Beware the lose/lose property deals.
by Neil Jenman
In the property ‘game’, everyone has heard the story of how some lucky (“clever” as they are often called) investors manage to make a tidy fortune buying property off-the-plan. If you’ve ever seen or heard someone in the industry telling you that it’s possible to make 200% return on your money, this is how they [say they] do it. Indeed, anyone shouting about returns of 100% or more is almost certainly a dodgy spruiker and someone you should avoid at all costs. If not, you’re going to head into a situation where, no matter what happens, you’re all but guaranteed to lose. Yes, this really is, so often, a classic lose/lose deal. If the property you buy goes down in value, you lose (obviously) but if the property goes UP in value, you also lose. How on earth can that happen? Wait and I’ll show you.
But first, here’s what those slick salespeople will tell you. When you buy a property (usually an apartment) off-the-plan and you pay, say, $800,000 for it, you only have to pay $80,000 deposit today. You don’t have to pay the balance (the other 90%) until the entire apartment complex is completed, which can be a long way into the future – two years is not uncommon. This is what is meant by “buying off-the-plan” – a property development has not been built, so all you see are a set of plans which show you how the apartment should look when it’s completed. You look at the plans, listen to the sales spiel and then pick your property. Yes, you have just become an ‘off-the-plan’ buyer – most of whom bitterly regret what they do.
But, assume you buy for $800,000 and it takes two years for the development to be completed. By that time – or so the ‘sales spiel’ goes – the property may have increased in value (and, yes, some of them do indeed go up in value, especially in a booming market as has been experienced in Sydney and to a lesser extent Melbourne and Brisbane throughout 2014 and into 2015) by, say, 20 percent which means that it is now worth $960,000. Now, all you have to do is what the clever investors do – sell your apartment for $960,000 giving you a profit of $160,000 on the $80,000 that you invested. Bingo, you just made 200 per cent return on your money. Imagine if you had been even shrewder and you had used a deposit bond which may have cost you, say, $20,000. If you outlay $20,000 and get a profit of $160,000, you’ve made a whopping return of 800 per cent on your money. Oh wow, how clever are you? Just the thought of these sorts of profits is what lures many buyers into an ‘off-the-plan’ deal. Of course, most of them never see such profits because, even if the property does go up in value, most of today’s property developers have what can only be described as a ‘rat-cunning-get-out-clause’ buried in the fine print of that “standard” off-the -plan contract that buyers were urged to quickly sign. Or, as many spruikers do these days, they send buyers to their in-house “tame” lawyers. This is where you will probably hear an expression that, if you knew what you were doing, it would make you run at high speed away from this deal. That expression is “one stop shop”. Beware.
Now, I have been saying this for years: Anyone who buys any property should always get their own independent lawyer to checkall the documents before they sign anything. But, of course, if you have your own lawyer they will be acting in your interests – which is exactly what you want; but it may not be what the property spruikers want. The property spruikers want to ‘control’ you, right from the time they first meet you until the time that you are locked in (“stitched up” as they call it among themselves). And there are few better ways to control you than to introduce you to their ‘tame’ lawyers. These are lawyers who are usually bereft of all moral standards. Yes, the sorts of lawyers who, if you wave a hundred dollar note under their noses, will lay down with anybody. These lawyers are told by the spruikers (usually over a boozy lunch) something such as this: “Hey, we’ll send you our ‘heads’ (another term for buyers) and you can do the conveyancing for them and make sure that they go ahead. And you are welcome to charge them whatever you like. As much as you can get away with.” Ha-ha, another beer? No, I shouldn’t. Well, okay, just one more.
Let’s be clear about something: When you use a lawyer recommended by a property spruiker or property developer that lawyer is most unlikely – no matter what he or she says – to act in your best interests. If the lawyer did act in your best interests, then the lawyer would not get any more investors sent to them by the property spruikers. And so, all those buyers who are sent to all those ‘tame’ or ‘controlled’ lawyers, do not warn the buyers about a tricky little clause that’s buried in the fine print of so many ‘off-the-plan’ property sales today. That clause is known as a “Sunset Clause’. In essence, it says the following: “If the development is not completed by a certain date, then either party – the vendor or the purchaser – can have the right to rescind the agreement. If this happens, then all deposit money paid by the buyer will be refunded to the buyer.”
