that’s searching for suitable partners to team up with. Where do you start looking? Here are just a few ideas:

• Networking groups
• Past and present work colleagues
• Family and friends – tread carefully here
• Mentoring programs
• Professionals, like your accountant or solicitor, if you have a close relationship

The biggest risk in any joint venture scenario is the people involved, so don’t be looking to rush into anything when approaching a potential investing partner.

With this in mind, and thanks to the benefit of hindsight, when choosing my joint venture partners, I place more focus on the personality and risk profile of the person, rather than the resources being contributed.

So, how do you go about choosing the perfect joint venture partner?

How to Choose the Right Joint Venture Partner

Here are the 11 factors I like to keep in mind when assessing a potential joint venture partner:

1. Integrity – A quality that is always at the top of my list with any personal, business or investing venture.

2. Contribution – Personality and character are important, but without some sort of contribution to the deal, the joint venture is over before it even starts. Try to ascertain early on which of the four key elements your potential joint venture partner might bring to the deal that compliments your contribution.

3. Exit Strategy – I like to work with people who understand the value of being able to exit a deal efficiently. Evaluate your prospective partner’s past exits from business and personal relationships. This may reveal how they will behave if your joint venture ends abruptly.

4. Test the Waters – Is there an opportunity to do a small “one-off” project to see what it’s like working together before you jump into a larger project that has increased risk, time and stress?

Money partnering is often a good way to get the ball rolling in building a solid financial relationship. It can be a less complicated process to simply borrow or lend money at a set rate of return, rather than a convoluted profit share arrangement.

5. Desperation – Understanding the financial circumstance of the potential partner is critical, so make sure you take a holistic approach when gauging the suitability of this potential associate.

Are they reliant on the success of this deal to survive? Working with partners that are desperate to succeed can bring a negative impact on the outcome.

6. Realistic – Transparency and good communication is the key to any personal, business or investing relationship. It’s worth sitting down and having an open-hearted conversation about what can go bad in this deal.

What are some of the worst-case scenarios if we invest together? Get creative here, you never know what might happen so it’s better to discuss this upfront – most people don’t.

7. Stress – Property investing at all levels will have its ups and downs, which will often produce stress and needs to be dealt with effectively. Find out how your potential partner reacts in stressful situations.

Find out about some real-life examples to get better clarity on this by asking direct questions like, “Can you tell me about a time where you were under extreme pressure and how you dealt with the associated stress?”

8. Conflict – Conflicting opinions and attitudes are bound to be uncovered, so it’s important to have a management plan in place that anticipates this potential unpleasantness.

Find out how the potential partner deals with conflict. What clues are you able to uncover that reveal how you can really expect they’ll behave in emotionally tough moments?

9. Expectations – Inflated expectations can often lead to disappointment and resentment, whereas underestimating a project’s worth can produce a misaligned implementation of the strategy, which ultimately affects the productivity of the project.

Be direct with your prospect and ask honest questions like, “What are your expectations, financially and for the length of the project?” You can also ask: “What does success look like to you by being involved in this arrangement?”

10. Get It in Writing – All joint ventures and money partner agreements should be in writing and verified by an independent solicitor for all parties.

Ask questions like: “What experience has your potential joint venture had with the legal profession?” and “Are you open to sharing the upfront costs of creating legal documentation, such as a joint venture agreement?

This will provide insights into their own risk profile and the value they put on investing in risk mitigation.

11. Skill Level – Whether your prospective partner is bringing skill or financial resources to the table, each party needs to make their own financial decisions around investing structures, tax minimization and income distribution.

It’s advantageous if your potential joint venture partner has a fundamental level of comprehension so that you do not have to facilitate this learning, in addition to your own roles and responsibilities within the project.

Making the Decision

Ultimately, you can never be 100% sure if the partnership will work. A lot can change in a person when money is eventually put on the table. Likewise, personal circumstance can also play a part in the person’s approach to business.

