All Topics / Help Needed! / Buying out JV Partner, should we do it?

Viewing 12 posts - 1 through 12 (of 12 total)
  • Profile photo of RMAARMAA
    Participant
    @roslyn77
    Join Date: 2004
    Post Count: 21

    Hi all,
    Been part of this site for years but this is the first time I’ve needed to bounce things off others. Sorry that it’s long.

    I bought a H&L in Lakeside, Pakenham back in 2010 jointly owned with family for $413,000 and this is what we owe currently. (first mistake I know but it was the only way to move forward at the time). 1 of the parties now are at retirement age and want to reduce their outgoings so of course want out.
    The property is cashflow neutral ($440pw rent) in the current environment and we will come out with a “profit” but when you factor in what we have spent over the years it doesn’t even come close.
    I believe that in years to come it will continue to grow as it’s in quite a good location of the estate. 5 minutes walk to amenities.

    Our dilemma is the valuation came in quite low $460,000 (very close to council rates val at $445,000) Which equates to about 2% CG per year.
    We were told “market value” or potential sale price by our Local REA should be $520-$550k.
    This valuation hinders our ability to get 1 loan to fully buy out the other parties at a market price, which is obviously what they want. This is also a sticking point, what should the sale price be to be fair and reasonable? I’m thinking around $505k is more reasonable because of comparables and this would be around $25k we would then owe.
    But whatever it may be, it now looks like they may not allow us to pay them out in instalments, which is what we first discussed, and want cash upfront so we may need borrow at higher rates (think personal loan) to do this.

    My thought process is if I can keep this we’d be in a better position because we would have to be paying stamps etc and possibly a higher purchase price to get back into the market anyway and we still have an asset that will grow.
    But I’m just at a point where I’m thinking is it just better to sell because of the headache.

    My question is, Is it worth paying higher interest on this? Is it worth paying stamp duty again on the transferred amount? Or are we better to just sell up and take our potential $25k and put it in something else?

    Thanks,
    R

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,416

    Hi RMAA,
    Now is a good time to really think this through, and to help, here are a few thoughts that might steer you one way, or another.

    There is obviously more to “the numbers”, with four of you in the deal. You might not want to share such things on forum, but you should do so with an Adviser. Major one is “What do you owe everyone if wanting to purchase their shares and retain the house for yourself?” See, I would guess you might have all “chipped in” for Deposit/Costs, and perhaps even yearly expenses – interest, rates, Insurances, Maintenance, etc. So, “Who gets what” in the carve-up?

    Getting that part agreed to would be a good start. Without agreement, you wouldn’t know how YOUR final numbers might look.

    Re buying a House and Land, these are often “loss leaders” for up to 10 years, as the developing company takes a lot of cream for the risk of building them in the first place. With ten years gone by, it “might” now be due for a better lift in value (or not).

    Not all developments are equal – some are great value from day one, with amenities added regularly (schools, shops, etc), and in areas that become quite sought after. Some have a decent amount of Land, while others have large McMansions shoe-horned onto tiny blocks. Some have quality-built homes, while others are quite shoddy.

    I don’t know Pakenham – it might have some developments of each kind. Then again, your part of Pakenham might be different to the rest of Pakenham – do look around at “comparables” and their sale prices in your area, or check in again with the RE agent. Talk to them about where the market is now, and also read up to see where the market “might be in another xx years”. e.g. is the Local Council spending money there? For what – better footpaths, better infrastructure, more shopping complexes, new schools, hospital, etc.

    For your next buy (including when “buying” this off your family members) look for a Problem that you can Fix. Steve says “Buy problems and sell solutions”. Unfortunately, the H&L purchase was “Buying a Solution”, and all of the profits went to the developer. For this place right now, is it a “Problem” that you can solve?

    e.g. Is it a bit tired, and a cosmetic reno might (a) lift its value, and/or (b) command a higher rent? Is the problem one of “The rest of the family want to quit it, and they will be very ‘kind’ to you if you help to make the problem go away?” (i.e. will they leave their Equity in the place for you so long as you take all of the trouble off their hands?)

    You made a good point about the costs to “Buy into something else”, and you are right. Selling this would have its costs, but so too would KEEPING it. The permutations around these “numbers” would be more easily handled if you discussed this side of things with a Mortgage Broker, who probably has a computer program that will quickly run through all the possibilities to show “Which decision is FINANCIALLY best for you.”

