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IN THIS ISSUE:

Selling a Leased Investment

Market Preview for 2014

Recent SalesAuction BunnySuburb Snapshot:

Leichhardt

REAL ESTATE REPORT

Selling a Leased InvestmentIssue 76

HARRIS PARTNERS

the added pain of paying another lease fee to find a tenant.

The solution for landlords is to be upfront and fair to tenants about your intention to sell in the future. You should disclose your plans to sell, in writing, in the lease agreement. This protects you against any suggestion of non-disclosure. Also, you may wish to demonstrate some fairness to the tenant by offering them an incentive when the selling campaign starts to help ease the burden of constant inspections.

An incentive for the tenants such as a slight rent reduction (in the form of

a rebate) or a complimentary cleaner, whilst the property is being shown to buyers, can create enormous goodwill.

Owner occupiers will attest to how stressful being on the market is to the household, but they are eventually rewarded with the sale. When an investment property goes on the market, tenants wear that same stress, for no benefit.

Notice to vacateIf you decide to sell the property unoccupied and/or do works prior to going on the market, this process

Continued on page 3

8 The Crescent, Annandale sold after just 10 days on market in a healthy sign of continued strength in the real estate market.

SOLD

The Law and LandlordsSelling an investment property is a time where the pain of carrying the property is

rewarded with profits from the sale. In theory, selling an investment property is a simple decision to make. On a practical level, it quickly becomes tricky managing the lease period, the selling campaign and the legal rights of the tenants.

If landlords and/or their selling agents are unaware of how the NSW Tenancy Act applies to the respective situation, problems can quickly occur. These problems can be costly and cause valuable profits to slip through the landlord’s fingers.

In too many instances, landlords learn about their obligations to the tenants after they have listed the property for sale. This is often too late as plans are set in motion. The law around landlord/tenant relationship was updated in recent years but the changes still catch many by surprise.

Things to consider as a landlordIf you intend on selling your investment property and don’t inform the tenant at the time of the lease being signed, the tenant has the right to break the lease. As a landlord, selling an unintentionally vacant investment property can become costly. If the tenant exercises their right to leave during the campaign, the landlord can quickly drop 6 to 12 weeks rent over the course of the campaign and settlement period. If the property does not sell, the landlord then has

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Disclaimer Notice: Neither Peter O’Malley, Harris Partners Real Estate, nor the publishers and editors of articles in this issue, accept any form of liability, be it contractual, tortious or otherwise, for the contents of this newsletter or for any consequences arising from its use or any reliance placed upon it. All the information contained in this publication has been provided to us by various parties. We do not accept any responsibility to any person for its accuracy and do no more than pass it on. All interested parties should make and rely upon their own en-quires in order to determine whether or not this information is in fact accurate. Any matter in the nature of advice contained herein is general and should not be relied upon for specific purposes and individuals should seek, and rely on, their own advice from professional advisors at all times. Unless stated as such any opinion is not the opinion of Peter O’Malley, Harris Partners Real Estate, nor the publishers or editors.

Suburb Snapshot: LeichhardtSource: APM 2000 2006 2013

Average House Price $401,728 $632,496 $958,699

Average Unit/Strata Price $346,182 $423,292 $671,507

Sold by Auction 64 50 94

Sold by Private Treaty 273 342 193

Highest House Price $980,000 $1,280,000 $1,990,000

Highest Unit/Strata Price $750,000 $1,100,000 $1,255,000

EDITOR’S LETTERDear Readers,

Welcome to the January edition of the Real Estate Report. Our feature article this month takes a look at landlord’s obligations to the tenants when selling an investment property. It is an awkward process to manage the sales campaign and keep within the guidelines at the same time. Many landlords only learn how the law effects them once they are on the market, which can be too late. Putting a plan in place before going to market will remove half the angst.

On page 4, we examine how to avoid being an Auction Bunny. An Auction Bunny is the trusting naïve buyer who falls for the agent’s guide price and ends up maxing out at the auction before the price even reaches the seller’s reserve. It is a horrible trap that many a buyer has fallen for. Learn how to play such a situation.

All the best,

Peter O’Malley

Market Preview for 2014

After a stellar year in 2013, many people are keenly awaiting the start of the 2014 property market. The

big question is whether the gains of 2013 will be improved upon or whether prices will simply hold at current levels. There is only a low expectation that prices will fall.

