Best settlement terms for this deal?

[ozi]

Hi all,

I looked at a property today which I am interested in purchasing. It is an old 2 bedroom; single-fronted weatherboard, which seems structurally sound although needs some updating. The owner contacted me after receiving one of my letters from a recent letterbox drop, so the property isn’t listed with an agent

The situation is a little interesting and I need some advice on how to present my offer in order to achieve a win-win for both the owner and myself. The owner purchased the property in 1992 and will be retiring from work at the end of the year. He owns land in the country somewhere, which he is planning to build a house on and move into within a year. He wasn’t looking to sell so soon, but if we can agree on a price and terms then he will sell.

The property needs the following work done:

* New kitchen

* New bathroom

* The rear of the property has had new plaster fitted, which needs joining and painting.

* Paint inside and out

* Maybe install split system air-con

* Polish timber floors

* Replace 3 of the wooden windows as they have rotted quite badly (owner tells me previous owner installed cheap window frames, pine I think and they haven’t been treated or painted). I thought it may be termite damage, but the surrounding walls seem good.

* Maybe knock down a couple of interior walls to make the kitchen/dining/lounge open plan.

The place is quite messy and the owner hasn’t done much in terms of looking after the property, but most of the problems are cosmetic.

Regarding the terms of settlement, I told the owner I am very flexible. We briefly discussed whether he would be willing to sell now and rent back for 6-12 months and he said he would consider. The only thing he doesn’t want is to move out straight away, so he wishes to live there at least another 6-12 months until his new house is complete, or near complete (he is yet to start getting plans done).

I should also mention that I am a first home buyer (in Australia) so would like to make use of the FHOG. Therefore moving in for a 6 month period within the first 12 months is mandatory. I am also planning to buy 1 more property, hopefully by the end of the year.

At the moment I have thought about the following options:

1) Settlement ASAP and have him rent back for up to 12 months.

2) Settlement in 6 months and have him rent back for up to 6 months.

3) Settlement in 12 months, vacant possession.

Obviously the longer I delay settlement, this means my money stays in my pocket for longer and hopefully the house increases in value. The area is currently very hot and houses are selling like hot cakes. Should I be aiming for a long settlement?

My initial plan was to buy something, move in straight away for 6 months while I do the renovation, then rent it out. If this guy is to rent back, should I hold off on any renovations until he moves out? Or should I fix the place up slowly while he is renting? I believe he is happy living there in its current state and condition.

He has stated that he wants at least $300k and had a valuer (not a real estate agent) through his property yesterday (he gets the report next week). My only concern is if the valuation comes in high, he is likely to bump up his expectations. Hopefully the valuation comes in below $300k, but I doubt it. The valuer physically inspected the property (inside and out), so it wasn’t just a drive-by.

I haven’t decided on price yet as I am still pricing some things, such as replacing windows, kitchen, bathroom, etc… But if anyone can give me some tips on what would be the most attractive scenario for settlement (both for him and me), that would be appreciated.

Kind regards,
Ozi

 

[alexlee]

If you rental yield is less than the interest rate (likely) then settle when the current owner wants to move out. Why pay more interest if you don't have to? I would try for access prior to settlement to start cleaning up the place, etc.

You can always NOT claim the FHOG this time and claim it on the next property.

As for the val.... you know how much value you're getting, right? That'll determine what price you pay. If his val comes in low, great, but if the val is higher than you expected but still below what you think the place is worth, it just means you make less profit.
Alex

 

[skater]

I don't know the area, so could not guide you as far as the price is concerned, however, why not offer settlement in 12 months. This gives him a guaranteed sale & also plenty of time to get his new home built. You could also offer him 6 months rental after settlement if that is needed as well. All up 18 months for him to get relocated. It would also give you the right to receive the FHOG as you can then move into the property within the first 12 months. This would be a win-win situation for the both of you.

 

[sailor]

My broker recently brought my attention to the fact that the bank's valuer usually comes in lower, than an independent valuer....something about the former being for a loan and the latter being "at fair market rate". Something to check out anyway.

Sharon

 

[ozi]

Hi all,

Thanks for the replies!

Firstly, houses in the area rarely sell below the $350k mark and the ones that do would normally need some serious work. I'm guessing the house would be worth around $330k in its current state. After renovation, probably around the $380-$390k mark (these are just rough figures).

I believe the valuation the owner got was an independant one and not one from the bank.

