Know When To Walk Away
Nick Gentle gives the low down on when to decide to walk away from a deal and when to persevere.
1 May 2019
You’ve been to all the open homes, been outbid a few times, spent the money on inspections and reports, not to mention your own time and petrol costs as you look for a good rental property.
You found one. You put in an offer and it gets accepted. Hooray. But put the champagne on hold . . . You’ve still got a lot of due diligence work to do and a very short time to do it in; here’s what your list might include:
1. What structural and cosmetic repair is needed? What will you need to do in the coming years that can be budgeted for now? You’re going to need a building inspection, which means reading through 60 pages of pictures pointing out all the ways in which a 50-year-old house is a 50-year-old house and trying to separate actual problems from standard wear and tear.
2. Will it really appeal to tenants? Who will live there? Why? What are the neighbours like? If you don’t know the answer then please do yourself a favour and engage a professional property manager from the outset.
3. At time of writing the NZ Insurance Council has not yet moved to the new meth standards as recommended in the Gluckmann report (even though the Tenancy Tribunal has) so your insurance will probably require that you get a meth test.
4. Insurance. The days of calling someone the day before settlement, telling them the address and how big it was and “she’ll be right” are long gone. To get insurance now you need to provide a lot more information about the size, condition, rebuild cost and age of the property. I highly recommend engaging an insurance broker during the due diligence period.
‘I can’t tell you how many buyers I have seen look at a building report and run for the hills’
The list goes on . . . It can be a mad scramble even for the most experienced of investors, which makes it incredibly disheartening when something comes up during due diligence that makes the deal suddenly appear to not be so great.
The most common example is when you get your building report. I can’t tell you how many buyers I have seen look at a building report and run for the hills. Modern building inspections are very comprehensive and the reports contain a lot of information.
What they can be light on is context, for example, pages and pages of pictures and “level of concern” statements. It can be difficult to work out what is a big problem, what is easily fixable, what is expected for a house of this age and what can be put on the list for future maintenance.
To me, a “big problem” is something structural, such as foundations, major cladding issues, significant moisture readings, or problems with the roof. These can all be fixed, of course, however you really should investigate more and know what you have on your hands.
A “fixable problem” is a cosmetic item or minor repair and building reports tend to highlight a lot of issues that will cause problems if left for too long. These I tend to “roll with” as I knew about them when I offered on the house and the building inspector is, after all, doing his job by pointing out every little thing.
Indeed, my approach as a buyer is to first remind myself that the price I have the property under offer for is usually a fair reflection of the condition of the property. I use building reports, not to review every instance of an old house being old, but to look for the “big issues” as well as any smaller items that really are immediate.
Remember what you ultimately want to achieve and think big picture; don’t get swayed by details that in a few years’ time will be inconsequential.
From there you can objectively decide whether the price you have the property under offer for still appeals and can proceed, negotiate further or exit the deal. The last thing to consider is how hot the market is and I look for reasons to complete the deal rather than walk away, after all it was a lot of time and cost to get to this point and in a hot market it may be a while before I get another property to this point.