38 - Surprise! Unexpected Changes

I find the vast majority of mainstream real estate reporting in the media is either all or nothing: the market is going gangbusters or it’s the next worst thing since the Great Depression and all hope is lost (I’ve given up paying any attention to the news…). There’s no middle ground. Similarly, the property spruikers only share the positives and conveniently overlook the details when they do cite a one-off example of something gone wrong.

Although many of the posts on this blog have been relatively upbeat—in line with our experience to date, I strongly believe in reality, facts, and the accurate, fair reporting of our experience. On that note, today’s post is a recounting of what is likely to be the largest single “upset” (not to dramatize) so far along our property investing journey.

Earlier this month we had three tenants in the Brisbane property and over six months remaining of a 12-month lease; then, suddenly, we had one tenant plus an “unknown” (or rather, the girlfriend of the remaining original tenant) and a pet request for a middle-aged, large-breed dog. On Friday morning last week, a water leak in the metre box was also reported.

How quickly things change from a seemingly stable position to near chaos. Fortunately, the exemplary property management team at West Property is handling all of this for us but I won’t deny I’ve found it remarkable that tenants can simply walk away from a contractual agreement they’re legally obliged to uphold. If nothing else, this doesn’t make for a good lease reference for them and they may end up have to cover re-letting fees for us.

I’m not sure why two of the three roommates have left but I believe they were together as a couple and I assume they either now aren’t or have decided they needed more privacy. I suspected there may be some instability when we took on the trio (we very much expected to end up with a family—mum, dad, two kids, and a dog) but they were the first application after a few weeks of home opens and they were happy to pay the advertised weekly rent. I thought one of them might leave eventually but wasn’t expecting any changes in the first year. In my mind, you sign a lease for twelve months, go to the hassle of moving, and then you stay put for a few years—call me simple and old fashioned.

We were notified by the property manager the pair have now moved out and requested to be removed from the lease. We had the option of saying no to this request and they would be obliged to continue paying their share of the rent—regardless of whether they’re actually living there. Practically, that option may be difficult to enforce.

In their place, the girlfriend of the remaining tenant had moved in, I’m told, but she had neither applied nor was she approved by us to live at the property. The wording in the lease document is quite specific to this point and clearly notes no one else can live in the house without prior agreement by the landlord.

If this new couple are keen to stay on, can afford the rent, and seem to be acceptable, then we’re all for that. Ideally that means no break in rental income. Plus there’s less wear and tear on the house for them to move out and be replaced with new tenants. But who is this mystery woman? Does she have an income? Does she have any prior rental referrals (or a criminal history)? Does she smoke? If she’s not paying her way, can her partner afford the full rent on his income after paying only a third of the rent to date?

Technically, there are more questions to be answered if the girlfriend checks out. Do we amend the lease to include her or have the tenants sign a new, 12-month lease? Do we increase the rent now as part of the new lease or after six months via some kind of special conditions clause (which may be tricky to do in Queensland—I’m not sure)? If the couple opt for a 50/50 split, the original tenant will need to increase his bond contribution from 1/3rd to 50%—or 100% if he’s covering the lot.

The worst-case scenarios I can imagine are having the remaining tenant vacate (for whatever reason), leaving us with an empty house to re-let and the resulting loss of income, or—if he stays—having a gap in the rent payments from the departing couple while all of this is sorted out. If all else fails, we are still covered by the Open Corp rental guarantee but that does mean having to accept any tenants they pre-screen and put forward to us (which could be good or not so good). Without checking the finer points of our insurance policy, we may also be covered for loss of rent if the rental guarantee were not in place.

Here’s another good fact sheet if you’re interested: http://tenantsqld.org.au/wp-content/uploads/2009/12/You-Want-to-Leave-Nov-09-SD_NEW.pdf

On the dog front, I simply wasn’t mentally prepared to deal with this request so early into the original lease and the property manager has recommended we say no for now (which was a relief). Before today’s revelation, we had considered allowing the pet if the (original) tenants were willing to sign a new 12-month lease effective immediately—using this request as a trigger event to keep the tenants on for a longer period. That’s less of an issue now.