I prefer to be joint venturing with those who have the same risk profile as me, coupled with a respectful, problem-solving nature that is open to change, should it be required. Those who are inflexible, pedantic or too detailed in their approach tend to be too rigid to work with successfully.

You’ll know you have the foundations of a successful joint venture relationship when all parties communicate effectively and are looking for win-win outcomes.

It’s never too early or too late to start incorporating more creative options to fund your property deals, so why not start today?

The post Finding Joint Venture Partners appeared first on PropertyInvesting.com.

To become a successful full time property investor that can sustain multiple market swings, you really need a method and a process that will bring you opportunities to access profitable deals on a consistent basis.

Having deals flow across your desk ensures you’ll never be in a static phase while waiting for things to happen. Successful investors tend to have one project being acquired, while managing a second project and selling a third to capitalise on the momentum.

Here’s my tried and tested three-pronged approach to ensure great property deals are presented to you in abundance:

1. Prong One – Look Beyond Those Retail Websites

One of my mentors recently told me that buying deals using realestate.com.au or domain.com.au is like buying your TV at Harvey Norman – you always pay retail. That’s not to say you won’t find opportunities on the retail property websites, but it’s not a great place to search unless you are crystal clear on what you are looking for first.

Most people tend to waste a lot of time doing random searches for deals on “retail sites,” usually after work or late at night, which yields little results due to your frame of mind. Those who happen to stumble across an opportunity take no action because they haven’t laid out a plan of attack on what to do next. Instead they print it out, put it in the top drawer and move onto the next bright, shiny object.

This type of random searching for deals tends to lead to distraction, boredom and becoming disheartened with your efforts. The truth is, if the deal is on the internet, it’s probably too late and not worth pursuing in a hot market. Prong Two and Three will show you some more efficient options to implement.

2. Prong Two – Become an Area Expert

The goal here is to know your area intimately. I’m talking between one and three suburbs, and know them better than anyone else, even the agents! This will instil confidence in your deal assessment abilities and ultimately lead to faster decision making, improved feasibility skills and better rapport with real estate agents.

Here’s a simple method that I have used based on some advice I got from Steve McKnight many years ago. Follow this process and I guarantee you will become a master of your area in as little as between 30 and 60 days, depending on your time commitment:

• Buy a hardcover, 200-page journal. Start tracking every deal you inspect. Include cutouts of the deal, feasibility templates and any relevant conversations you have with the agent.
  
  
• Attend at least five open for inspections (OFI’s) per week. Even if you’re not interested in the property, inspect it anyway to become familiar with the agents.
  
  
• Interact with as many agents as possible. You can do this by phoning them, visiting their offices and attending their OFI’s. Educate the agents on the type of project you are seeking and look to reward them for their efforts
  
  
• Aim to document 100 deals. You’ll be amazed to discover your journal transforming into a scrapbook jam packed with on the ground facts and figures that will give you the street smarts to out muscle and out manoeuvre other investors in the market.

3. Prong Three – Targeting Agents

Real estate agents often get a bad rap, but like any service-focused industry, there will be good and bad representatives. If you have a negative mindset around agents and what they stand for, make some internal adjustments, because your most likely source of property deal opportunities will come from agents, so start befriending them!

Follow these tips to target area agents:

• Pay them a visit. When researching a new area, look at paying each agency a personal visit in your quest to genuinely understand your area.
  
  
• Introduce yourself. Then, explain what sort of property you’re interested in and start building rapport. If approaching agents scares you, rest assured they are all human and you’ll find that the more you do this, the more comfortable you will become with the process.
  
  
• Use the one in 10 rule. In my experience, I’ve found that one in 10 agents will be worth building a long-term relationship with. This is a good ratio to have in mind as you look to leverage your time while out in the field.
  
  
• Attend their OFI’s. Always touch base once a week with a short phone call or a visit to their office. Real estate agents have short memories so you want to make sure you’re front of mind when a deal presents itself.

