Reading the minutes can save property investors years of regret
When the real estate market is cooling there can be a tendency to put the bargain blinkers on and rush in but decisiveness shouldn’t be confused with impetuousness.
With property affordability improving across much of the nation, current market conditions should present prime opportunities for savvy investors looking to buy residential property.
Nationally, real estate prices reached their strongest annual growth on record in 2021, rising 23.7 per cent, according to the Australian Bureau of Statistics.
After the skyrocketing prices the market has now moved into the adjustment phase.
During a cooling market there can be a tendency to put the bargain blinkers on and rush in.
While decisiveness is a noble trait, it shouldn’t be confused with impetuousness.
Time spent in reconnaissance is never wasted. Bargains can often morph into long term financial drainers without the correct due diligence.
Not only should a prospective property tick all the investment boxes, but you need to ensure there are no structural or legal issues – which are often not immediately apparent – that could jeopardise the investment’s outlook.
Pests and lawyers
It is vital that a building and pest pre-purchase inspection is undertaken on houses, as there are several potential defects that are hard for the lay person to identify, such as termite or borer infestations, a faulty roof, or cracked slab footing.
Some of these problems can cost tens of thousands of dollars to rectify and require a building to be vacant for weeks to effect repairs.
However, building inspection reports do not always give you an unambiguous steer on whether to buy or cut and run.
Often the outcome is a more nuanced ‘maybe’, and further consideration is required. Most established properties and especially older styles have some problems that need to be addressed. There is often a happy medium between trading off some relatively minor issues with the building in favour of the high scarcity value conferred by classic architecture.
Close attention should also be given to the proposed contract of sale and the associated disclosure documents, which are prescribed by state law to enable relatively transparent and informed negotiations.
Sadly, many buyers pay scant regard to these documents. They provide a wealth of information some of which, if picked up before the contract is signed, may influence the decision to invest, or aid in the negotiation process.
The content of these disclosure documents may vary from state to state but tends to include: details of the title; charges on the property – such as rates and body corporate fees; land tax levels; building permits – whether they have or haven’t been obtained; orders issued by the roads authority; zoning information such as heritage overlays; whether the property is accessible via road; whether utilities are connected; the existence of any heritage or environmental orders; whether the property is leased; whether there are any easements or registered or unregistered right of ways; or any caveats.
A thorough inspection of body corporate meeting minutes is especially critical for apartment buyers. The minutes allow buyers to check whether there are any recently passed resolutions that might create a financial impost.
The typical way lawyers are used in property transactions today is actually somewhat perverse. Rather than getting lawyers to check contracts before they are signed, most buyers only engage them for the conveyance process – the act of transferring property title from one person to another – after signatures have dried on the contract. The lawyer may well pick up the problems at this juncture, but it is now the new owner’s problems, not the vendor’s.
Given the enormous costs involved in purchasing property, it is understandable that buyers look for ways to make savings. However, it is definitely a case of ‘penny-wise, pound foolish’ for investors to shun building inspectors and legal advisors.
The contract negotiation phase is also the opportunity to make the terms and conditions more favourable to the buyer. Seeking a longer settlement period helps reduce the risk of needing bridging finance if you are in the process of selling another property.
Also try to add a clause to the contract to allow you to show tenants through the property prior to settlement, which can result in you earning rent from day one of ownership – a promising start to your new investment.