We also hadn’t yet decided whether there would have been a corresponding rent increase; we can’t increase the rent mid-lease in Queensland so even a token increase would likely be the way to go to a) ensure we achieve an increase within the 12-month period, b) condition the tenant that the rent will always increase at renewal time, and c) cover any issues related to the dog (i.e. damage) as we can’t charge a pet bond in Queensland.

Meanwhile, the water leak is still being investigated by the water company. At least it’s outside and I’m told it’s likely on the water company’s side or will otherwise fall to the builder to rectify.

A few weeks on, and after consulting with Open Corp and receiving a tenancy application from the girlfriend, we offered the couple a six-month lease to see how it works out. We also increased the rent by $5/week. The lease was accepted and signed and we shouldn’t have missed any rental payments (the outgoing tenants would have been required to continue paying their share of the original lease until it was terminated). It will be interesting to see if the relationship lasts and what bearing a breakup has on the remaining tenant’s affordability; it’s easy to say a married couple with kids would have been a more stable tenant option but who knows—with the frequency of divorce I’m not convinced marriage equates to tenant longevity.

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael

30 – Progress Update: Done!

And that’s the end of the beginning, so to speak.

Since land settlement in March (only six months ago), we’ve built a house and found tenants. The grunt work to secure financing happened before all of that, of course, so make it nine months all up if you exclude our dithering at the beginning of the process.

I spoke to our Client Liaison Manager at Open Corporations earlier this week—the final phone call to say “it’s all done”—and today we received a fitting gift from Open Corp in the form of the Monopoly game.

From here we transition into the various guarantee phases with Open Wealth (rental and maintenance) and start on the pathway to long-term property value appreciation. Hopefully the property will become positively geared one day in the near future (I’ll post a financial overview of our current situation in an upcoming post). The next few years will certainly be enlightening as I interpret the numbers come tax time and we do our best to ensure we’re keeping the ATO happy.

It’s impossible to accurately predict what the future holds for our family and our country and whether this will prove to have been a sound investment. Will negative gearing laws have been abolished and would that really affect us much anyway? Will more significant tax reforms have come into play? What will population statistics show? What will the employment landscape look like. Will China be at war with the West? Will the upwards trend in property values that started in the 70’s continue at the same pace or fall back? Will there be a shift towards a preference for apartments over houses?

Going on the history, it will have been a wise investment and become an asset but I’m not going to assume history will repeat because there’s no guarantee. For now, however, I think we’re on the right track and I’ll leave it to the goodwill of time to smooth out any short-term lumps and bumps. The hope, of course, is to one day retire—if not live—off the income from this and other (as yet to be acquired) properties.

Of course Brisbane hasn’t seen much in terms of significant growth for a little while now so it will be very interesting to see if we do get that initial growth as the property clock advances and the cycle peaks in the next few years.

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael

28 - To Inspect or Not to Inspect?

One of the inclusions of building an investment property with Open Wealth Corporation is a travel “allowance”, of sorts, funded from the development management fee paid at the beginning of the process. The question facing us now is whether we take advantage of those funds and see the property and the house for the first time with our own eyes.

Open Wealth offered us the opportunity to fly to Queensland from WA to inspect the area when we were considering a purchase and again at land settlement. With construction now complete, and no tenant in the house as yet, we recently received a final offer to have a look. In our case, we’ll be reimbursed $400 for costs to get to Brisbane and back, which is money that will otherwise go back to Open Wealth. As a return flight to Brisbane from Perth costs $538 at a minimum, we’ve been asking ourselves whether we spend the extra money and inspect the build or not.

Were it not for the money (and possibly the time), the question would be a silly one and the answer would be “of course! We’ve just built a new house so why wouldn’t we want to see it?!?”

The obvious response is to remain emotionally detached from what is a purely financial investment. We have no plans of ever living in Queensland or in this property and as long as it can be successfully rented to fund the cost of holding the true asset—the land—we shouldn’t care if the front door is pink or what the view out the front window looks like. We don’t actually need to see it in person.