Types of Agents

Additionally, target these three types of agents in the market:

1. Agents selling premium, million dollar properties with a cheap, unattractive listing. You’ll find these guys are used to higher commissions and a dud listing is like a thorn in their side; they’ll be more motivated to get it off their books, potentially at a discounted price.
   
   
2. Tired agents that have been in the game too long who don’t want to work hard for the sale. They’ll look to take the easy route by conditioning the vendor down in price.
   
   
3. Out of area agencies that suit your strategy. If you find one of these agents with a deal, jump on it. The agent probably may not know the area or the value of their listing and the property is often a pain for them that they’re happy to get off their books.

These tips will take you a long way in the property investment market, but it’s not enough to simply implement this three-pronged approach sporadically across a 12-month period. If you want the best results, you need to be dedicated to the task and apply the process with consistency.

The post A Three-Pronged Approach to Finding Deals appeared first on PropertyInvesting.com.

In his latest installment of “Tips & Tricks for Developers,” Dean Parker shares his five critical steps of site acquisition – from submitting an offer subject to due diligence to making a decision on whether or not to proceed with the purchase.

Video Transcript:

Hi. Welcome to the latest PropertyInvesting.com video blog. Today I’m going to talk about site acquisitions. Our business, “Your Style Homes”, operates out of Brisbane, up here in Queensland. Today I’m standing in Newmarket, in front of a site that we’ve just acquired.

I’m going to summarize this into five steps that we follow: from signing a contract with a due diligence clause, through to actually proceeding with that contract.

The first step is to talk to our town planner. He’s the first person that we would call when looking at a site like this. He will do a desktop analysis and identify any risks and issues with a particular site. He’ll do all of the searches. He will check for easements. He’ll check for the planning zones. He’ll check for anything relating to the site, and let us know so we can make decisions from his report.

He’ll also ensure we can get storm water in and out of the site, and check that sewer is available. All of those sort of issues, he will go off and address those. He will also then advise us of any items we need to prepare in our plans, which takes us to step two.

Step two will be talking to an Architect. We’ll get the feedback from our town planner, and then create a basic mud map of what we can achieve on the site. There is no real detail of the internal of the dwellings at this time, so it’s really just high-level boxes with a layout of the apartment or townhouse we want to build.

Then, there is a whole heap of other details we need to work out to meet the town planning requirements. For example, that will include setbacks to boundaries, car-parking allocations, making sure our drive ways are wide enough, and whether we can get the bins on the site, or if they will be on the street.

There is a whole league of town planning issues that we need to address. As I said, this is initially just a mud map of what can be achieved on the site, and from there we can work out our yield. The yield means how many apartments or townhouses can we fit on that particular site.

Once we’ve got that, we can then talk to builders or a quantity surveyor about working out some basic numbers around construction, giving us a reasonably good idea of what that particular building will cost to construct.

Once we’ve got all of that information, then we go back to our town planner. We get him to review all of those plans and assess whether we can actually do it or not. He’ll then identify the risks. Up here in Brisbane they call it either “impact assessable” or “code assessable.” If the town planner says its “code assessable,” we’re basically ticking all of the boxes, and can proceed. If it’s “impact assessable,” we’re not ticking all the boxes and we’ll need to negotiate with council on some of those items.

Now that we’ve dealt with our town planner, our architect who has drawn up our plans, and the builder to get some pricing, we need to come up with a feasibility report. We’ll put all of those numbers into the feasibility, we’ll identify our acquisition costs, and all our other costs associated with the build, any council fees, any holding costs, any selling costs, any marketing costs. We’ll put that all into a feasibility analysis, which will produce a number at the end – the profit that we can make. That number needs to be around 18 to 22 percent for the projects that we’re doing.

If we can tick that box, the last step really is just making a decision on the project, whether we’re going to proceed or not.

