If you list your property with more than one real estate agent, make sure you don’t become liable for more than one commission.
A young client showing wisdom far beyond her years called me to seek guidance about how to protect her investments on a sale of a unit she had listed with three agents.
One of the agents had submitted an offer…
The lease on the property was managed by the resident unit manager (RUM) in the building.
The agent assured her that the buyer hadn’t seen the property through any of the other agents and therefore there would only be one round of real estate agent’s commission payable to this agent who had actually sold it.
I asked her to fax to me a copy of the contract signed by the buyers together with a copy of her management agreement with the RUM and, if she had it, a copy of the lease.
She advised that she didn’t have a copy of the lease and I asked her to call the RUM and ask him to immediately fax a copy to her.
In that circumstance I cautioned her about the strong possibility that the manager would be very anxious about the sale and an unscrupulous one might tell her that the lease (which they had signed on her behalf as her agent) also included an option for the tenant’s benefit, allowing the tenant to extend the lease for another six months.
This would be unacceptable to the buyer’s requirements and cause the loss of the sale, as the buyer required vacant possession of the unit on settlement for their own use.
I recommended to her that if the manager told her this was the case she sould call their bluff and call for a copy of the lease (showing the option) to be faxed to her immediately, so they couldn’t attempt to stall things and backdate a new lease containing that option.
My client asked “Why would a manager go to all of that trouble to attempt to retain the letting of just one unit in their letting pool?”
The answer was simple: their desire to protect their income stream of say, $1500 a year from the management of the letting of a unit, but more importantly the capital cost they’d paid to buy the management of that unit as a part of the management and letting rights business.
On the Gold Coast the capital cost of acquiring this unit as part of the business is approximately five times the rental income, that is $7500. The manager therefore would be fighting to save the loss of $1500 income and the capital cost of the unit in the letting pool of about $7500.
After perusing the lease and the management agreement with the RUM I advised that there were three things that she must do to protect herself in this sale.
Firstly, include a clause in the contract of sale whereby the buyer guaranteed that they were introduced to the property by the agent who had sold it, and not any other real estate agent.
The clause should also go on to state that the buyer indemnified (compensated) the seller in the event of any successful claim for commission by any other real estate agent.
My client wasn’t sure whether she had given a sole agency or an exclusive letting agency to either of the other two agents and therefore without the protection of this clause there was a real risk she could end up paying double, or even possibly triple commission.
Insertion of the clause was therefore very important and shouldn’t raise an objection with the buyer if their claim that only one agent had introduced them to the property was truthful.
Secondly, I advised my client to ask the manager in writing to notify the tenant in writing after the contract had been signed that return of possession of the property was required at the expiration of the lease so that the tenant couldn’t legally remain in possession as a month-to-month tenant. Failing to give notice to a tenant that possession is required at the end of the lease usually allows the tenant to stay on as a month-to-month tenant – this would be fatal to the contract.
Finally, I advised that she must give notice in writing to the manager terminating the manager’s appointment to manage the property upon vacation of the property by the tenant.
Her agreement with the manager required her to give 90 days’ notice to terminate the management, failing which the seller would continue to be responsible to pay commission to the manager.
THE VALUE OF A VALUATION
“I have seen the light,” cried a new client who called me late one Friday afternoon after the stockmarket had closed. “I’ve just sold my last parcel of shares and goodbye was all I said. I’m now only going to invest in property,” he told me.
“The problem is though, Rob, the area that I’m looking to invest in could still be falling in price,” he added.
“When I was trading in shares a cagey old stockbroker taught me never to catch a falling knife. That is, never buy a share whose price has fallen dramatically and continues to fall.”
My client then told me he’d made an offer to buy a property which he thought was good buying.
Remembering the sagely advice of the stockbroker, and to protect himself, he asked me to provide him with a clause which made the contract subject to valuation.
If the valuation came in at less than the purchase price, the price would be reduced accordingly.
I explained to him why a seller would be anxious about such an open-ended clause – because there’s no limit to the reduction of the purchase price determined by a third party valuer.
After much discussion with the seller through the real estate agent, a contract was concluded with the following clause. It represents a fair balance between the position of the buyer and the seller.
Valuation of unit
This contract is subject to the buyer or the buyer’s lender undertaking a valuation of the unit and the buyer being satisfied with the results of this valuation within 30 days of the date of this contract, failing which the buyer may terminate this contract of sale and receive a refund of the deposit. In the event, however, that the valuer of the unit estimates that the value of the unit is less than the purchasing price, the buyer will provide to the seller a copy of that valuation for its perusal.
The buyer also acknowledges that the seller may undertake its own independent valuation of the unit in these circumstances and in the event that it does so it will provide a copy of the valuation to the buyer.
At the completion of the valuation and no later than 35 days from the date of this contract the parties agree that in the event that the buyer or buyer’s lender’s valuation is less than the purchase price, to use their best endeavors to renegotiate the purchase price acceptable to the buyer, failing which the buyer may terminate this contract and receive a refund of the deposit.
This article was originally published in Australian Property Investor magazine and is copyright and reproduced with their permission.
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