The practical man inside of me, however, has a slightly different opinion on such things. Including our family home, this is the second house we’ve now had constructed by a project builder. From experience with our first build, we know some things will have been overlooked and some things will have been delivered to an unacceptably low standard. These defects, if not addressed during the builder’s warranty period, have the potential to translate into a significant cost to us in the future.

I’ve previously noted Open Wealth conduct a number of inspections throughout the build and the first and second practical completion inspections have already occurred. A small number of defects were logged and the builder addressed those defects promptly. The defect list seemed well-considered and detailed. To that end, my visit is likely redundant but for the $200 and a day out I’d rather be certain—I don’t have laser vision but it’s pretty close and I’m a stickler for details.

I’d also like to photograph the house inside out before tenants move in. Open Wealth will again be providing us with professional photographs of the completed house and the property manager will take dozens of photographs for the baseline property inspection report before the first tenant moves in. Like I said, stickler for details.

Beyond the basic house inspection, Open Wealth will supply me with a driver for the day and suggested I have a look around the local area. I’ve never been to Brisbane before and, if we opt to build again, having a better (albeit very quick) feel for the city and state will be helpful. I’ll also be meeting the builder’s site manager and one of the property managers from Century 21 and it will be great to have that personal contact.

As we’ve got two young kids at home it’s going to be a quick one: fly over in the morning and fly home that night. I’m hopeful it will be worthwhile.

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael

20 - The saga of a sliding door, seven years later

This post doesn’t really belong on this blog but I wanted to share my experience dealing with a builder’s defect more than seven years out from practical completion, particularly as we’ll soon have our first investment property build complete and under warranty. I’ve written in the past about pushing your lenders and insurers; this post is about pushing your builder and their suppliers.

As regular readers of this blog will know, we built our family home through 2006-2008. The house was constructed by one of the project builders here in WA, Don Russell Homes. The house is a two-storey double brick and tile construction, typical of many homes built in Western Australia to modern standards. The block on which we built was originally sloping so we retained and filled with sand prior to the builder compacting and commencing construction. We took up residence in mid-2008.

One notable feature—and the subject of this post—is the double sliding door at the rear of the house which opens on to our back garden. The door opening is 3500mm wide and is filled by two fixed panes at either end and the two doors in the middle which slide open over each fixed pane. A galvanised steel lintel spans the window opening and the door frame is powder-coated aluminium. The windows throughout our house were manufactured by Jason Windows.

During our practical completion inspection near the end of the build, I flagged to our site manager a problem with the sliding action of one of the doors. This was noted on the PCI report and I subsequently listed it in my communications with the builder. Essentially one of the doors would catch and stick as it travelled along the track.

The builder’s initial solution to this problem was to lubricate the door track. This worked as a temporary solution (long enough for the fix-it man to make his get away!) but was not a lasting solution for an unsheltered external door which catches the weather coming from the Western coast. The external garden was also still a sandpit at this stage and of course sand and lube don’t mix very well. It was apparent to me there was either a problem with the door wheels, the frame, or the track and it was the responsibility of the builder to address.

In addition to our PCI report we listed a large number of issues (forty, actually) on our 16-week “liability issues” report, which we submitted a few months after move-in day. A number of these were major issues which required the builder’s attention and watered down some of the lesser issues like a sticky door. Other than lube, there was also no quick fix for this problem by the builder’s trusty fix-it man and it should have been referred back to the window company. It eventually fell off the radar as Don Russell’s maintenance division became less and less communicative and as time wore on.

Over the next few years the problem got worse and I assumed the door wheels were clogged with or damaged by the sand and needed to be replaced. After I tried to change the wheels myself in 2010 without success (the doors, including the fixed panels, need to be completely removed to change the wheels, my wife arranged for a window maintenance firm to come out. Jason Windows do not offer a maintenance service.

The maintenance firm suggested, to our surprise, the wheels were fine but the door would need to be cut down to better fit the opening. The gap was so minimal, the metal of door frame itself was riding directly on the track. We never received a quote for the work and the issue once again slipped off the radar as life marched forward for us. I telephoned a sliding door repair company from the Yellow Pages at one point and it was suggested this is a common problem with the lintel having sagged but, again, the fellow was reluctant to come out to inspect and quote.

