This is the second part in the series on due diligence when buying a property for a family or organisation. In our article last week we discussed the following three red flags:
*The allure of the offer of a very good deal;
*The pressure to act quickly to avoid losing out on a ‘good’ deal; and
*The vendor conducting themselves in a manner implying that that they are doing the buyer a favour. Please read the full article here.
Today we share another experience with lessons behind it.
After looking for a while, Benjamin* (name has been altered) thought that his search for an affordable house was over when he came across a project that was offering a price within his budget range. The development was under construction and was being sold on off-plan basis. He would have the opportunity to pace the payments as the development was going on. With the excitement of finally being able to achieve his dream of buying a home, he took the step to run the investment idea by Property Access.
The price of the property was below market value. Market value is the price that the property would fetch in the market. A buyer should consider if the price is within market value and a licensed valuer will be in a position to advice on the market value. While it is not always the case, when a property is priced below market value this can be a red flag and there is need to investigate the reason behind the low price. This is because property developers are not in business to make losses. However, it is worth noting that off plan projects priced at market value or even premium prices have also stalled and led to losses for buyers.
Back to the story: The developer mentioned to Benjamin that this was their second development project but provided scanty information about the success of the first project. Information on how long the current project had been going on was inconsistent. (Red flag: lack of requested information, scanty information, misinformation, and inconsistencies. When investing in a property, a buyer should make an informed decision and should therefore get satisfactory answers to every question they might have.
According to the developer, the project progress period would be dependent on the buyers’ (Benjamin and other investors into the project) commitment to pay. He was excited about this because he was committed to make his home ownership dream come true. Unknown to him, in the absence of a track record, if the developer was as committed to the project, they would have a plan to complete the project with or without his funds. It is a red flag if a developer’s project success is entirely dependent on your funds as a buyer.
Benjamin did not want to lose out on benefiting from this project yet he also appreciated the risk. Property Access further advised him that he had an option of waiting out to assess the progress of the project; in the meantime he could invest the money in a money market fund to keep it safe, earning enough interest to cater for the price escalation that would arise as the project progressed; if it would. It is now six months later and Benjamin appreciates that he was well advised.
We thank you for the contributions to the previous post and continue to welcome your experiences on important steps or red flags. We will combine with ours and if you would like to check out our final checklist and inventory, follow us on LinkedIn, Instagram, Twitter and Facebook.