Artifically increasing the rent
- Thread starter georgie1
- Start date
Looks like some of you are taking the moral high ground, a bit rich coming from a bunch property investors. I did speak with my solicitor today and they pointed out the following scenario's if the purchaser wanted to rescind the contract or sue for damages:
- The biggest risk is the tenant taking the 10k and leaving early in the first 6 months. They would have to pay 6 weeks letting fee but they would profit $4,900.
- No normal lawyer would take this case on as the "fraud" amounted to $7,500. The legal fee's alone would be more than the $7,500.
- If it did get to court the courts will look at the purchaser and say:
Are you a prudent investor? the purchaser will say "yes" then the court would say you should have know the rent was inflated and cannot rescind the contract.
- If the purchaser says they want to sue for paying 30k-50k over the market rent they would need to get expert witness's such as valuer to prove they paid over due to the fraud. In residential the rental is not commonly used to value the property and so the purchaser has no leg to stand on; as well, 30k-50k is very possible for my property depending on the comparables chosen, the value of residential property is subjective.
Overall its a low risk play with regards to litigation. The only issue is the tenant. Although a solution was posted above where the tenant pays $1,000 a week and I refund $150 at a time. The $2,500 could be paid up front as sign of good faith. I will just advertise at the time for $850 for the property and once I have found suitable candidates ill put the offer to them.
I could probably guarantee you guys this idea is not originally and has been done before by other land lords before me.
- The biggest risk is the tenant taking the 10k and leaving early in the first 6 months. They would have to pay 6 weeks letting fee but they would profit $4,900.
- No normal lawyer would take this case on as the "fraud" amounted to $7,500. The legal fee's alone would be more than the $7,500.
- If it did get to court the courts will look at the purchaser and say:
Are you a prudent investor? the purchaser will say "yes" then the court would say you should have know the rent was inflated and cannot rescind the contract.
- If the purchaser says they want to sue for paying 30k-50k over the market rent they would need to get expert witness's such as valuer to prove they paid over due to the fraud. In residential the rental is not commonly used to value the property and so the purchaser has no leg to stand on; as well, 30k-50k is very possible for my property depending on the comparables chosen, the value of residential property is subjective.
Overall its a low risk play with regards to litigation. The only issue is the tenant. Although a solution was posted above where the tenant pays $1,000 a week and I refund $150 at a time. The $2,500 could be paid up front as sign of good faith. I will just advertise at the time for $850 for the property and once I have found suitable candidates ill put the offer to them.
I could probably guarantee you guys this idea is not originally and has been done before by other land lords before me.
^ Difference - it's disclosed. The buyer KNOWS it's a 1 year "temporary" rental guarantee. In the OP position, the buyer doesn't know there is a $10,000 kick back.
End of the day the buyer is not only buying a property, they are buying the tenancy agreement that comes with it as well.
If a buyer does take the bait...then yes you could say the buy should have done some due dilligence...but in this case the seller has gone out of his way to hide the fact and gone out of the way to scam some unknowing buyer.
Looks like your lawyer is paving himself for another "lawyer's fee"/ case...
...omg
And what happens if they say no...most prudent or experienced investors ( if not all) will def check on market rent and market asking price. The only type of investors i know that may fall for this "scheme" would be first time investors, how would your so court look at this now...
---
you walk away with $30k...and a young investor walks away with a scattered dream and a bad start.
See, there are two parts to litigation. One is winning or losing the action. The other is paying the money to play the game. You might win, but only after spending a lot of your own money.
You might think the risk of losing is low, but you still have to pay your legal fees and put the time and effort into the defence.
Consider also that of this happens and it goes to court, your ruse will be made public -- it's likely be all over the media -- and getting a second buyer at any price will be hard.
But you seem to have worked it all out yourself.
Looks like some of you are taking the moral high ground, a bit rich coming from a bunch property investors.
Honest Property Investors.Your way we will probably see you on ACA.
^ Difference - it's disclosed. The buyer KNOWS it's a 1 year "temporary" rental guarantee. In the OP position, the buyer doesn't know there is a $10,000 kick back.
End of the day the buyer is not only buying a property, they are buying the tenancy agreement that comes with it as well.
If a buyer does take the bait...then yes you could say the buy should have done some due dilligence...but in this case the seller has gone out of his way to hide the fact and gone out of the way to scam some unknowing buyer.
Looks like your lawyer is paving himself for another "lawyer's fee"/ case...
...omg
And what happens if they say no...most prudent or experienced investors ( if not all) will def check on market rent and market asking price. The only type of investors i know that may fall for this "scheme" would be first time investors, how would your so court look at this now...
---
you walk away with $30k...and a young investor walks away with a scattered dream and a bad start.
Someone who knows anything about property would know that when you receive rents in excess of $600+ you are buying and selling between seasoned investors. My property is in the $800+ bracket unless there are some trust fund babies running around then I doubt that I am selling to first time investor.
If I were to think my risk of losing are low then the risk of the other side losing would be high. Unless they are rich and want to prove a point then any self respecting lawyer would advise their client to not take this case to court as there is a high risk of them losing.
Usually that market is OO (I live in this kind or market and there are by far fewer rental homes here than in the cheaper ranges).
A seasoned investor not only does their DD, they don't favour the 1M+ residential market for PI over other property investment.