To summarize the five steps… Step one is talk to your town planner. He will identify risks of the site. Step two is talk to your architect to get some basic plans done; a mud map. Step three is to talk to your builder to make sure you’ve got your construction prices sorted and that you can build what you’re proposing.

You then get all those people together and be sure that you’re happy through those first three phases. Step four is prepare your feasibility. Make sure your numbers stack up. Step five is to make a decision to either proceed with the contract or walk away.

You must make sure that you do these five steps really accurately. There is no point getting into a contract, and then figuring this information out and being stuck with a lemon.

Due diligence is really the most important process in any development. You make your money when you buy and obviously this stage is where you avoid all of your mistakes. You must make sure you cover everything off.

I hope you got some value out of this update. I’ll see you on the next one.


This transcript has been edited slightly to improve readability.

The post Tips & Tricks For Developers: 5 Critical Steps of Site Acquisition appeared first on PropertyInvesting.com.

When finances are sorted and it comes time to select a property, keep it simple by keeping three factors in mind: Location, Land and Looks. These are the three most critical factors if you are looking to buy property with greater capital growth potential.

Location

The location of the property is the most important factor to consider because its location will never change. The size of the property can be altered, as can its condition and appearance but where it is located, will never change. For investment properties, being near the city or the sea is very important. Tenants typically seek out rental properties that are close to the CBD for employment or close to the beach for lifestyle. This is especially true for our larger cities like Sydney and Melbourne where renting is a more affordable option than buying a property, in their desired location.

Being near public transport is also a must in these Australian metropolises. Location for purchasers looking to live in the property is just as important but for different reasons. Whilst being next to the city or sea is less imperative, owner-occupiers may wish to be close to work, within certain public school zones or close to their extended family.

Land

The land component of a property is where the value lies. Houses can always be renovated and improved or knocked down and built again but land cannot be created and its finite nature is what makes it so valuable. Land is good for both investors and owner-occupiers in regard to resale value and development potential.

An investor may purchase a property to rent out with a huge backyard. Whilst tenants won’t pay more for a larger yard, the next purchaser of the property will. The investor may also decide to rent the property for a number of years and then demolish the dwelling and develop the land.

This is also true for owner-occupiers. A large backyard would be fantastic for young families but when the kids have all moved out and the yard just becomes too much of a maintenance issue, the owners may decide to subdivide the yard and create a hammerhead (battle axe) allotment. If the block is on a corner and thus offers dual street frontages, this is a much better option for development purposes.

Looks

The appearance of a property is important for obvious reasons. Generally speaking, the more aesthetically appealing a property is, the more it will be worth. Whilst looks can be subjective and tastes of purchasers can differ, the one ‘look’ that will always attract value is character or period style homes. These types of homes, typically built before World War 2, hold a high value due to their charm. Even the character laden properties that need a lot of work will generally attract a remarkably high price.

This is again due to their finite nature; they are not building any more Californian bungalows, Edwardian or Victorian style homes. Whilst it is possible to mimic the period design in new homes, genuine character homes are limited in number across the whole of Australia.

Looks also refers to an outlook. If you can buy a property that has a view, your capital growth potential is enhanced. The best outlook you can have is a view of the sea. The next best view is one of the CBD. A view of the hills or open spaces is also advantageous.

When it comes time to buying a house and everything seems complicated and too hard, just remember the three ‘L’s: Location, Land and Looks!

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Existing properties are perceived by many investors to be less attractive, requiring the hassle of renovation and bringing the risks of higher maintenance costs. For this reason, some investors opt for the supposed benefits of new properties, including the newness of a freshly built home, tax depreciation benefits and government incentives, like lower stamp duty or higher first home buyer grants.

Salespeople are particularly fond of selling off-the-plan properties, as they can bring higher commissions and referral fees. Financial planners often form relationships with developers and receive large incentives, sometimes as much as five percent of the sales price of the property.

What Does It Mean to Buy “Off-The-Plan”?

