If the owners in a duplex or triplex you want to buy into have let the operation of the body corporate lapse, what can you do to protect yourself?
Property investment is a bittersweet mixture of successes and mistakes.
As an investor, you’ll have triumphs and victories, as well as misadventures and mishaps.
Persisting with a strategy to create wealth through property investment over the long term therefore takes courage and the ability to pick yourself up when you trip and fall and have to start again.
What drives us is our desire to be successful investors.
Keep up your desire and your education about what’s happening in the marketplace and you’ll move forward in the real estate world.
Let me do my bit in continuing your education.
As I’ve said before, education is your bridge and your safe crossing into the real world of property.
FAILURE TO OPERATE BODY CORPORATE
They simply agree amongst themselves who is responsible for maintaining and mowing the lawns and which insurance company they’ll jointly appoint to insure the building.
This makes sense from a practical point of view, although the dilemma for you is that once the body corporate has been established – which must occur to allow separate title deeds to be issued for the units – then owners of those units and future owners have a legal obligation to maintain the operation of that body corporate.
How can you be sure, then, as the purchaser of a duplex or a triplex, that things are as simple as they appear?
If you purchase a unit in a strata title scheme where the body corporate is operational you can protect yourself by making the contract subject to a search of the body corporate records and you being satisfied with the results of this search.
The results of this search will reveal one way or the other whether everything is good on the home front or not.
However, if the body corporate has been inactive for many years, carrying out such a search will be pointless.
You can still of course search the title office records to confirm what by-laws apply to the body corporate and find out the location of any common property and any exclusive-use areas, but that will reveal nothing about the operation of the body corporate.
The way to bridge the gap in these circumstances is to physically meet with your neighbours in the complex to satisfy yourself that there’s nothing untoward going on.
This is a must. It’s the only real way to obtain the peach of mind you need to be satisfied that the fact the body corporate has never conducted annual general meetings or struck any levies doesn’t come back to haunt you down the track.
CO-OWERNSHIP: THE ROAD LESS TRAVELLED
Until the arrival of the global financial crisis (GFC), the growth in prices of quality residential and commercial properties had put many such properties outside the reach of single investors.
This led to the explosion of property trusts and syndications, which captured many small property investors who otherwise would have been unable to invest directly in those properties.
The downside to investing in trusts and syndications was that the trust and the syndication acquired the property in its name.
Investors who still wished to go down the path of direct property investment did so by acquiring property in co-ownerships.
That is, where all of the co-owners are shown on the title deed for the property as co-owners with various shares.
You might have expected the advent of the GFC and the real drop in the value of properties to lead to the purchase of more property by individuals rather than co-ownership as the prices would be more within their reach.
But it hasn’t.
Instead the softening of confidence, despite the drop in the prices, has led to a re-emergence of co-ownership.
Property investment in this climate now takes more than just confidence.
It takes real courage.
Investors who don’t wish to stump up with all the monies and take all the risks are now opting for a road which has, for the past few years, been less travelled – co-ownership.
Co-ownership with others can work as long as the purchase is properly documented by way of a co-ownership agreement.
It’s essential to have a well-thought-out co-ownership agreement, not just because of the vagaries of the real estate market, but also because people’s goals and circumstances can change dramatically, particularly over the five to 10 years that a property may be co-owned.
I encountered an incidence recently of an Australian company that co-owned properties with three other investors and after five years of co-ownership the spouse of one of the directors of the company contracted a life-threatening disease that required immediate and expensive medical treatment overseas.
The company therefore needed to sell its interest in the property to fund this treatment.
Thankfully the co-owners of the property saw the benefit five years earlier in preparing what appeared at the time to be an expensive legal document.
Following a plea from the director of the company to the other co-owners, all hand snow reached for a copy of the agreement from the bottom drawer.
The agreement provided that all investors had the right to exit the property and the terms of this exit were, fortunately for all, crystal clear.
Every co-owner had the right, in these circumstances, of first refusal.
This required the departing owner to first offer their share to the others at a purchase price to be agreed upon.
If they couldn’t reach an agreement the document provided that an independent valuer be engaged to determine the value and calculate the exit price.
If, following the valuation, the other co-owners didn’t want to exercise their right of first refusal, then the departing owner could offer their interest for sale to others outside the group.
The new co-owner still had to be approved by the others and in the event that the departing owner couldn’t source a new co-owner who was acceptable to the others, the agreement provided the property was put on the market for sale and sold at market price.
And what’s unfair about including such a provision in a co-ownership agreement if everyone was treated equally and all had the same rights?
Nothing at all.
So, while it appeared five years ago that there was little value or positive benefit in spending several thousand dollars in legal fees to prepare such an agreement, the reality was that in the fullness of time, it was money well spent.
This article originally appeared in API Magazine
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.