There were some conflicting signals late in 2013 as the auction clearance rate pulled back a bit and signs of buyer resistance to vendor’s asking prices began to emerge. Overall though, prices in Sydney were up 12 to 14% for the year and even higher in the Inner West.

Interest rates and employment will be the key determining factors for the market in 2014. While interest rates and unemployment both remain low, the real estate market should perform relatively well. It is fair to expect that the first quarter will see a great deal of activity as limited supply over the Christmas/holiday season causes pent-up demand.

However, demand from local investors is likely to cool off as prices have risen and rents have dropped in pockets of Sydney. Any pullback from investors probably won’t show up until the second quarter as owner-occupiers absorb the early New Year stock.

If the Australian Dollar (AUD) continues to fall or even remains as low as it is now, it will assist the real estate market in 2014. Expats and Chinese buyers are the two major groups of potential buyers likely to be inspired to act by a low AUD. In 2013, the AUD peaked

at 0.6952 against the GBP and finished the year around 0.54. A whopping 22.5% drop. Similarly the AUD dropped 16% against the USD and 17% against the Chinese Renminbi. Such falls in the AUD make quality Australian real estate that much more affordable to expats and overseas investors. Developers in particular will benefit from a lower AUD, as overseas investors are encouraged to buy brand new dwellings by the Foreign Investment Review Board.

Affordable yet conveniently located properties with easy access to transport, infrastructure and the CBD will perform well as Sydney continues to struggle with traffic problems.

Prestige real estate (over $2 million) had a good year in 2013, but still underperformed compared with the broader market. If the share market performs well in 2014, this will flow across to the prestige end of the property market. More and more in recent times there has been a link between share market performance and prestige real estate.

A rising interest rate and/or rising unemployment pose the greatest risk to the market in 2014. In 2013, the Sydney real estate market rose as the broader economy deteriorated. This is unlikely to happen two years in a row as the Reserve Bank of Australia (RBA) will not be able to cut interest rates by the same degree. Ultimately, the performance of the real estate market will mirror the economy in 2014.

In summary, prices should hold and may even rise modestly for vendors whilst buyers will struggle to find bargains. The big upward shift in prices has probably already happened. There is no obvious catalyst for continued aggressive price growth in 2014.

this strategy as well. And there are a few pitfalls for the naïve landlord.

Firstly, the tenant’s lease cannot be broken without their consent. Therefore, if you sign a lengthy lease on your investment property, the tenants are allowed to vacate inside the lease period (with some penalties) whereas the owner cannot terminate the lease, provided the tenants live within the requirements of the lease. This applies even if/when the property is sold. The major consideration for a landlord that is selling with a lengthy lease over the property is that they may inadvertently rule out buyers who plan to occupy the home. A narrower market can result in a lower price.

Secondly, the tenants are entitled to 14 days notice of the property being listed prior to any inspections taking place.

Thirdly, if the property is sold with an expired lease in the contract, but the contract of sale between vendor and purchaser states the property is being sold ‘subject to existing tenancies’, then the new owner inherits the existing tenant. This is fine if the property has been sold to an investor.

The contract of saleMany mistakenly believe that the tenant can be given 30 days notice to vacate even if the contract states ‘subject to existing tenancies’. In reality, the tenant is entitled to the full 90 days exit period on an expired lease, if the contracts are exchanged on a subject to tenancy basis.

needs to be carefully managed.

The notice to vacate requirements catch many by surprise. It’s important for landlords to fully understand their rights and requirements well in advance of making major decisions around selling timing, tradespeople etc.

To ensure a vacant property on the lease expiration, the landlord must give 30 days notice to the tenants in advance of the expiration. In turn, the tenants must give the landlord 14 days notice if they wish to vacate the property upon expiration of the lease.

On an expired lease, the landlord must provide the tenants with 90 days notice if they would like the tenant to vacate. The tenants in turn, can provide the landlord 14 days notice at any time in that 90 day notice period.

The timing of when the property falls vacant is beyond the landlord’s control. Practically, this creates a nightmare scenario if the landlord and agent are aiming to book trades in such as painters, gardeners, carpet layers, handymen etc. The timing is too fluid and can result in the property standing vacant for a month as tradespeople juggle their availability.

It is for this reason that landlords should always be aware of when the lease expires on their investment property. If they don’t, the law as it stands in terms of expired leases equals uncertainty for landlords.

