Forums / Property Investing / Help Needed! / Well, that was strange…

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  • Profile photo of Ethan TimorEthan Timor
    Participant
    @ethantimor
    Join Date: 2016
    Post Count: 282

    Hi all,

    Here’s a hopefully interesting story with a riddle in the end.

    Found a nice property to buy. One house, two units, long term tenants.

    After some back and forth, we agreed on the price. Great.

    Made it clear my offer was based on existing tenants being able to stay at below market rates. Vendor was happy, tenants were happy and agreed to new rents. Excellent.

    Got the contract, added pest, building and finance. All good.

    Vendor wanted the contract subject to existing tenancies but the attachments revealed (and discussions later confirmed):

    1. Both tenants are paying WAY below market rates.
    2. Bond amounts are super low (close to 2 weeks of existing rents)
    3. One of the tenants has no contract whatsoever.

    OK… how can we solve this one, I thought?

    So I offered the following:

    1. We exchange conditional on pest, building, finance.
    2. Once it goes unconditional, vendor gives tenants 30 days notice to vacant.
    3. I meet the tenants before settlement and sign new leases with them so they don’t have to leave. Was even ready to commit doing so (with specifying the rentals etc in the contract) to assure the vendor that his long time tenants will not be kicked out.
    4. We settle.

    I thought it’s a good offer, isn’t it?

    The vendor didn’t. He refused to change to ‘vacant possession’ and that’s it. Sale is not proceeding. House is back on the market.

    Left me wondering: why on earth would he insist on this point?!?

    Strange, isn’t it?

    Ethan Timor | Aligned Finance Pty Ltd
    http://www.alignedfinance.com.au/
    Email Me | Phone Me

    Active Investor & Broker; Based in Northern NSW, servicing Australia wide; Author of '34 Proven Ways to Maximise Your Borrowing Power' (download free from our website)

    Profile photo of JerryJerry
    Participant
    @jerry_o
    Join Date: 2013
    Post Count: 46

    Why is the vendor so attached or too concerned with the tenants? Related party perhaps?
    How many percent did you increase the rent from existing amount?

    Jerry | Mortgage Station
    http://mortgagestation.com.au/
    Email Me | Phone Me

    Finance Strategist - Active Investor - Serving clients Australia-wide - Based in Sydney / Melbourne

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,325

    Hi Ethan,

    I wonder if Jerry picked it? Related parties or similar.

    Funny thing is that it shouldn’t matter that much even if you DID accept the tenants as they stand. One has no lease, so they could be out in 30 days or so – the other, well, how long is on their lease before renewal – and, at renewal time, the vendor is out of the picture, and you are the landlord.

    So, depending on how good the property is, maybe a small adjustment to your offer price to compensate for extra rent foregone, and accept his terms. Why not?

    (Takes off devil’s advocate hat again)
    Benny

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,110

    Vendor may have problems getting tenants out in time for settlement and wants to push that on to any purchaser.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of DeanCollinsDeanCollins
    Participant
    @deancollins
    Join Date: 2015
    Post Count: 372

    How long were the leases?

    Should have just sucked up the short term loss and then given the tenants notice to quit once they came up for renewal.

    Make sure you include the leases in the sales contract eg so they cant be extended.

    Profile photo of Ethan TimorEthan Timor
    Participant
    @ethantimor
    Join Date: 2016
    Post Count: 282

    Hi all,

    Thanks for all the great replies.

    The vendor previously offered a small discount to compensate for the ‘subject to tenancies’ (just like Benny suggested) but I was concerned about his reasoning for refusing to do “vacant possession”.

    A bit more gentle research this week suggested that the issue the vendor had was indeed regarding the tenants. They have been his tenants for 5 and 20 years, no Property Manager so strong personal connections. It seems that he felt/knew that they will be able to handle the rent increase (+15% which is still 10% below market rate) but they will have issues coming up with 2 weeks advance + top up the bond to proper levels.

    All this means that if he would have signed “vacant possession”, he would have in effect kicked out at least on of the tenants.

    That makes sense to me so after some number crunching, we decided to take him up on his offer and contracts were exchanged yesterday.

    Next stop: pest & building inspections :-)

    Thanks again to all!

    Cheers,
    Ethan

    Ethan Timor | Aligned Finance Pty Ltd
    http://www.alignedfinance.com.au/
    Email Me | Phone Me

    Active Investor & Broker; Based in Northern NSW, servicing Australia wide; Author of '34 Proven Ways to Maximise Your Borrowing Power' (download free from our website)

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