I spent some time at a major property investment seminar over the weekend. On the whole it was great to be surrounded by people with goals and dreams and the ambition to learn how to make them happen.
However, I also had a couple of very difficult conversations which also reminded me why I am such a firm believer in preventative law.
The first conversation
An investor approached me with questions about a $200,000 private loan that he had made that was in default. I asked some basic questions about the background.
It was immediately clear to me that the investor had lost their $200,000 with little or no hope of a return. Unfortunately for the investor, I was well aware of the borrower and the project as I had already been engaged by another lender in relation to the project. I had seen sufficient detail in relation to the value of the units and the debts owing under the first, second and, yes, third, mortgages over the property to know that this investor was unlikely to receive any return on their investment.
Even if I don’t know of the specific deal, there is much about security, deal structures, interest rates, default, enforcement and more that I can explain to you that will allow you to make a better-informed decision.
The second conversation
The second investor had purchased an apartment off the plan via a group of property consultants.
The investor’s circumstances had changed and the investor now wanted to exit the contract. The sunset period on the contract was 6 years.
I explained that the only real way out was to find another buyer for the property. However, it was likely that the contract price included a $30-40,000 commission to the property consultants which would make it hard to find another purchaser.
This would also make it hard to convince the developer to cancel the contract – as the value of the property was likely to be less than the contract price.
What you don’t know that you don’t know…
In life, there are things that you know that you know – and also some things that you don’t realise that you know.
There are also things that you know that you don’t know. For example, most of us don’t know how to fix our car – but we realise that and seek appropriate help when something goes wrong. Hence these issues don’t usually cause too many problems.
However, there are things that we don’t know that we don’t know. For most of us – this is where we can get into real strife unless we are very careful.
There was much that the first investor wasn’t aware of in relation to the investor’s private loan. The investor either didn’t realise this or, possibly, was too embarrassed to ask. If the investor had approached me before lending the funds, I would have told the investor that I was aware of the borrower and the project and I would have strongly advised the lender not to proceed.
As an aside, I have in my career issued about 12 letters to clients strongly recommending that they not proceed with a proposed investment. I am aware that in about half of these cases the client suffered a disastrous outcome. I am not aware of any case where the investment was successful. If you happen to get one of these letters in the future please exercise extreme caution…..
If the second investor had approached me before signing the off the plan contract I would have highlighted the six year sunset period and also expressed concern about the contract price and likelihood that commissions were being paid.
Please Seek Advice
In addition to holding an accounting degree, a law degree and an MBA, I have spent 30 years advising property investors – ranging from first home buyers to sophisticated developers. I have seen great projects and horrendous ones.
All of that knowledge and experience is available to you at a modest cost via a range of solutions:
- You can click here to book a 30 minute appointment with me for $275;
- We will review your private loan agreement for $550 – this includes a formal written review and a follow up zoom / phone call with me;
- We will review a proposed joint venture agreement for $550 – this includes a formal written review and a follow up zoom / phone call with me; and / or
- We will review your standard domestic building contract for $825 – this includes a formal written review, suggested special conditions and a follow up zoom / phone call with me.
Please click here to contact us to arrange a loan / joint venture or building contract review.
I am so confident that we can add value to your property project that, if after your review, you don’t believe that we have added value or avoided problems to the value of the fee you have paid I will refund your fee in full.
Whilst I don’t like conversations where I explain to clients they have lost money – I can guarantee that you will be even happier not being on the receiving end of one of these conversations!
Lewis O’Brien
Your Preferred Property Lawyer