Here’s my tale of woe – I hope others can learn from my bad experience.
Last year a property investment partner & I put an offer on a block of units in Gladstone. These were a very old block of units but there was 6 in the line & they were asking for, what I believed, was a good price – about $260k. These units were all tenanted by long term tenants & the rent return was over $600 per month – excellent positive cash flow.
We negotiated with the agent/vendor & get an offer accepted at $245k which, we believed was under market value compared to other units in the area.
I had already conducted significant research about the Gladstone area & knew it was a growing area with lots of development to take place (this is now already commenced). I also knew that vacancy rates were low especially for lower priced rental properties such as this one.
The plan was to purchase the properties & then spend a small amount – say $10k to do minor renovations in order to increase rent slightly & to maintain tenancy. The property would return a nice positive cash flow & one day in the future we might decide to do more to the place or even knock it down & redevelop.
After the offer was accepted, subject to a number of clauses, we went ahead & booked for the normal reports to be done – building, pest etc. BUT the one fatal thing we didn’t do was to get a valuer.. the main reason for this was that there was NO one in the area willing to conduct a valuation until at least 6 months later.. every valuer was booked out & no one was taking new valuations.
We decided to pursue the deal having read the bldg & pest inspections. The reports showed that yes, the place was old & could do with some minor repairs, but there wasn’t anything major in it that needed big work or emergency work.
Our finance had already been preapproved so we decided & all other clauses were fulfilled, so we signed on the dotted line.
Then the nightmare was realised. The bank sent their valuers out there (I won’t mention names here), & the report came back that they could not recommend a mortgage to be placed on the property! We couldn’t believe it! We went back to them & asked them why this was so & they said the property needed major repairs. We showed them the building & pest inspection but they disagreed. They said that the property needed about $50-100k to bring it up to being acceptable to be a security for a mortgage.
We asked them to detail this repairs, & they said that this would cost us a fee – they would have to send engineers out there to detail the repairs required. We tried several different banks & financiers but these valuers had a monopoly on the area, we couldn’t get anyone to get over this hurdle.
We couldn’t believe it!
The only silver lining on this grey grey cloud is that the vendors didn’t decide to sue us for breach of contract.. they just kept our deposit, so we were out of pocket $10k. It could’ve been a lot worse!
The lesson is to make sure you get a valuation or pay for a indepth building inspection report if you are purchasing very old properties.
Live & learn!
PS: The good news is that this tale of woe has not put me off purchasing older properties. We successfully purchased another block of old units in North Qld & that investment is going well!
Sorry to hear about your loss
Just one question though, wouldn’t a clause reading ‘subject to finance’ in the contract have helped avoid the loss of the deposit? Anyways, it’s great to hear that your current investment is doing well [king]Cheers
Queensland property law works slightly different. That clause is essentially already built into the contract. But you have a certain time to go back & say whether the finance has been approved or not.
Technically the finance had been preapproved so we were happy to let that clause expire, which was our big mistake. We couldn’t foresee this happening because there was nothing in the property reports to even give us a hint of this happening. So we stupidly went ahead with the contract advising the vendor that finance was fine. Stupid!
Hi Colio!
Sorry to hear that story and thanks for sharing it… I learnt something… But it pays to remember that all the money in the fat bans does not acutually belong to them – it is owned by people like you and I who have deposited it in there
What I am saying – not that it helps you now – is could you not have found people with cash to help you close the deal? Maybe people with equity in a line of credit? A few family friends or retirees maybe…
This way you could have purchased and repaired the property and gone back to the banks again to try for a loan…
Did you try solicitors mortgage funds? I understand these guys are not cheap with their rates and also all their fees but if it was only going to be for 6 months or so you may have come out better than burning the $10k you did…
It is horrible when people with nothing at stake make decisions that affect others… I am sure the valuers still got paid – they wouldn’t have it any other way… No responsibility or risk on their part – Your problems are your problems and our problems, well, they’re your problems too.
Cheers,
GregWhat a bugger that must have been colio, but at least you have a positive attitude and are looking at the lesson learned.
Just a question, how could it have been positive cashflow at $600 a month, should that be $600 a week…technicality.
cheers
lifexperience
Thanks for your thoughts Gregg. To be totally honest my property partner & I had the cash to purchase the thing outright if we wanted to, but the thing was whether or not the original bldg inspection was correct or whether the valuers were correct saying that it needed 50-100k to fix up. If the latter was the case, it wouldv’e been a bad investment so we decided to lose the 10k instead.
We didn’t really want to put more than the 30% we needed to get the property because we had other investments to put our cash/equity towards. And we didn’t want to ask anyone else for help in case the property did turn out to be a lemon.
Woops! Yes yes, it was $600 per week. $600 a month would have been a terrible return! [blink]
dont forget when you write on the contract subject to finance you still really aint covered cause the bank can pull out of it at any time up until settlement day…..we had this happen to us we signed with subject to finance the broker said woo hoo u got the loan then subject to morgage insurance then 15 days later the mortgage insurers said no so by this time 5 days cooling off period had elasped so we were stuffed…we had to sale 1 property to get out of the shit so we didnt get sued….even if you get pre approved you still aint really covered completely…its all risky business unfortuanetly
Hi Colio,
I sympathise with you – it happened similar to me in NZ although you don’t pay anything until the finance is approved.
