The building industry would have you believe that the spate of insolvencies that have spread through the building industry was an entirely unforeseeable event.  They are therefore utterly blameless and just victims of circumstance.
 
But is this really true?
 
Sure – the world as a whole has seen little inflation for thirty years or more.  However some pundits have been warning of inflation since quantitative easing and other central bank trickery began in 2008.
 
There are reports that HomeBuilder led some builders to sign up more than 4 times as many house contracts in the following 12 months.  Did it not occur to them that a large increase in demand would cause prices of both materials and labour to increase – even without supply disruptions and military action in Ukraine?
 
My point is that the builders were driving looking in the rear view mirror.  They had no recent experience of inflation so didn’t think to address the real risk.  We’ve always done it that way and will continue to do so!
 
For those of us that aren’t builders, the question is – are we guilty of the same in our approach to property investing?  (Or, even worse, are we signing the documents other parties give us because we don’t know any better?)
 
I firmly believe that in everything we do we need to be doing it better every year.  This is especially so in more challenging economic times.  In this article we will explore some of the issues raised by common documents that property investors sign.  While we have always done it that way – It is time to do it better!
 
Agent’s Sale Authorities
 
Did you know that the definition of ‘sold’ is the standard Sale Authority used by selling agents is “the result of obtaining a binding offer”?
 
If you think that through, the agent doesn’t need to get a contract signed and doesn’t need to wait for settlement (or deposit release) to ask for their commission to be paid.
 
To give you a real world example, one developer client is facing terminating some off the plan contracts because the feasibility no longer stacks up with increased building costs.  Fortunately, the client amended the definition of sold and won’t face paying $50,000 in agent’s commissions under the terminated contracts.
 
Would you have thought to do the same?
 
Condition of Property at Settlement
 
When we purchase a property, most of us expect that the property will be clean and tidy and everything will be working at settlement.
 
However, the standard contract doesn’t say this.  It says that the property will be delivered in the same condition it was in on the date you signed the contract with an allowance for fair wear and tear.
 
This means, that if the hot water system fails after you sign the contract but before settlement it is likely to be a purchaser problem if it’s the result of normal usage.
 
Most of us don’t check whether appliances are working before we sign the contract.  If they aren’t working at settlement we can’t prove they were working or that they failed as a result of something other than fair wear and tear.
 
The simple solution is to insist on a special condition where the Vendor agrees that the property will be clean and tidy at settlement and all appliances will be in working order.  After all, you don’t want to spend your first day of ownership cleaning someone else’s mess or arranging a replacement appliance.
 
Nominations
 
The provisions around nominations in Victoria are relatively flexible.
 
Increasingly the stamp duty implications are not.
 
If you nominate after preparing a plan of subdivision or before you enter a JV you may have a double stamp duty problem.  And paying one round of stamp duty is more than enough for most.
 
You also need to watch the special conditions and other restrictions on nominations.  It may be that your right to nominate has been removed or restricted.
 
Private Loan Agreements
 
I recently reviewed a loan agreement on behalf of a lender.
 
The Agreement was prepared by the borrower company.  No security.  No limit to what the borrower could do with the funds.  The borrower was incorporated a month or two before and didn’t own the property yet.
 
The Lender pointed out that the document was prepared to maximise the Lender’s flexibility and was not negotiable.
 
Fortunately, the client engaged us to review the Agreement.  As you would expect I could comment on what was in the Agreement.  More importantly I could point out what wasn’t there and what ‘normal’ is in a private loan agreement.
 
Concluding Thoughts
 
If you continue to simply do what you’ve always done in a changing world you are potentially taking huge risks that you haven’t thought about.
 
There is also the issue that, as a property investor (whether a home buyer or property developer) most of the contracts you are asked to sign are prepared by another party to suit their needs not yours!
 
At Lewis O’Brien & Associates our mission is to make you a better property investor.
 
We do this for our clients by seeking to be involved before you sign documents – be they real estate contracts, leases, loan agreements, joint ventures or other property related agreements.  In addition to reviewing the words in the documents you are about to sign we can:
·       suggest changes / special conditions to include or consider;
·       give you feedback on what is normal; and
·       share our experience of common problems and issues and how to avoid them.
 
Try us – we will make you a better property investor!


Lewis O’Brien