I thought that a long settlement would be the best scenario. Skater, a 12 month settlement plus an option to rent back a further 6 months sounds like a great idea! I'm in no rush. Chances are I will find another property to buy before then, so I could always use the FHOG for another purchase. My only concern is that 12 months is a long time away and peoples circumstances can change. Are there any risks in having such a long settlement?

Kind regards,
Ozi

 

[The Y-man]

If you rental yield is less than the interest rate (likely) then settle when the current owner wants to move out. Alex

Agree. We use this as a technique for justifying a low offer. Although it's a bit harder when the date is so "up in the air" as it seems for this case, go in with a lowball with the up side of letting them stay on.

Cheers,

The Y-man

 

[Les]

G'day Ozi,

I you ARE going the FHOG route, then be sure you read up on YOUR requirements. I think I remember something like "an existing lease will allow you to defer your occupation of the premises (e.g. if someone has an 11 month lease remaining, you can allow them to stay for that period, but then you MUST take possession" - something like that). Or maybe this relates to a PPOR without CG penalty - not sure.....

As I'm not an adviser, use this simply as a warning to CHECK OUT the relevant laws or rules relating to FHOG before putting your plans in place.

Other than that, there are real advantages in setting a price now, but taking possession (much) later. Good luck with it,

Regards,

 

[ozi]

Hi again,

The SRO Victoria website states the following:

http://www.sro.vic.gov.au/sro/SROWebSite.nsf/rebates_fhog.htm

From 1 January 2004, at least one applicant must occupy the home as his or her principal place of residence for a continuous period of at least 6 months commencing within 12 months of either settlement or completion of construction.

Note: The Commissioner may approve a lesser period if satisfied that there are good reasons why the applicant cannot comply with the 6 month requirement. The Commissioner also has discretion to extend the 12 month period if satisfied that the applicant cannot occupy the home within 12 months of settlement or completion of construction due to circumstances that were unforseen and beyond the control of the applicant.

I think I would be eligible if I settle in 12 months and occupy for a 6 month period within 12 months of settlement (unless I use the FHOG for another purchase before then)

Thanks for the heads up Les. I believe for the PPOR CGT exemption I can rent the property for up to 6 years, as long as move back into the property before the 6 year period is up. I will need to check up on this.

Y-Man, I've been putting in quite a few low-balls lately and starting to get sick of them I'll try not to low-ball too much with this one as it could be a good deal.

I will probably get in contact with the owner tomorrow or the day after to put in my offer. I'll keep you all posted. Thanks.

Cheers,
Ozi

 

[lowb]

My only concern is that 12 months is a long time away and peoples circumstances can change. Are there any risks in having such a long settlement?

Kind regards,
Ozi

hi ozi

one risk that i can think of is that the property market in your suburb could fall during the 12 months. that is also one benefit as it could increase too.

hope everything works out for you

 

[Les]

G'day Ozi,

I believe for the PPOR CGT exemption I can rent the property for up to 6 years, as long as I move back into the property before the 6 year period is up. I will need to check up on this.

And I believe you're right on it there, Ozi. I was thinking more of the period after settlement (i.e. on/before it becomes your PPOR).

Anyway, it seems you've checked out the FHOG requirements - well done. In retrospect, I think my comment was more "PPOR" based than FHOG. So, do check out the requirements re "setting this up as your PPOR". In my recollection, it sounds A LOT like what you posted re FHOG.

Until you have it as PPOR, the 6 years exemption doesn't come into it - yes? So, get the first bit right, and the rest will follow,

Regards,

 

[ozi]

Hi again,

Lowb, yes there is a risk of the market falling over the next 12 months, but I can't really see this happening. The market in this area has been very strong for a while now, and given that I would be buying (hopefully) below market value, and below the median for the area, I mitigate some of the risk. I also plan to hold long term, so even if the market falls, I won't be selling in the short term. The risks I'm more worried about is the owner not looking after the property if he knows he has already sold it. 12 months is a long time and he may decide not to fork out for any maintenance or repairs needed in the short term. I guess a condition report would be useful upon signing the contracts.

Thanks Les, I will make sure I find out the exact requirements regarding PPOR .

Cheers,
Ozi

 

[gstroud]

Why not JV with the owner?

Hi Ozi,

Due to the owner being so airy fairy, think about what would suit him. This property does not sound like one you want to start as your PPOR. You need something you can occupy within 45 days for this.

I would offer him a JV development contract. Don't buy it at all, just control it. Offer him the valuation price of the valuer plus 20% of the uplift after the reno when he bails out. You pay all the reno and other costs, and he keeps the title. You will not have to pay any SD this way, and you keep the difference in cash when the property sells. Put it towards your next deal, then keep building it.

