As a property investor honesty is the best policy

The resurgence of interest in commercial property has become a real barometer of the strength of the recovering real estate market.

Ownership of this class of property is also becoming a badge of prosperity among investors.

The question for this month came from an investor who called me about a commercial property he was acquiring for a purchase price of $1 million. woman property deal

He was delighted to tell me that his lender had valued the property at the purchase price of $1 million, but his dilemma was whether he should now tell the lender about a $50,000 reduction in the purchase price that he’d secured because of the sellers’ non-disclosure of an easement affecting the property, and a few building defects.

He said to me:

“I want you to take your solicitor’s hat off now and think of this issue as an investor. What would your advice be to me about this issue and how to handle it as an investor?”

The unspoken question, of course, was “should I disclose the purchase price reduction to the lender?”

Once disclosed, the lender will almost certainly implement its policy of lending the investor a reduced amount due to the lower purchase price.

My response was, firstly, I had to answer the question as a solicitor as the client hadn’t engaged me as an investment adviser, nor was I his co-investor.

From a solicitor’s perspective, the answer to the question is simple.

You must be very careful as an investor not to mislead or deceive your lender as you have an obligation to disclose anything that affects its decision about whether to lend you the money or not, and if so, how much to lend.

Being aware that it has a policy of lending 70 per cent of the lesser of the purchase price or the valuation, you must disclose the price reduction to the lender.

But what if I was a co-investor here? 

My response would have been this:

“Why are you so worried about this issue? It’s not as if you’re being asked to give away $35,000.

Your loan liability will be reduced by $35,000 and the outcome of disclosing the price reduction is simply that the lender will advance you $35,000 less.

You haven’t lost any money.

So, don’t risk losing the relationship with your lender, disclose it.”

The pushback then was “if I didn’t disclose it, what are the chances of the lender finding out about the price reduction and this becoming a last-minute issue before settlement?”.

The answer to this question is that there’s a strong possibility the lender will find out about the price reduction as it’s standard practice between lenders and an investor’s solicitor for the lender to call for a copy of the settlement statement (the letter to the investor from the solicitor outlining the funds required to settle, which of course will show the final purchase price – minus the reduction).

This will most likely occur at an advanced stage of the transaction, before settlement and will almost certainly “put the cat amongst the pigeons”.

At the very least it could undermine the goodwill and relationship between the lender and the investor.

So, is it worth it? 21138688 - 3d people - man, person and question mark. confusion

It is not.

Your own moral compass should’ve been able to answer this question for you in any event.

If, as you were reading this column, you pictured yourself making the phone call to your solicitor to ask the question, you should sit down and have a genuine self-assessment of your investment style.

It’s time for some self-cleansing.

As Dolf De Roos, an investor who’s shared the stage with the likes of Robert Kiyosaki, Donald Trump and Anthony Robbins says:

“Whenever I’m confronted with such a dilemma, I look up at a plaque that’s on the wall in front of my desk, which just says ‘integrity’. You must always conduct yourself with it.”


Subscribe & don’t miss a single episode of Michael Yardney’s podcast

Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.

Need help listening to Michael Yardney’s podcast from your phone or tablet?

We have created easy to follow instructions for you whether you're on iPhone / iPad or an Android device.


Prefer to subscribe via email?

Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.

Rob Balanda


Rob is a partner in the Gold Coast based law firm MBA Lawyers. He is a highly regarded educator of property investors and estate agents and the author of the "Made Simple" series of books and CD's.

'As a property investor honesty is the best policy' have no comments

Be the first to comment this post!

Would you like to share your thoughts?

Your email address will not be published.


Copyright © Michael Yardney’s Property Investment Update Important Information
Content Marketing by GridConcepts