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Pre-purchase checks you should never forget about

Monday, December 04, 2017

It is largely accepted that buying a rental is different to buying a home.  Investors buy on projected yield and growth making purchasing a rental a somewhat mechanical process (if you repeat it often enough).  But what if you are buying a rental and an existing tenancy?  Should you broaden your due diligence and look at anything other than the numbers?  Take a look at the recent Tribunal order, Chamberlain, Timothy Joel vs Property Brokers Limited Wanganui - Agent for Tony and Simon Alatett (NZ) Ltdand the answer should be a resounding Hell yeah!

Background

Mr. Chamberlain rented a Whanganui property from Tony and Simon Alatett (NZ) Ltd.  During the course of the tenancy, the property was sold to Ms. Jaiayamma Vitta though the management company remained the same.  Mr. Chamberlain brought an application against the original landlords for improper maintenance of the property and was awarded $2,935.86 in compensation and exemplary damages.  

The Tribunal ordered that Ms. Jaiayamma Vitta be joined as a party to Mr. Chamberlain's application seeing that at the time of the order, she had become the legal owner of the property.  

The Tribunal gave leave for Mr. Chamberlain to amend his application and adjourned the hearing until October which brings us to the published order itself.  

Outcomes

Adjudicator Lyon made the following order:

  • That Ms. Vitta to complete various specified work or suffer immediate rent offsets/reduction
  • That Ms. Vitta pay $1,420.57 to Mr. Chamberlain made up of $1,000 in exemplary damage and $420,57 as rent compensation to address the reduction of tenancy quality due to the disrepair

The adjudicator's reasoning for compensation, exemplary damage, and work orders are straightforward enough.  Of interest to this commentary is the joining of Ms. Vitta as a party to the application and the order being made against her specifically.  Without impugning Ms. Vitta's conduct and intention (as we have no knowledge of her nor the tenancy outside of what is described in the order itself), the case teases out some of the often overlooked pre-purchase checks by property investors.  

The take-home 

This case reminds us all that buying an investment property that is already being used as a rental with an existing tenancy is slightly more complicated than buying an empty investment property.  All of a sudden you are not just dealing with the numbers and asking yourself whether you can meet your new financial obligations.  Buying an existing rental with an existing tenancy can be potentially problematic if you do not at least make some additional inquiries.  

We suggest checking the following: 

  1. At the very least, ask for a copy of the tenancy agreement and any variations; 
  2. Other paperwork such as rent summary and inspection reports to support the on-going validity of the tenancy; 
  3. Details of any past, current, pending Tenancy Tribunal application instigated by either party; 
  4. Whether the property itself is compliant with current RTA standards (if not, what would be the cost for you to bring it up to standard?); and
  5. Rent increase protocol followed so far by the landlord or the property manager. 
It should go without saying, the safest bet is to buy the property on vacant possession, meet the current tenants before settlement and invite them to apply for a tenancy with you once you become the owner of the property.  That way, you will know for certain you are getting the best tenant on merit rather than a hand-me-down tenant from a landlord you have very little information on.  

Have you ever bought a rental with an existing tenancy?  Comment below if you have any tips to share with other investors.

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