So not only do you need a mug seasoned investor, which is a contradiction in itself, to fall for an inflated rental figure, you need to find that rare investor that invests in top end property (you generally don't switch from a 500K property to a 1M one because the rent is on par with others in the neighbourhood that are in better condition
).Anyway looking for that one idiot buyer (Aaron's description) sometimes takes a while, so your advertising fees rise and your home is at risk of becoming the dud that has sits on the market and people then think no one else wants/likes it and question it's desirability.
In many cases the longer a house sits on the market, compared to the comparables in the area, the lower the offers get.
Haha if that's how it worked there would be a lot less litigation.
You getting favourable legal advice does not mean the other side will get the correspondingly unfavourable advice. And even if they did, it is a painfully frequent scenario where clients will ignore the financially practical approach and instead go forward with litigation on the principle of it.
While personally I think your plan is silly and probably won't work, kudos to you for actually getting some proper legal advice on it. I'm a little surprised at the advice, but if you want to go through with it, its an issue for you and your lawyer.
Good luck.
No. Most of the properties in Sydney rents for over $600pw.....
Not sure which state your selling, but making an assumption that if a property has a rent of >$600 it will only attract seasoned investors only, is pretty....
End of the day, in my eyes it makes no difference if your ripping off an seasoned investor or first time investor - they still bought your place in good faith.
Regards
Michael
A great deal of lenders also ask for a current rental appraisal before granting finance, if they are to take the yield into account when working out whether or not to lend.
I do these all the time as part of my job, and you would have a hard time finding an agent to sign a document that says "to the best of my knowledge, if the property was advertised for rent in the current market, it would likely achieve $1000" - most agents are VERY careful when appraising for bank valuations.
If this Wood Duck who is apparently buying an investment property for $50K over market value is taking out a loan, that might stop your plan there.
Also - I'd be afraid of getting a brick through my window if I were you.
I do these all the time as part of my job, and you would have a hard time finding an agent to sign a document that says "to the best of my knowledge, if the property was advertised for rent in the current market, it would likely achieve $1000" - most agents are VERY careful when appraising for bank valuations.
If this Wood Duck who is apparently buying an investment property for $50K over market value is taking out a loan, that might stop your plan there.
Also - I'd be afraid of getting a brick through my window if I were you.
Like jim1964 says, we clearly are honest property investors whilst it seems very clear you are nothing of the sort. And you take a swipe at a "bunch of property investors" like we somehow are some species you would find under a rock. Pffft!!!
I know which type of person I would rather be...
And just to clarify... When I suggested you increase the weekly by an even more ambitious amount and try to get some sucker to pay $200K over what the place is worth, I was being sarcastic (just in case anybody might think i was in any way thinking your dodgy scheme has ANY merit at all).
Geeez Georgie whats your perception of Property Investors then, someone who has no or low morals?
I realize your initial post was only querying the legality of such a move, but on an open forum, you'll always get a variety of opinions
Some of the posts above have mentioned the ethics of such a strategy and others have even queried the strategies success
With regards to leasebacks, I have seen similar in residential and at a higher rent, but as per Dazz's post the seller was also the tenant (resident) i.e. someone selling their PPoR, but only to an investor, for a set period and at $X rent.
I would be interested to know if ANY residential landlord was swayed in their decision to buy a house due to the rental achieved? It is something I would not consider at all. I look at the house itself, the area, how it compares to other houses I know, already own, or have looked at.
If that all stacked up and the rent appeared to be too high, I would smell a rat. There is a house in my street owned by friends so I know what rent they get, and it has always been much higher than I would have thought possible (due to number of bedrooms and layout that enabled good separation for big families). They tried to sell it a couple of years ago for "market value" at the time, and it didn't sell. The very high rent didn't sway anybody to pay even what seemed like a reasonable price back then. It would make me want the house for the price it is worth, but not a penny more.
If that all stacked up and the rent appeared to be too high, I would smell a rat. There is a house in my street owned by friends so I know what rent they get, and it has always been much higher than I would have thought possible (due to number of bedrooms and layout that enabled good separation for big families). They tried to sell it a couple of years ago for "market value" at the time, and it didn't sell. The very high rent didn't sway anybody to pay even what seemed like a reasonable price back then. It would make me want the house for the price it is worth, but not a penny more.
Most would take the yield into consideration. Would have been better written as: How many residential investors are swayed by a properties yield WITHOUT checking market rent for comparable properties in the area?
But look at the number of people buying overpriced properties with developer guaranteed rental income... there would definitely be a few who don't do their homework. As said earlier in the thread it only takes 1 foolish "investor" to buy.
Ok... I suppose my question should have been "For somebody who looks at a house and does their DD on that house compared to others they have looked at, would anybody think "gee, that house is $50K more than the others of similar quality but the rent is $150 a week higher. I'll buy it."
I just don't think so.
I realise people do silly things, and perhaps Georgie might snag him/herself a buyer who has no clue about values etc, but why bother making the rent higher. Just add $50K to the asking price and see what happens.
My point is that higher than expected rent would not make me want to pay any more than I think the house is WORTH. In the case of my friends' house, I have pondered on why they get such good rent and believe the answer in the layout and number of bedrooms and ability for two age groups or two families even to live there, but I still would not pay any more for the house than what it is worth because of the higher than expected rent they are able to get.
I most certainly look at rent: I want the property to pay for itself.
Look at this place:
http://www.realestate.com.au/property-house-nsw-shalvey-107253373
...it's been on the market for around 12 months. The rent is high, even for a 5 bedder.
Dishonest and you reap what you sow.
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