…they just kept our deposit, so we were out of pocket $10k. It could’ve been a lot worse!better you lose 10k now that 1M or 10M later on.
They say that the only way to get out of a hardship, is to keep going through it.
Best Regards,
George.I’ve found a way to help you save and earn whilst not selling or delivering any product. If interested, drop me an email or PM me to find out how
To clarlify the “subject to finance”
You as the purchaser can nominate the time frame on this as part of the negotiations. If the vendor accepts 7, 14, or 21 days finance, you then have the time necessary to get written approval from the bank as they will always send a valuer around. Preapproval means nothing….
the key lies in the property that you’re financing.As the buyer, you have to then give written notice to the agent / solicitor that you eith have the finance or don’t.
I recently got out of a contract on the finance clause (it’s your best friend)
If you want more info on it, drop me an email.
Cheers
Chad
Reading all this raises an interseting question ?
Is it sufficent to rely on the Bank Valuation alone ?
In many cases this is done free of charge to the buyer as part of the bank covering themself and therfore can save you the hassle and cost of getting an valuer.
However, I have heard that the bank valuation are lower then market valueAny thoughts anybody?
we had this happen to us we signed with subject to finance the broker said woo hoo u got the loan then subject to morgage insurance then 15 days later the mortgage insurers said noCorrect me if I’m wrong here, but you DON’T have finance approval unless it is in writing. And in my experience (thru the last 5 houses we attemted to buy) the REAs don’t even tell the vendors unless they receive a letter of financial approval directly from the Bank!
Mind you, I live in WA and we seem to do things a bit differently over here, from comments I get from REAs. We generally do the negotiations before we do inspections (inspections are done once the Offer and Acceptance are signed by all parties). The clauses simply specify what happens to the validity of the contract based on the successful (or otherwise) satisfaction of the clauses with-in the O&A.
So stipulating “…subject to finance approval by Joe Bloggs Bank of WA” and “…within XX days of the offer…” means that the contract is null and void if finance is not achieved in writing within XX days!
Deposits are returned or you get an extension. Seems fair to me. Shurely this is also the case over east?Cheers
C@34
Quite a yarn.
What did the person /company who did the original building inspection have to say about the bank valuer’s conclusions about the condition of the building? Aren’t they liable if they miss major problems?
I guess bank valuers are right more often than they’re wrong but sometimes I wonder how thorough they are. When we needed bridging finance 3 years ago the bank never sent out a valuer at all, much to our astonishment. (The mortage was only on the property we acquired, not on property being sold)
Another owner in our area had an interesting experience getting their house valued. Knowing that values in the area had increased substantially since they originally acquired the property they were disappointed to get a figure well below their expectations. They mulled it over for a month or so and then requested another valuation – and got almost 50% increase. It seems that the first time the valuer just drove past the street side of the property, and didn’t realise until he walked into the house and saw the view that it was waterfront (onto Moreton Bay) property![blink]
I think Kristine’s point was that you can have a written offer for finance approval from a bank and so the contract becomes unconditional, then at any time the bank can just change its mind and withdraw the offer e.g. the bank discovers you lose your job the day before settlement and withdraws its offer for finance. You can never be certain of getting the finance until the property settles – this is a very serious problem and can really leave you up to your neck in it.
Extensive list of ‘Off The Plan’ property available for sale in Perth.John – 0419 198 856
AusProp,
have you ever heard of such a thing? As I haven’t. That doesn’t say it does not happen, but does a loan not come under Contract Law? Offer and acceptance? They 9the bank make the offer) and you then accept it, hence any withdrawal could have major ramafactions for the Bank as well as neg. publicity (which they sooo love).Your thoughts?
Cheers
C@34
its never happened with any of my deals, but my preferred broker tells me it can and does happen. I know many of my clients need to get their finance ‘refreshed’ on OTP deals that drag on longer than expected as the approval is often only for 3 months. If they pulled finance on you I don’t think you would have any legal recourse – the fine print would well and truly cover it.
Even with loans in place – my broker told me of one situation – in Bunbury I think it was – where one of our esteemed major banks decided overnight that it wasn’t comfortable in that region anymore and withdrew finance to all the businesses in that area with a very short time frame to find a new bank. Apparantly they were ruthless and disinterested, yet they are still a big glossy major bank! Not sure if this can happen with residential property due to the UCCC (I confess here and now I know very little about the UCCC), then again most investment property isn’t within that anyway. And Peter Spann tells us on a different forum that margin calls can and do get made on property that are declining in value (to my surprise) despite a very heated debate on this forum about this topic approx 6 months ago.
Extensive list of ‘Off The Plan’ property available for sale in Perth.John – 0419 198 856
Just one question though, wouldn’t a clause reading ‘subject to finance’ in the contract have helped avoid the loss of the deposit? Anyways, it’s great to hear that your current investment is doing well [king]
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