    Good luck with your decision,
    Benny

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

    Good points, Benny.

    R, a few questions, if I may.

    1. Do I understand correctly that because one party wants to sell, you want to buy all other parties out?
    2. How many parties are there?
    3. Can you service the loan all by yourself?
    4. If you had to buy a property for the same price (minus the purchasing costs, say), would you buy this one or another one?
    5. Do all the other parties want to sell?

    Happy to continue the conversation once the above is more clear in my head 👍😎

    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 TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    Why not just get a second valuation, and a 3rd perhaps. You could agree that the price paid to the other party is the average of the 3.

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

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

    Profile photo of RMAARMAA
    Participant
    @roslyn77
    Join Date: 2004
    Post Count: 21

    Thanks for the insight Benny.
    You are right we bought a ‘solution’.
    Unfortunately as the place is 5-6 yo there’s not a lot we could do to add value to it at this stage.
    Also as it’s in an estate the covenants dictate a lot for the exterior.
    The positives are it’s part of the SE growth corridor of Melbourne, new (additional) train station due to the population growth, more schools etc. but there is a lot of land around to build on at the moment.
    It was actually the REA advice NOT to sell if we could help it because it is a ‘great property in a great location, getting a good rental return’.
    You’re right in that we’ve all contributed and earlier this year I painstakingly went through statement after statement to confirm how much so in any sale scenario we’re all working on the “carve up” would be equal thirds.
    Ethan, I think the above answers a couple of your questions but I’ll confirm.
    1 out of the 3 wants to “cash in” so the remaining 2 either take it over or sell. (my hubby to become #3)
    I literally have loan documents ready to sign but we’re just at the point where we all need to agree on a “sale” price. This also covers if we put it on the market.
    But due to the bank valuation we can’t borrow enough on the mortgage to pay out the third (they won’t accept that it’s only worth $460k because of the RE appraisal) so we’d have to borrow it from elsewhere.
    In regards to another purchase for a similar price, I’d probably look elsewhere to be honest if it is for shorter-term or manufacturing growth but the fact that NG on this is purely due to depreciation is attractive as this gives us cash to start paying down home. We knew when we bought this place that it would be a buy and hold type property.
    If we did sell though we also wouldn’t have enough funds to buy again in the short term.
    I keep coming back to that in reality we’re only purchasing a third of a house not a full house.

    Terryw I did query the valuation with our broker (I noticed that they put the house as older than what it is so not sure if that would have had an impact at all) but we’re using a lender with no LMI for CPA and I guess stupidly, I didn’t want to irritate the tenants with numerous valuers wanting access as our lease is coming up soon so we want to be seen as easy to deal with landlords.

    I guess the situation overall just had me kicking around in my head which scenario is better so I thought I’d put it out there if anyone had any opinions/ideas that I haven’t already thought of!

    P.S I had a chat with our accountant but unfortunately she’s just agreed with every scenario I’ve mentioned that it all is possible but not given any advice as to what they’d suggest based on our circumstance.

    Profile photo of BennyBenny
    Moderator
    @benny
    Join Date: 2002
    Post Count: 1,416

    Hi RMAA,

    The positives are it’s part of the SE growth corridor of Melbourne, new (additional) train station due to the population growth, more schools etc. but there is a lot of land around to build on at the moment.

    That is both good and bad… Good that it is in a growth corridor that is seeing Infrastructure being built – bad that it is in an area that has heaps of land available.
    Speaking of which, how big is the block the house is on? Since it is land that appreciates in value, THERE is where the future value lies:-
    1. A larger block provides options a small one doesn’t
    2. The location will never change – that could be good, or fantastic, or not so good…..
    3. In a new development, it may take 10 years before the overall values climb high enoough to give you back a bit of Equity. Not much of a problem for Home Buyers, but not so good for investors.

    Re your accountant, many are simply “scorekeepers” who don’t have a lot of knowledge outside of “balancing the books”. Also, in most cases, they are not licensed to provide financial advice – as such, the fact that they are “leaving it up to you” does not surprise me…..

    One other thought out of left field re this:-

    But due to the bank valuation we can’t borrow enough on the mortgage to pay out the third (they won’t accept that it’s only worth $460k because of the RE appraisal) so we’d have to borrow it from elsewhere.

    Other words from you indicate it might be nearer $520k to $550k. If so, then this is up to $90k higher than valued. The “third party wanting out” would be due an extra $30k, yes? The remaining parties have the extra Equity, even though they can’t borrow it YET.

