The purchase of a property with your best friend may seem like a good idea: half the deposit, half the risk and double the pleasure, is not it?
All is well while the times are positive. But what will happen if your friend gets sick or loses his job and can not afford half of his mortgage?
This is one of the many considerations potential owners do not consider when planning enthusiastically for a joint venture.
Jacob Duane, director of Bennett & Philp, a law firm specializing in commercial and real estate litigation, points out that relationships can often break up after a poorly considered double purchase. He adds that even if there is a long list of things that investors should do when they buy a property, the list of what they should not do is even longer. "We often only read examples of success, but the fact is that it is not difficult to make mistakes that could have serious legal and financial consequences," says Duane.
"These mistakes – many of which are easily avoidable – are sometimes mistakes that you may not know at the time and that could potentially hinder the success of any real estate investment. It is therefore imperative, as a real estate investor, to do your research and to call on qualified consultants who work in your best interest. "
The top five mistakes made by real estate investors are described below, as well as the best way to reduce the risk that they will occur to you.
Mistake # 1: Buying with Friends and Family
The purchase of an investment property with those who are closest to you might seem like a good idea at the time, but this could well prove to be the biggest mistake you could commit.
This may seem like the right thing to do: a solid way to set foot on the property ladder or expand your portfolio while minimizing your financial risk. But it is important not to assume that everything will go as planned.
Real estate and financial expert Noel Whittaker said that when considering an investment partner, you should look closely at differences in temperament, age, and investment objectives.
He adds that the potential for changing circumstances, such as new relationships, death or sudden unemployment, is also a key factor to consider when balancing a trading partner – and does not make any mistakes, an investment decision is a business decision.
"Your best business partner is always the bank. All they ask is that you pay them interest, "Whittaker says.
Avoid this error in: Think carefully before investing with your family and friends.
Investing with friends and family can result in a discount sale that forces sellers to sell their assets at greatly reduced prices, usually because of financial difficulties. This kind of result can seriously put your relationships to the test.
"I've seen these investments degrade many times and it's not worth it," says Duane. "To save you money, time and stress, I strongly advise against it."
Mistake # 2: Do not Undertake Full Due Diligence The absence of due diligence can have dramatic – and very negative – consequences for real estate investors.
"At Bennett & Philp, a number of customers have asked us for urgent help and asked us to reduce costs and reduce costs in the due diligence phase by focusing attention only on "relevant" research, "explains Duane.
"From a lawyer's point of view, all the research is relevant. Without inspecting the property, how do you know if this pergola was properly constructed or if the extension of the commercial building is above an underground easement? What may seem relevant now could change dramatically in the future. "
Duane added that commercial properties carry unique risks of due diligence. For example, many infrastructure loads on the ground can not be discovered through standard research.
"Often, these taxes are only identified after a standard or sometimes complete search, which is much more expensive to obtain. A thorough investigation of all aspects of the property will allow an investor to identify possible risks. Of course, not all risks are discoverable, but the goal is to reduce your risk exposure. "
Avoid this error by: Committing not to cut angles. This can save you a few dollars in advance, but at what potential risk?
"Your lawyer is just a consultant in the due diligence process – it is essential that real estate investors work with a number of professionals from various sectors to mitigate the foreseeable risks," says Duane.
"Your decision-making process should be part of your decision-making process, given this risk and your potential loss if you do not exercise due diligence."
Error # 3: Plunging into the head the first without advice
Recently, an investor signed a contract to purchase a $ 14 million shopping mall. The contract provided for a seven-day due diligence period – half the standard 14-day period for commercial contracts – which strongly constrained the investor's legal team to go through all the steps and make up for all the difficulties.
In such situations, it would be ideal to hire a consultant or lawyer early in the process, as this would allow for more appropriate timelines or conditions.
Working with consultants from the beginning will also help identify potential problems with the draft documents. For example, when it comes to acquiring a property in a self-directed super fund, the borrowed funds can only be used to acquire a "single asset acquired"; Several lots may, depending on the circumstances, require separate contracts and trusts.
The risks associated with the purchase of a commercial property in a SMSF should also be considered separately by an experienced practitioner in the field of superannuation, since a general carrier may not have sufficient experience in these areas.
Avoid this error by: Get support and relevant advice so you do not get stuck in unreasonable terms or unreachable deadlines.
"Real estate investors need to do extensive research not only on the property, but also on their advisors and consultants," says Duane.
"Engaging consultants and legal advisers earlier in the procurement process will ensure that all issues can be identified and resolved before accepting unrealistic conditions."
Error # 4: Funding Failure
Now more than ever, it is essential that investors obtain prior approval from their lender or bank before bidding on a property. In addition, when you are approved for a loan and you receive the loan documents, it is important to read them and read them before signing them – otherwise you risk being stuck in a mortgage for several years that would not be suitable. to your needs.
Let's take the example of interest rates. The loan for which you requested and which you approve may have been announced at a very low rate, which has aroused your interest.
"What people may not realize is that the advantageous rate a lender could be compensated for by the fine print, which could cause you financial hardship to the lender. future, with ongoing bank charges and termination fees, "says Duane.
Legally, comparator rates must be announced to try to counter misleading banks and lenders, but it's still worth looking at the loan market properly to make sure you have a matching mortgage. really to your requirements.
Avoid this error by: Work with a qualified mortgage broker with investment investment experience who can create a long-term financing strategy – a strategy which will suit you well beyond this unique property.
"It is important to recognize that real estate investing is a long-term investment. As such, investors should use a financial product that meets the long-term needs and objectives recommended by an experienced broker and subject to a thorough review and comparison, "Duane. said.
Mistake # 5: Working with Real Estate Investors
This often starts with an introduction to cold marketing, or a free consultation in the form of "price". The next thing you know, the investor has signed up for an expensive 'seminar' on investments, which is designed primarily to sell them a whipped good by the organizers well above its market value.
"These marketing tactics can lead to other arrangements with many potential conflicts, such as meetings with real estate agents, accountants, lawyers, bankers, etc.," says Duane.
It can be difficult to tell the difference between authentic advisors and spruikers, so keep that in mind: advisors have an obligation to consider the best interests of their clients and to give priority to their clients. interests before the interests of the advisers.
The Australian Securities and Investments Commission issued two reports in July 2018 specifying that the company's supervisory group would closely examine the progress and advice provided by the one-stop real estate kiosks. .
"Not all homebuyers are doing the wrong thing, and many are aware of their obligations to their customers," says Duane.
"The risk lies in the increased possibility of conflict and in the reduction of available choices or limited advice that can be given."
Avoid this error by: Ask questions and do your own research.
"You can never ask too many questions when you use a spruiker of the one-stopshop property and its favorite associates," says Duane.
True advisers are in a precarious position if they push specific products and send investors back to certain associates for financial gain, so ask tough questions, such as: What commission will you earn on this sale? How are these properties valued? What balance do you have to help other investors take advantage of the property?
"Real estate investors should consider whether the advice provided reflects the fact that their financial situation has been examined under all circumstances and whether all the services provided are in their best interest," Duane says.
"It's also a good idea to shop around and do as much research as you can. As a real estate investor, you are not tied to the partners of a spruiker. It is therefore essential for your financial success that you do your homework. "
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