Now, a dodgy lawyer (okay, let’s spell it out – one who is virtually in the pocket of the spruikers) will say something such as: “This is a fairly common clause which just means that if things drag on too long that you have the right to change your mind and buy something else and you get your deposit back. So, really, you can’t lose.”
But wait. Here’s what so often happens (and these dirty scoundrel lawyers are well aware of it!): If the property has gone up in value, the developer is going to regret selling to you at the cheaper price. As we said in our earlier example, if the property has gone up from $800,000 to $960,000, the developer will be wishing he could get that extra $160,000 today. And, let’s say that there are 24 apartments in the building, then 24 times $160,000 means that the developer could have picked up another $3,840,000 – almost four million dollars!
So, here’s what unscrupulous developers are doing these days (and, believe me, when sums like an extra four million dollars are concerned, scruples often take a back seat to clever business practices – as they like to call it): Knowing that the market has boomed and aware that the apartments are worth a lot more than when they were sold to different buyers off-the-plan, the developerslows down the construction of the development (not so that they can ever be accused of doing it deliberately, of course) and then, once that date for the agreed completion has passed, the developer uses the Sunset Clause to make all the contracts null and void. The buyers get a letter saying something such as, “Due to the development taking longer than expected, we are invoking our rights under the terms of the contract and we are cancelling our agreement to sell to you. Here is your deposit back of $80,000.”
Of course, if you still want to purchase one of those apartments – as many non-investors often intend to do; indeed they may have had their hearts set on their brand new home for many months – you can still buy, provided, of course that you pay the “new price” which may well be as much as a million dollars (in our example case; developers usually like to sell for more than the market price. And, buyers who have their hearts set on a project are often willing to pay extra to get exactly what they want).
So, how on earth could this happen? Why were you not warned about this Sunset Clause? Well, quite simply, whatever lawyer you had acting for you was either incompetent or dishonest (often both). Any decent lawyer will tell you that only you, the buyer, should have the right to cancel the contract in the event of a completion delay.
So many buyers – probably thousands – have been caught with this Sunset Clause. It really is a nasty, grubby little sting. And, it’s not just the price that might change. Sometimes the developers decide to build the apartments smaller in size to what was on the “plan” (check the fine print. Oh, sorry, your lawyer is a dud or has been recommended by the salesperson who sold you the off-the-plan property!). Other times, developers have been known to grab a car space. Instead of having two car parking spaces, you may get a letter saying that you now only get one. Some buyers have been told that they are now getting no car parking facilities. Of course, the developers – usually through their lawyers – will tell you that, if you don’t like these new ‘terms’ then you can just have your money back.
Remember how you were told that you “couldn’t lose”? Well, technically, that’s true; you don’t lose any of the money you paid as your deposit. But when the market increases by, say, as much as 20 percent then you are going to have to pay upwards of another $150,000 to buy the same property in today’s market. There have been cases where buyers were forced to pay as much as $250,000 extra because of the Sunset Clause. Well, not really “forced” because they can always walk away and rent for a few more years. But if they want to stay in the property market, they have no choice – take it or leave it, that’s the smirking offer from the rat-cunning developers and their morally bankrupt lawyers. If that’s not a loss in reality, then tell me what is a loss?!
Of course, if the property had gone down in value, you can be sure that the developer would have completed the apartments on time, thereby forcing the buyers to go ahead.
So, you see how it works? It’s a classic case of heads they win and tails you lose. A lose/lose no matter what happens to the market.
The message here is clear. And oh-so simple. If you must buy a property off-the-plan, always insist on using your own lawyer(and try and find a good one, preferably one recommended by a trusted friend or family member). Get the lawyer to check the fine print thoroughly – and pay special attention to that rat-cunning Sunset Clause. Your lawyer can remove those ‘rat’ clauses and amend as many of the conditions as you request.
And, one final tip: Developers have a dreadful habit of saying that some method or condition (including the price) is their “policy” and is not open to negotiation. Well, that’s mostly a monumental bluff. Always remember that you are the buyer, you have the money. And the person with the money is the person who is supposed to dictate the terms. Stand firm and if you can’t get a fair deal for yourself at the start, go elsewhere and find another more honest and reputable developer. Good developers, good projects and good lawyers do exist. You don’t have to get involved with the dodgy brigade. Okay?
You have been warned.