    So, can you talk the “third party” into accepting whatever their share is at the $460k sale price, with a promise that the remaining partners would come up with the other $30k in (say) 3 years time. You can save this with just $200 a week over that time, or look at refinancing then. Get it all signed up legally so there are no mistakes or mis-intentions….. maybe even offer slightly more if they are prepared to wait – negotiate to make a win/win/win….. ;) Can that work?

    Benny

    Profile photo of RMAARMAA
    Participant
    @roslyn77
    Join Date: 2004
    Post Count: 21

    Thanks Benny.
    The size is nearly 450sqm so not huge but compared to what developers are carving up nowadays and charging a premium for it’s actually pretty good.
    The thought isn’t really out of left field because that was something we were considering actually.
    But good to have someone else who think’s it’s not such a crazy idea. It’s just getting them to agree.

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

    We were told “market value” or potential sale price by our Local REA should be $520-$550k.

    No offence to the RE agent but I wouldn’t count on their estimation of market value more than the valuer’s. RE agents many times state the ‘hope’ price which the market may or may not accept. In short, RE appraisal can be worthless. Lenders rely only on the valuation the valuer does. Even if you guys manage to sell it for $520k, the new valuer might say it’s worth only $460k so the buyer’s lender won’t give the buyer the mortgage amount s/he will be after either.

    I personally wouldn’t buy for $520 something the bank says is worth $460, which is what you are considering to do? (Delay payment of additional $30k)

    A lot of land = low CG. 2% p/a makes sense to me based on what you said and I don’t see the value jumping much in the next few years. Do you? 460 to even only 504 is 10%. That could take years…

    I much prefer a property that I can manufacture its growth (reno, subdivide etc). It’s a much quicker way to build wealth IMHO than the good old buy and hope.

    Going back to the RE appraisal:
    would you be happy to sell for $550? If so, why not put it on the market? Either it will prove to all parties that the RE appraisal isn’t worth the paper it was written on (poor trees…) or everyone will be happy and full of joy by selling at 550 or $500+ And use their funds elsewhere where they can return a higher yield.

    Bottom line: there are a few options but nobody knows which option will pan out to be the best. The choice is up to you guys.

    Will be very happy to hear how this matter progressed and resolved.

    Best wishes,
    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)

    Profile photo of RMAARMAA
    Participant
    @roslyn77
    Join Date: 2004
    Post Count: 21

    Just an update we’ve decided to keep the property at the moment.
    One thing I can’t fathom though, going a bit off track is that we’re finally ready to settle with the refinance and I haven’t heard back from my broker for nearly 8 weeks.

    Is this normal practice for a broker to get everything approved etc and then just disappear not returning calls or emails?
    I guess I’m a little disappointed as they came highly recommended.

    Profile photo of Corey BattCorey Batt
    Participant
    @cjaysa
    Join Date: 2012
    Post Count: 1,010

    That is very odd – in terms of the refinance was the loan actually approved and you’ve signed the loan offer documents detailing your new loan etc? Heard enough horror stories when subpar brokers have their loans declined and hide from the borrower as they don’t want to deliver the bad news.

    In any case it’s unacceptable to not be able to get a hold of your broker over that time – be it phone, email etc.

    Sounds like a particular broker I know of who is notorious for that, their initials aren’t AC at all?

    Corey Batt | Precision Funding
    http://www.precisionfunding.com.au
    Email Me | Phone Me

    Investment Focused Finance Strategist - servicing Australia-wide

    Profile photo of RMAARMAA
    Participant
    @roslyn77
    Join Date: 2004
    Post Count: 21

    Not those initials Corey. But all approved. Docs signed. Were just waiting for a couple of land transfer documents to be signed and given to the bank.
    I don’t want to bad mouth anyone as there could be a reason, I just can’t think of why.
    I guess just venting as I thought maybe my expectations were off.

    Profile photo of Corey BattCorey Batt
    Participant
    @cjaysa
    Join Date: 2012
    Post Count: 1,010

    Barring personal emergency (fallen off a boat – this has literally happened to an Australian broker), that’s a little too long without returning phone/emails.

    Good to hear that it’s definitely all approved and signed up however!

    Corey Batt | Precision Funding
    http://www.precisionfunding.com.au
    Email Me | Phone Me

    Investment Focused Finance Strategist - servicing Australia-wide

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