An off-the-plan purchase is a legally binding contract to acquire a property pre-development, before occupancy approval has been granted. It often involves two contracts: one contract for the purchase of the land and a second contract for the construction of the dwelling.

When buying off-the-plan, you’re not actually buying a home – you’re buying a promise. The developer is committing to build a home according to previously agreed terms. There can be many months, or sometimes years, between the signing of the contract and the handover of the home.

Here are five reasons why buying an off-the-plan investment property can be a bad decision:

1. You May Not Get What You Thought You Were Paying For.

Because you can’t walk through and inspect an off-the-plan purchase, at least not until the property is completed, you may have an expectation that in the end, doesn’t quite measure up to reality.

Sometimes disputes arise due to poor drainage and flooding on the property, or the quality and type of fittings in the home aren’t quite as expected. As long as your expectations are clearly detailed in the contract, you can usually resolve these unmet expectations amicably, but if your builder lacks integrity or you must deal with a body corporate, you could end up with a fight on your hands.

2. Lending Standards May Change, Making It Impossible For You To Settle.

The property market is ever-changing, therefore banks are continually assessing their risks and making subsequent adjustments to their lending criteria. If the market turns against you in the time between contract and settlement, you could find it impossible to get a loan. Sometimes regulators step in to change bank capital requirements, which can also impact an investor’s ability to gain finance.

Since there can be quite a long delay between the time an off-the-plan contract is signed and the settlement date, a lot can change from the bank’s perspective. Even if the bank’s lending criteria hasn’t shifted, your situation can change, which could impact your serviceability.

Photo by Martin Kingsley / CC BY

If you’re hoping to settle on a property, but the bank changes your deposit requirement from 10 percent to 20 percent, you’d better be able to come up with the additional cash to pay the developer directly. If you’re unable to come up with the additional cash for settlement, you’ll most likely lose your 10 percent deposit.

Even worse, you could end up being sued by the developer. If the property is later sold for a price below your contract price, the developer may come after you for the difference. You can find some real life examples of investors facing settlement challenges here, and on an even larger scale here.

3. The Bank Valuation Could End Up Below Contract Price.

As the property market is always changing, your property could end up losing value between the time of signing the contract and making a settlement. If you agreed 12 months ago to pay $500,000 for an asset that is now only worth $450,000, how much do you think the bank is going to lend you? They will lend you 80 percent of the current value, not the contract price.

According to this article, a large property valuer recently conducted a study of about 1,700 properties and found that the valuations on nearly half of them actually came in lower than the contract price. On some of these, the prices in the market fell, but many of them were just overvalued by the developer from the beginning.

Having worked directly with builders myself, I’d say many were over-valued from the beginning because the sales price included hefty referral fees to pay financial planners or other industry professionals who recommended these properties to their clients.

What is the buyer to do then? Well, it depends on your relationship with the person who sold you the property. For many, they must either come up with the difference themselves, risk losing their deposit, or worse, face a law suit from a developer.

4. There’s Usually Only One Way To Make Money.

Even if everything goes well, and you settle on the property without any headaches along the way, it doesn’t mean you’ve made a good investment. You’ve probably made the developer a nice little profit, but for you, the buy and hold investor, all you can do is cross your fingers and hope for the best.

There’s generally three different ways to make money in property investing:

• generic capital growth, when all assets in the area appreciate;
• manufactured growth, by adding more in perceived value than actual costs; or
• positive annual cash flow.

When you buy off-the-plan, you’ve usually paid so much for the property that the interest and operating costs are greater than the rental income, so there’s no cash flow profit.

You’ve also bought a solution, so there’s no problems left to solve, and therefore no manufactured profit. The developer has already harvested all the subdivision potential off the land.

What does that leave? All that’s left is generic capital growth. The only way you can win is if the asset increases in value over time, more than your annual cash flow loss. The worst part about it is that there’s nothing you can do to improve your chances; you’re powerless. All you can do is hope it all works out.