In retrospect, I should have flagged this as a warranty issue to Jason Windows while the door was still under warranty but the path for resolution under warranty of a supplier’s product when you’ve previously dealt exclusively with the builder is not well defined. It’s also not terribly obvious (to me) if windows form part of the structure and are therefore covered by structural warranties—it’s likely they do not.

In recent years the door became virtually unusable. Both doors now stuck as they “slid” open or closed and on a hot day would take a proper shove to move.

I finally contacted the Sliding Door Doctor and a window manufacturing company. The Sliding Door Doctor quoted $600 to repair the door whereas the window company quoted around $6,000 to replace the doors. Both groups reiterated the “sagged lintel” idea, based on the measurements from top to bottom across the door opening (see the opening image above). The Door Doctor also pointed out the top locking plate was missing—likely removed when the door was installed as the door wouldn’t have fit with it in place!

As there are no other signs of a sagged lintel (cracks to the brickwork) I concluded the lintel was likely bent when it was installed or the door opening measurements were incorrectly supplied to the window company/the door was built too large by the manufacturer.

At this point, after picking my jaw up off the floor (I expected a replacement door set to cost around $2,000-3,000) I decided enough was enough and attempted afresh to contact the service department at Don Russell. My emails and calls were ignored for weeks if not months and I finally went in to the builder’s office in person to ask to see the Service Manager. He wasn’t in and I asked to see his superior… who also “wasn’t in”.

The receptionist must have sensed my frustration and as I noted down contact details for the Service Manager’s manager (the Construction Manager), I was offered details for the Operations Manager. Only by writing to this individual did I finally receive a response from Don Russell.

In my letter to the Operations Manager I complained about the lack of response I’d received from the Service department and included the log of my failed contact attempts. I included my measurements (illustrated above) and photographs showing the sagged lintel. I made a video of me opening the door to demonstrate the severity of the problem—which I posted on YouTube (as a semi-private video). I included a copy of the original PCI report and the 16-week liability issues report.

And I demanded the issue be addressed at the builder’s expense.

After another brief delay, the Operations Manager replied to tell me the Service Manager would be in touch, which I took as a good sign. The Don Russell Service Manager and the Jason Windows Service Manager eventually came out to the house together to inspect the problem. During this appointment the builder’s Service Manager vehemently declared the lintel not to be sagged. The Jason Windows representative was simply aghast at the idea we’d lived with this problem for such a long time. The issue of cost did come up before I suggested it would be dealt with between the two companies and it was not mentioned again.

After another few months of manufacturing delays, the original door stiles were replaced to lock to each other (instead of using a lock rod system), the track was properly secured to the lintel, the door frames were filed down slightly, and the wheels were replaced. The doors now slide much better than they ever have before and, while not perfect, are functional.

Yes it was embarrassing and annoying to have to chase the builder on this matter after such a lengthy time period. This is time lost I could have spent on other more prosperous activities if the builder had done their job properly in the first place. Thankfully both Don Russell and Jason Windows were sympathetic to the situation and did the right thing by their mutual customer.

As a last resort I could have raised this problem with our house insurance company but we have a high excess and I’d prefer not to have that black mark on our insurance file for something that wasn’t, originally, our fault.

At the end of the day, I felt I had a case to be heard and was finally able to get my point across to someone with the authority to see the problem resolved. I’m thankful to both companies for addressing this problem and, more than anything, glad to see the end of it!

I suppose a disclaimer is also worth posting: I'm just a guy, I'm not an accountant, lawyer, solicitor, tax agent, mortgage broker, banker, financial adviser, insurance agent, land developer, builder, government agent, or anything else so I disclaim your application of anything I write here is to be applied at your own risk. What I write may be incorrect and you are best to seek your own professional advice (tax, legal, financial, and otherwise) before entering into contracts or spending your money. Your situation is unique to you and what I write here reflects my experience only. This content is not professional advice and is not tailored to your situation. I'm learning too and expect to make many, many mistakes along the way.

Enjoy,

Michael