Buying out JV Partner, should we do it?

Hi RMAA,
Now is a good time to really think this through, and to help, here are a few thoughts that might steer you one way, or another.

There is obviously more to “the numbers”, with four of you in the deal. You might not want to share such things on forum, but you should do so with an Adviser. Major one is “What do you owe everyone if wanting to purchase their shares and retain the house for yourself?” See, I would guess you might have all “chipped in” for Deposit/Costs, and perhaps even yearly expenses – interest, rates, Insurances, Maintenance, etc. So, “Who gets what” in the carve-up?

Getting that part agreed to would be a good start. Without agreement, you wouldn’t know how YOUR final numbers might look.

Re buying a House and Land, these are often “loss leaders” for up to 10 years, as the developing company takes a lot of cream for the risk of building them in the first place. With ten years gone by, it “might” now be due for a better lift in value (or not).

Not all developments are equal – some are great value from day one, with amenities added regularly (schools, shops, etc), and in areas that become quite sought after. Some have a decent amount of Land, while others have large McMansions shoe-horned onto tiny blocks. Some have quality-built homes, while others are quite shoddy.

I don’t know Pakenham – it might have some developments of each kind. Then again, your part of Pakenham might be different to the rest of Pakenham – do look around at “comparables” and their sale prices in your area, or check in again with the RE agent. Talk to them about where the market is now, and also read up to see where the market “might be in another xx years”. e.g. is the Local Council spending money there? For what – better footpaths, better infrastructure, more shopping complexes, new schools, hospital, etc.

For your next buy (including when “buying” this off your family members) look for a Problem that you can Fix. Steve says “Buy problems and sell solutions”. Unfortunately, the H&L purchase was “Buying a Solution”, and all of the profits went to the developer. For this place right now, is it a “Problem” that you can solve?

e.g. Is it a bit tired, and a cosmetic reno might (a) lift its value, and/or (b) command a higher rent? Is the problem one of “The rest of the family want to quit it, and they will be very ‘kind’ to you if you help to make the problem go away?” (i.e. will they leave their Equity in the place for you so long as you take all of the trouble off their hands?)

You made a good point about the costs to “Buy into something else”, and you are right. Selling this would have its costs, but so too would KEEPING it. The permutations around these “numbers” would be more easily handled if you discussed this side of things with a Mortgage Broker, who probably has a computer program that will quickly run through all the possibilities to show “Which decision is FINANCIALLY best for you.”

Good luck with your decision,
Benny

Why not just get a second valuation, and a 3rd perhaps. You could agree that the price paid to the other party is the average of the 3.

Hi RMAA,

The positives are it’s part of the SE growth corridor of Melbourne, new (additional) train station due to the population growth, more schools etc. but there is a lot of land around to build on at the moment.

That is both good and bad… Good that it is in a growth corridor that is seeing Infrastructure being built – bad that it is in an area that has heaps of land available.
Speaking of which, how big is the block the house is on? Since it is land that appreciates in value, THERE is where the future value lies:-
1. A larger block provides options a small one doesn’t
2. The location will never change – that could be good, or fantastic, or not so good…..
3. In a new development, it may take 10 years before the overall values climb high enoough to give you back a bit of Equity. Not much of a problem for Home Buyers, but not so good for investors.

Re your accountant, many are simply “scorekeepers” who don’t have a lot of knowledge outside of “balancing the books”. Also, in most cases, they are not licensed to provide financial advice – as such, the fact that they are “leaving it up to you” does not surprise me…..

One other thought out of left field re this:-

But due to the bank valuation we can’t borrow enough on the mortgage to pay out the third (they won’t accept that it’s only worth $460k because of the RE appraisal) so we’d have to borrow it from elsewhere.

Other words from you indicate it might be nearer $520k to $550k. If so, then this is up to $90k higher than valued. The “third party wanting out” would be due an extra $30k, yes? The remaining parties have the extra Equity, even though they can’t borrow it YET.

So, can you talk the “third party” into accepting whatever their share is at the $460k sale price, with a promise that the remaining partners would come up with the other $30k in (say) 3 years time. You can save this with just $200 a week over that time, or look at refinancing then. Get it all signed up legally so there are no mistakes or mis-intentions….. maybe even offer slightly more if they are prepared to wait – negotiate to make a win/win/win….. ;) Can that work?

Benny

RMAA wrote:

We were told “market value” or potential sale price by our Local REA should be $520-$550k.

No offence to the RE agent but I wouldn’t count on their estimation of market value more than the valuer’s. RE agents many times state the ‘hope’ price which the market may or may not accept. In short, RE appraisal can be worthless. Lenders rely only on the valuation the valuer does. Even if you guys manage to sell it for $520k, the new valuer might say it’s worth only $460k so the buyer’s lender won’t give the buyer the mortgage amount s/he will be after either.

I personally wouldn’t buy for $520 something the bank says is worth $460, which is what you are considering to do? (Delay payment of additional $30k)

A lot of land = low CG. 2% p/a makes sense to me based on what you said and I don’t see the value jumping much in the next few years. Do you? 460 to even only 504 is 10%. That could take years…

I much prefer a property that I can manufacture its growth (reno, subdivide etc). It’s a much quicker way to build wealth IMHO than the good old buy and hope.

Going back to the RE appraisal:
would you be happy to sell for $550? If so, why not put it on the market? Either it will prove to all parties that the RE appraisal isn’t worth the paper it was written on (poor trees…) or everyone will be happy and full of joy by selling at 550 or $500+ And use their funds elsewhere where they can return a higher yield.

Bottom line: there are a few options but nobody knows which option will pan out to be the best. The choice is up to you guys.

Will be very happy to hear how this matter progressed and resolved.

Best wishes,
Ethan

That is very odd – in terms of the refinance was the loan actually approved and you’ve signed the loan offer documents detailing your new loan etc? Heard enough horror stories when subpar brokers have their loans declined and hide from the borrower as they don’t want to deliver the bad news.

In any case it’s unacceptable to not be able to get a hold of your broker over that time – be it phone, email etc.

Sounds like a particular broker I know of who is notorious for that, their initials aren’t AC at all?

Barring personal emergency (fallen off a boat – this has literally happened to an Australian broker), that’s a little too long without returning phone/emails.

Good to hear that it’s definitely all approved and signed up however!