Selling with tenantsMany landlords who decide to sell, choose to sell with the tenants in place in order to avoid losing valuable income. There are many benefits to

At the point of contract exchange, it’s imperative the selling agent, managing agent and solicitors are all on the same page as to whether the property will be occupied or vacant on settlement. The contracts need to be marked accordingly. Previous verbal instructions and undertakings won’t wash on settlement day if there are discrepancies. Only the exchanged contract matters in any dispute resolution.

If the landlord is selling a tenanted property to a buyer who wishes to move into the property on settlement, the contract must be marked ‘vacant possession’.

Confusing? You bet.

The importance of being so particular on this issue is because no one wants a situation on settlement day where the tenants are rightfully entitled to be in the property for another six weeks or so and the buyer thinks they are moving in. It’s awkward to say the least.

Correctly planning the sale of an investment property takes time. It’s best to be aware of all the moving pieces before making any firm decisions. There are many other factors at play when selling an investment property, that are best discussed with your agent.

Maintaining a great relationship with your tenants is one of the easiest ways to ensure a smooth transaction when selling the investment property.

Continued from page 1 Know your rights when selling the investment

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Auction bunnies are home-buyers duped into bidding at auctions when they have

no chance of being a successful buyer. The auction bunny reaches their maximum price at the auction before the price even hits the seller’s reserve.

Not only do these poor bunnies often get their hearts broken, they also lose thousands of dollars in ‘due diligence’ expenses – such as building reports, pest reports, strata reports and legal expenses.

Here’s what happens: An auction bunny asks the auction agent, “How much will this property sell for?” The agent gives the standard bunny-trap reply – they quote a price around 10 to 15% below the seller’s reserve price. For example, if the sellers want a million dollars, the auction agent will say, “We’re expecting bidding to start from around $850,000.”

If the auction bunny pushes the agent, saying something like, “Are you sure? Do you really think it will sell for such a low price?” the agent will say something like, “The sellers are keen and will meet the market on the day. The market sets the price.”

It beggars belief that business is done this way. It’s heartbreaking to witness someone go through the bunny process. It’s downright infuriating.

Auction BunnyReading the play when buying at auction

AUCTION

The more you inspect, research and follow the sales results in your chosen area, the more knowledge you acquire. And knowledge really is power. If your opinion of value is higher than the agent’s quote, you have probably stumbled on a bait price. At least you know before you waste thousands of dollars on reports, checks and searches.

Ask other agents for their thoughts. These agents will have a fair idea of true value. Many times, other agents will tell you the truth about their competitor’s properties - they’ve got nothing to lose or gain. Be careful, though, some agents will run down any property that is not with their office, however this is an easy tactic to detect and you’ll rarely be fooled by it.

Attend other auctions. Ensure you understand the bluff and bullying tactics commonly used at auctions. Don’t be frightened. Decide what the property is worth (to you) and stay calm at the auction, or find a friend or relative who can bid on your behalf.

You can also make an offer before the auction. By law, all agents must pass on all offers to all owners.

Follow these simple yet powerful points and you’ll rarely be an auction bunny. Good luck!

8 The Crescent, Annandale ............. $ - Confidential

19/52a Nelson St, Annandale ...............$739,950

88 Elliott St, Balmain ...................... $ - Confidential

29 Gladstone St, Lilyfield ................ $ - Confidential

1/4 Bungay St, Leichhardt .....................$930,000

91 Trafalgar St, Annandale ....................$945,000

2/75 Glassop St, Balmain .....................$390,000

12 Albion St, Annandale ................ $ - Confidential

7/9-11 Hathern St, Leichhardt ................$699,000

2/47 Piper St, Lilyfield ...........................$882,500

6 Rosa St, Croydon ............................$1,210,000

24 Charles St, Petersham ................ $ - Confidential

An auction bunny is the naïve buyer who reaches their maximum price before the auction even hits the

seller’s reserve price.

But, welcome to the auction system as practiced by thousands of agents.

Protection PointsAs a genuine buyer, you must do your best to protect yourself against the bunny tactic rather than having to complain about it later. When it comes to misleading prices quoted by agents, believe nothing and check everything. The agents are right on one point – the market will ultimately set the price. If you are lured to an auction by what seems like a low price quote, be assured, you won’t be the only buyer looking for a bargain.

You and the other hopeful bidders have been hooked by ‘bait pricing’.