You will need to put a Caveat on the title for your profit, and a charge on the title for the development costs, just in case he backs out, but that is fairly simple.

Cheers,

Geoff

 

[ozi]

Hi Geoff,

Thanks for your response. I must say that is a creative strategy and one which I hadn't thought of. I'm not sure this is the path I would like to take though as my goal is to buy and hold for the long term. I can see this area doing very well long term, so I would rather keep the property instead of selling it for a quick profit. Also, as this is my first renovation I wouldn't feel comfortable taking on a JV partner in case things go wrong.

This property does not sound like one you want to start as your PPOR. You need something you can occupy within 45 days for this.

Sorry, but can you elaborate on this comment?

Regards,
Ozi

 

[ozi]

Heritage Overlay

I've just spoken to the planners at the council and have been told the property has a heritage overlay This adds a bit of a twist to the deal now as it doesn't look as attractive as before, or does it? Basically any extensions or improvements to the property's exterior (mainly the front I think) will need a planning and building permit. Yes, I was planning to do some improvements to the front of the property.

Should I let this put me off, or maybe go in with an even lower offer? What do people think about heritage overlays? I know they are more of an annoyance, but do people generally not buy these properties because of the headaches that could be involved down the track.

Is it likely that this heritage overlay will affect property prices in a positive way in the future?

Regards,
Ozi

 

[gstroud]

Hi Geoff,

Thanks for your response. I must say that is a creative strategy and one which I hadn't thought of. I'm not sure this is the path I would like to take though as my goal is to buy and hold for the long term. I can see this area doing very well long term, so I would rather keep the property instead of selling it for a quick profit. Also, as this is my first renovation I wouldn't feel comfortable taking on a JV partner in case things go wrong.



Sorry, but can you elaborate on this comment?

Regards,
Ozi

Hi Ozi,

I was really referring to the complications of the unknown with this Vendor.

If you are going to use up your FHOG, I would make sure you had a dead set certainty. A real cleanskin deal, bought well, will release more equity for you when you are ready to make hay on this deal in 12 months time.

Think of the snowball. A well bought PPOR now will give you more momentum in 12 months. There are quite a few mortgagee sales on now from people that bought in 2003, now crashing around them.

Geoff

 

[gstroud]

Higher risk, lower price

Hi Ozi,

The higher your risk in both money and time, the lower the price you pay.

The Vendor may not like the sound of this as he sounds unmotivated right now, so it may kill the deal.

But a lower offer is worth a try now. Think FUD. Fear, uncertainty, doubt. It can put more money in you pocket.

Geoff

 

[geoffw]

Ozi

Some councils subsidise work on heritage houses- such as 50% of costs of visible improvements (eg paint) up to a certain value.

 

[ozi]

Hi Ozi,

I was really referring to the complications of the unknown with this Vendor.

If you are going to use up your FHOG, I would make sure you had a dead set certainty. A real cleanskin deal, bought well, will release more equity for you when you are ready to make hay on this deal in 12 months time.

Think of the snowball. A well bought PPOR now will give you more momentum in 12 months. There are quite a few mortgagee sales on now from people that bought in 2003, now crashing around them.

Geoff

Thanks for clearing that up Geoff, I follow now

Regards,
Ozi

 

[ozi]

The higher your risk in both money and time, the lower the price you pay.

The Vendor may not like the sound of this as he sounds unmotivated right now, so it may kill the deal.

But a lower offer is worth a try now. Think FUD. Fear, uncertainty, doubt. It can put more money in you pocket.

FUD - I like that one and will use it when negotiating! Thanks.

Some councils subsidise work on heritage houses- such as 50% of costs of visible improvements (eg paint) up to a certain value.

That sounds great, I will follow up on this. Its not everyday the council throws money at you. Its normally TAKE TAKE TAKE... Then TAKE a bit more

Cheers,
Ozi

 

[tubs]

I'd also take the 12 month settlement. As everyone says, you control the property and it doesnt cost you a cent! Just be careful that you dont do anything in the next 12 months to jeapordise your finance, thats all.

You may want to be careful about your legal situation with the long settlement. We all know that a contract is a contract is a contract. But if he wants to extend, or change his mind in a year he could claim that you tricked him into signing a contract that wasnt right for him, and he didnt have any legal representation. People do tend to change their minds and think they can do what they want after a while.

Tubs