5. You Over-Value Buildings And Under-Value Land.

When you can get it, generic capital growth is a wonderful benefit of holding real estate, but there’s no guarantee you’ll sell a home for more than you paid for it at the time you choose to sell.

Another question is, if you do get capital growth in your investment property, which part has increased in value, the building or the land?

Land tends to increase in value over time. Buildings tend to decrease in value over time. So if it’s generic capital growth that you’re after, then you’ll want to buy a property that has most of its value in the land, not the building. This reveals one of the primary disadvantages of buying off-the-plan and one of the primary benefits of buying an established property.

When you buy off-the-plan, you’re buying something that has a larger percentage of its value tied up in the brand new building. Often, the land has been subdivided down by the developer as small as it possibly can be, which means there is a minimal amount of land in the deal.

This means your property will increase in value less over time, relative to a larger block of land with an established dwelling in the same area. At the same time, your building has decreased in value more than the older home which has already depreciated significantly.

A Success Story

For the last 12 months, I’ve been mentoring a first-time investor named Soumen. He came into our mentoring program at a distinct disadvantage. As a recent immigrant from India, he didn’t even know how to carry out a property transaction in Australia.

But his lack of knowledge became one of his greatest assets, making him humble and teachable. He knew he didn’t want to just hope for the best, and rather than feel his way in the dark by making mistakes, he decided to seek help.

So, he followed Steve McKnight’s Property Apprenticeship training course to a tee, systematically taking action on every step while I guided him through the process.

To make a long story short, Soumen made an offer of $357,000 on a four-bedroom home near Brisbane on 1,008 square metres, which had been listed for $390,000. Through the negotiation skills he learned from Steve, he ended up buying it for $362,000, on a 90-day settlement, with permission from the vendor to renovate the property prior to settlement.

He learned how to add value to the property without overcapitalizing and he followed a few key steps to keep his operating costs low. He then found a tenant who would pay $520 per week.

Now he owns a property with a 7.5 percent gross yield and positive cash flow of $7,000 per year. He also has the potential to subdivide the property in the future, enabling him to manufacture growth. If the property also happens to increase in value over time, that will be a bonus.

How’s that for a first property deal? It sure beats the outcome most investors get when buying “off-the-plan.” All Soumen did was follow a proven system. This story illustrates the fact, that with a bit of know-how, you can have a positive outcome, too.

The post Why Buying an Investment Property Off-the-Plan is Dumb appeared first on PropertyInvesting.com.

There are ways for buyers to legally back out of a contract of sale, but be careful. Although real estate sales contracts often tend to favour the buyer, contract provisions still give considerable power to sellers.

Domain ran a story last week that highlights just how prudent buyers must be. Here is a real-life example:

Back in April, 2014, two property investors agreed to purchase a home in the Melbourne suburb of Richmond for $4.48 million. The property was located across from Epworth hospital and came with a permit for medical rooms, meaning it was technically a commercial property.

A few days later, the investors got cold feet, and since they were within the cooling off period of three business days, they notified the vendor’s agent in writing of their wishes to pull out of the contract. The agent replied the following morning, on day four, to say the cooling-off period had expired, and suggested they take the matter up with the vendor’s solicitor.

The seller refused to return the $350,000 deposit to the buyers, and instead relisted the property for sale. Four months later, another buyer came along and paid $4.07 million.

The investors filed suit against the seller to recover their $350,000 deposit. The seller filed a counter suit. He demanded the buyers pay an additional $98,000, being the remainder of the 10 percent deposit, plus the vendor’s $410,000 loss on the resale of the property, plus his sales costs for reselling.

This was quite the standoff. So, who do you think was in the right?

In the end, the judge ruled in favour of the seller, demanding the buyers pay up in full, plus reimburse the vendor for all his legal costs. In total, these unwitting investors could end up paying out over $1 million for their mistake.

