You can run, but you can’t hide
Small mistakes can often snowball into larger problems when it comes to property transactions.
Sometimes as a property investor you can make a mistake, pay the price and then just move on. Other times the problem hangs around to haunt you.
A case in point is an investor made was to neglect to ask for a list of exclusions that weren’t included in the sale, only to find out following settlement that more than $5000 had to be spent on a number of matters to bring the property up to scratch to keep the tenant happy.
Readers will recall that the investor hit the developer up to pay for these costs and do the work itself and at its expense.
Hallelujah, the developer agreed to do the right thing and carry out his work. But this wasn’t the end of it.In attending to the work, the developer visited the property unannounced without making prior arrangements. The tenant became very annoyed and felt harassed by the developers representatives. During one visit the developer’s men left the front gate open and the tenant’s expensive prize dog escaped to be lost for more than a day. No wonder the tenant almost terminated the lease as a result!
None of this would have occurred if the investor was educated and knew to ask the developer not just for a list of inclusions in the house once completes, but also a list of all items that were excluded.
If this had been provided the investor would have proceeded on an informed basis, knowing what work had to be attended to, rather than trying to fix the problem later.
OPTIONS VERSUS RIGHTS OF FIRST REFUSAL
Now that buyers’ appetites have returned to the marketplace. I’m seeing more investors actively promote the idea of sellers granting them an option to buy their property.
As readers are aware, this puts the property on lay-by for the buyer until the buyer makes up their mind about whether they wish to proceed with the purchase and exercise the option.
How enforceable are these options from a sellers’ prospective?
I received a call from an anxious client: who had too quickly granted an option in favour of the buyer for six months, only to later change her mind. This prompted a call to me to ask for advice about whether she could pull out of the option.
“Isn’t it like getting a landlord’s consent on the transfer of a lease — that is, I have to give my consent to the exercise of the option although, like a landlord when asked to consent to a transfer of lease, I have to be reasonable?” she asked.
“No it’s not”, I said. “Whether or not to exercise the option is the buyers call as an option gives the buyer’s call as an option gives the buyer the right but not the obligation to insist that the owner of the property sell it to them.”
“Perhaps then I should have given the buyer a right of first refusal. Would I be better off if I had done that?” she asked.
“Yes you would”, I said. “With an option the terms of the contract that comes into existence if it’s exercised are crystal clear from the outset as the contract of sale is actually attached to the option agreement. With the right of first refusal, however, your agreement as the owner is that should you ever sell the property at some time in the future and on whatever terms you determine, you must first offer it for sale on those terms to the buyer.”
So, you see, with an option the terms and conditions are negotiated up front whereas with a right of first refusal you’re are doing this ‘at the back end’.
Whether the property is sold and, if so, on what terms is completely at the seller’s whim. With an option then the buyer has control, but with a right of first refusal it’s the seller who controls the outcome.
All too often investors aren’t aware how the creative use of clauses (i.e. special conditions) in contracts of sale can five them the edge and secure the property for them where otherwise they might have missed out.
This lack of education or property ignorance is perpetuated by the real estate by the real estate industry, which actively discourages buyers from making conditional offers on the little-spoken principle that operates within the industry that ‘less is yes’. That is, the less clauses an agent has in a contract of sale they submit to a seller, the more likely they are to get a ‘yes’ from the seller to that offer.
However, a proper understanding of the use of special conditions can give you the edge. Let’s have a look at a case in point.
A hungry investor had been trawling through the lean pickings in towns west of Ipswich in Queensland looking for cheap land to build a house on to sell to a first homeowner. Frayed and tired from the experience and almost ready to give up, he stumbled upon just the property for him.
Unfortunately, it was already subject to a contract, but it was subject to finance. One extension of finance had already been given and feedback from the local agent was that another request for an extension was soon to be made.
The question for me from this investor was: “How can I get the property and be the first cab off the rank if this sale falls over and the property is released to the market?”
The answer was, “Offer to buy it on back-up contract.”
This contract would be at the same price and subject only to the first contract being terminated. The back-up contract would contain a clause whereby the seller agreed (before another request was made) to grant no more extensions to finance approval on the first contract, so that if finance wasn’t approved by the due date it couldn’t be extended.
Consequently when the first contract fell over my client would already have the property tied up. Their contract would become operational when the first contract, through the passage of time, came to an end.
My firm drafter the second contract with the back-up clause since the local agent, when asked to produce such a document, advised, either out of ignorance or based on the ‘less is yes’ principle, that such a strategy wasn’t legally possible. This advice was wrong.
An example of a back-up contract clause that could be utilised is set out below:
The vendors warrant that the property is presently the subject of a contract of sale dated (insert date) between themselves and (insert name) as purchaser and that this contract is conditional upon the following matter:
a. Approval of finance within 14 days from the date of that contract;
If the above condition is not satisfied or waived in writing by the date outlined above the vendors must terminate such contract.
This contract is subject to the purchaser of the property referred to above, or the vendors, terminating that contract on or before 5pm on the (insert date).
The vendors must not grant any extensions of time to the purchaser of the property referred to above to allow the purchaser further time to obtain the approval of finance. The vendor also agrees not to vary the other terms of that contract of sale.