Due Diligence - Webinar 4 Jul 08

Current Market:

Australia experiencing housing shortage
New dwelling approval falls by 6.25%
Population growing at fastest rate at 18years
Affordability and gloom is keeping the prices down

ANZ predicts price and rent explosion
Affordability Fear is driving the market at the moment. Price will not rise untill
1. Government intervention to free up money to buy,e.g access to super, government provide low cost housing
2. Interest rate fall; banks collectively feel int unlikely to all unless US mkt change and inflation in control. it takes 2 years for the situation to change
3. Income increase

Mortgage recession declared. New morgages experienced 2nd consecutive fall.

There will be a boom, but when? Short-term it’s going to fall. Better to get in when the market has just got off the bottom and miss a little bit of the initial rise.
The trend is not going to change rapidly. At the moment it is volatile.

Now:
invest in areas where there is a shortage; focus on shortage of supply relative to specific demand
Work hard on balance sheet so we are ready when the market changes
Be very careful about speculating in current market

What is the hot topic among graduates? JV


JV with friends and family members need legal document to protect all in case of something goes wrong
There is more at stake than money when JV with family.
Open discussion and decision made for if something goes wrong
What the expectations are for every member of the joint venture
What if extra funds are required as the project progresses?
Don’t rely on someone else in the group doing due diligence. Do your own DD on the deal and the people in the JV
Focus no exit strategy on worst case.

Due Diligence:
Due Diligence is to make sure you know as much as you can
It’s what you don’t know costs you money in real estate. Once you know it, you can take measures to mitigate it.
It’s the things that are left to chance sink the project.
The more things left to chance, the more chance things will go wrong.

Key areas of homework

numbers: real estate is a medium for making money; the numbers have to stack up
the physical property: most people who sell hide the flaws; It’s your job to find them
tenant
offer
finance and legal

When doing due diligence, make use of the templates on the website.

2. When doing numbers, take into account
· realistic time required for sale
· Time frames and holding costs
Get a definitive time frame, deadline provided in a document

2 Physical property:
a. land size ; boundaries are different; measure yourself
b. turn on the over, lights, tap, heating; see if the water is dirty ( the pipe could be corroded)
c. Cracking bricks, weather board
d. Evidence of termite, woodwork damage; look for odd new carpet
e. Talk to neighbour. What is the neighbourhood like and how is it going? (don’t ask the neighbour directly about the owner as people are protiective of their neighbours)
f. changes in the building without permit
a. Any extension, pergola, carport, ask for building permit. Section 32 in Victoria should provide info for permit; question anything added; ring the council see if they have a record
g. Age of the building.
a. old copper piping for plumbing are expensive
b. fire aid between apartments is a problem when subdividing
h. Roads: Don’t take what REA tells about roads going to be built. Check it out yourself.

3. Get a copy of the title for the property. It tells you the dimension, the boundary, and easement, covenant, caveats.

Easement is what you own but you don’t have authority over, sewer line, water line, power, gas, overhead easement say power line over the block

Covenant: an undertaking put in place to restrict the use of the property. It might restrict what you do with

Caveat: indicate there is debt or other interest on the property. Ask the agent to provide detail to ensure it’s not something to prevent you from taking possession

4. Existing lease: find out whether there was a bond taken, the rent payment history and whether rent was artificially inflated. Get a rent valuation by phoning a rental manager.

Investigate the rental management fee; It varies from area to area. In the country it could be a lot dearer.

Find out about vacancy rate in the area

5.body corp.: special levy, body corp. fee; order for maintenance (order by council for external maintenance)
6.finance options, exit fee, LMI, etc

Pre-purchase inquiries sound a lot. Do it very thoroughly once as exercise.