4 common property nightmares: Part 1
When it comes to buying property, investors are often faced with difficulties that have the potential to disrupt the purchase – but there are some risk-mitigating actions that can be implemented to avoid this.
Blogger: Cate Bakos, director, Cate Bakos Property
Unfortunately, as a buyer’s advocate we often see property nightmares unsuspecting buyers have got themselves into and often it's too late to fix them by the time they come to us. But not always, and sometimes swift action can either save a buyer from making a terrible mistake or it can help solve some of the upset for them.
There are many property nightmares out there, but I’ve captured four common ones in this two-part blog, along with some ideas for swift action that might just make a positive difference. The first two nightmares relate to signing a contract only to find that the property has a major flaw, and missing settlement and facing penalty charges.
Nightmare #1: The first nightmare is when a buyer has signed a contract to purchase a property without conducting suitable due diligence before signing.
Post-signing, they have realised that the property is not what they thought, or has a substantial flaw. I categorise these issues into four camps; the first camp being where the flaw adversely affects the value of the property. The buyer may have felt that the property was worth x dollars based on their inspection, but knowing that it has a fundamental flaw or is actually lacking something they thought it came with undoes the value it represented in their mind. The upset for the buyer is that they feel they paid too much. An example is buying close to a train line without realising, or on a flight path. Or perhaps it is buying a property that appeared to have extensive land on title but is in fact on a 99-year leasehold; or worse still, is bounded by crown land which is not on title. Maybe the home is wired with fantastic surround sound and the buyer missed the section in the contract where mention was made that the vendor will take all of the audio equipment with them.
The second camp is when the buyer realises that the property has illegal works or incomplete paperwork. A perfect example is an extension or pergola that was built illegally and lacks paperwork. This is always distressing and often a building report could have picked this up. The implication is that the buyer takes on the legal exposure.
The third camp relates to a property with more building and structural flaws than the buyer can afford to repair or rebuild. Aside from adversely affecting the overall happiness of the buyers, these flaws (if visible) may adversely affect the valuation too. As for the point above, this can often be identified with a pre-purchase building inspection.
The final camp of this first common nightmare is when the buyer realises that there is something about the property title that prevents it from being an easy-to-finance asset. Examples include buying Company Share title, commercial zoning or a high-risk asset that attracts too much scrutiny for a bank to be comfortable taking on, such as bushfire zone, flood/fire damage or incomplete works.
This selection of nightmares are the toughest to challenge, but not necessarily impossible to overcome. Nobody likes to overpay for a property, but if the property is still the right property for the buyer, time can heal. In a moving market and with plenty of patience, an overpayment can be healed when the market rises. Not all markets rise at an aggressive pace, so for some buyers a decade may be required. In the case of the Eastern seaboard capital cities over the past year, a 10 per cent overpayment could have been corrected in the space of just one year.
And for the assets that have quirky titles or challenging zoning; they too can occasionally be changed. I’ve witnessed a few successful rezoning applications and I have been part of a successful owners’ subdivision from Company Share to strata. In these rare cases, the owners can buy at a discount and alter the title with success, but it would be foolish to anticipate that this is a guarantee. While a moving market or the change of a rezone or subdivision could change the nightmare-landscape for an unfortunate buyer, the reality is that many who find themselves in this predicament face upset or financial losses. The last two options (pending timing of the nightmare-discovery) are firstly to question whether a cooling off period still applies. If so, the buyer can rescind the contract for a small penalty and walk away. If a cooling off period didn’t apply (or has lapsed), the buyer’s only last chance is to explore whether a contract loophole exists for them to exit the contract. A property specialist lawyer is the best person to assist with this and they will usually scope the task and quote a fee. I’ve seen hopeless case situations where a property lawyer has found a solution for the buyer to exit the contract, so if this is indeed the predicament an upset buyer finds themselves in, the fee is a worthwhile consideration.
Nightmare #2: The second nightmare is missing settlement and facing hefty penalty charges.
Risk-Mitigating Action: While it’s a horrid and often expensive issue to face, losses are not always placed at the buyer’s feet. If the delay to settle is due to the lender’s mistakes, the lender will pick up the tab. And just because the contract allows for penalty interest to be charged, it still remains the decision of the vendor if the purchaser is at fault. Not all vendors choose to invoke penalties and not all vendors are commercially disadvantaged by a late settlement. In most cases I’ve witnessed where the vendor didn’t sustain losses as a result of the purchaser’s delays, they have not chosen to claim penalty interest. But if they do; quick action taken to settle can prevent the days turning into weeks. One handy tip is to avoid Friday settlements if at all possible. Paying for one extra day is always easier than paying for three. The best advice I have is for buyers to remember that they may be at the mercy of the vendor in such a situation, so being respectful and friendly at the onset of the purchase can pay off. If a vendor feels good about the person their home has sold to, it is unlikely that they will wield the knife out of spite when delays occur.
Nightmares need not go on forever. Sometimes the problem can’t be solved but it can often be improved. Often the nightmare can be obliterated altogether with the help of someone who knows their stuff.