Where did the buyers go wrong? The judge ruled that a cooling-off notice must be served to either the vendor directly, or the vendor’s solicitor, but never to the vendor’s agent, unless the contract specifically gives that liberty.

This story highlights the importance of buyers understanding the rules of the game, and most importantly, thoroughly understanding the terms of the contract.

Here’s how to make sure you never find yourself on the wrong side of a legal standoff:

1. Carry Out Thorough Due Diligence Before Over Committing Yourself.

Never rush into signing a contract when you have doubts. Unless you’re 100 percent sure the deal stacks up, don’t make an unconditional offer.

Many investors rush into deals for emotional reasons. Sometimes they get caught up in the hype of a euphoric market are afraid they’ll miss out on an opportunity. Other times, they make rash decisions without looking at the deal from every angle.

I’m not sure why these Richmond investors decided to pull out. Perhaps they decided they had paid too much. Maybe their circumstances changed and they could no longer justify the purchase. Likely, they overlooked a vital aspect of their due diligence and needed to change course. Either way, they over committed themselves.

2. If Possible, Include a Get-out Clause.

You may need to secure a property for purchase before your due-diligence is completed. It’s okay to enter into a contract when you still have doubts, as long as you leave yourself a way out.

A “subject to due diligence” clause is a time-limited, catch-all clause that buys you time to carry out a more thorough due diligence before going unconditional. Depending on the market, you may not be able to get the vendor to agree to accept such an open-ended clause, but giving the vendor more favourable terms can soften the blow.

I’ve written more about other “subject to” clauses in the article, “4 Simple Rules for Submitting Offers on Investment Properties.”

3. Cancel the Contract Within the Cooling-off Period.

Many residential contracts include a cooling-off period. The terms of the cooling-off period depend on the laws of each state, as well as the specific pre-contract negotiations between the buyer and seller.

Here’s a basic overview of the cooling-off laws for real estate purchases in each state:

• Victoria: Three business days, with a financial penalty of 0.2 percent of the purchase price.
• New South Wales: Five business days, with a financial penalty of 0.25 percent of the purchase price.
• ACT: This is the same as NSW.
• Queensland: Five business days, with a financial penalty of 0.25 percent of the purchase price.
• South Australia: Two business days, with refund in full of purchase deposit over $100, but forfeiture of holding deposit.
• Western Australia: No mandatory cooling-off period.
• Northern Territory: Four business days, with no financial penalty.
• Tasmania: No mandatory cooling-off period.

As the story above about the Richmond investors illustrates, there is a right way and a wrong way to exercise a cooling-off right. Be sure you thoroughly understand the terms of your contract.

4. Walk Away From Your Deposit.

The final way to back out of a contract is to simply walk away from the deposit. This option would seldom make financial sense, unless the costs of continuing with the purchase become greater than the costs of pulling out.

Some have speculated that investors who are now buying off-the-plan apartments in Melbourne and Brisbane could end up walking away from their purchases. Many have put down 10 percent deposits, but most lenders have recently changed their lending criteria to require an 80 percent LVR for investors. The problem could be compounded if prices fall and valuations don’t stack up.

It’s important to be mindful. Before walking away from your deposit, keep in mind that the saga may not be over. The vendor may come after you for their losses if the property sells to another buyer for less than your contract amount.

Back to the Richmond investors: In hindsight, walking away from the transaction would have brought them a much better financial outcome than taking the seller to court. The judge had little choice but to honour the sales contract to the letter of the law.

If you end up having to walk away from a purchase and forfeit your deposit, you likely haven’t done your homework before entering into an unconditional contract. By using a thorough due-diligence system, you should not have to resort to drastic measures.

Conclusion

The greatest protection is to arm yourself with thorough education, so you never find yourself on the losing end of standoff with a vendor. In Steve McKnight’s Property Apprenticeship course, the entire third module is dedicated to analyzing and buying properties. Steve includes a thorough due diligence system that empowers you to buy on fact, rather than on opinion, speculation or emotion.

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