Advice Appreciated

[raskolnikov]

I have a friend who owns a small business. His business is ratshit at the moment and he is in major debt. He has an investment property which he has had for sale for a couple of years but it is just not selling at the moment. He is desperate to sell it to pay off some debt. A month ago he asked me to buy it. He said it was worth about 450,000 but would give it to me for 410,000. As I was kind of interested in an investment property and that sounded like a good deal I said I would.

I went to the bank and applied for the loan. The bank did the valuation and it came back at only 370,000. My friend was upset by this. However, he still wanted me to buy the property for 410,000 as I had agreed. I didn't want to pay this. Properties in our area are going down after a dramatic boom in prices. So I could be up to 70,000 or 80,000 in arrears. I told him the bank would not lend me more than the valuation. Today he came back to me and told me I could buy it for 370,000. But then he said something about having a 10% share in the property. I think if I buy this property sooner or later we are headed for a confrontation. I think if I tell him I am no longer interested in buying the property it could sever the friendship. So not sure what to do. Advice appreciated.

 

[J_Moore]

If he's expecting his mate to be responsible for bailing out his business, then he's not much of a mate.

No friendship is worth owning a house you don't want.

 

[JuddsABlue]

Yeah I'd just be withdrawing the offer because its getting too muddy and you cant reach a solution

If it something he's willing to start end the friendship over then hes not really much of a friend

Are you actually interested in the property at 370k?

 

[checkraiseulite]

you're prob getting an ok deal at 370 given historically bank valuations are fractionally lower than true market value.

think of this as an awkward lesson to not say yes to things without thinking them through. don't under any circumstances buy it and let him keep 10% or some shit where you continue to mix finances. buy 100% of it for a price u like or don't buy it at all.

though this bloke strikes me as the sort of mate that will sell it to you for $370 and when the market recovers and the place is now worth $450k, say "thanks for doing me the favour mate, let me have it back for 370".

 

[Scotland]

Abort! Abort!

If you can get the property outright for market value and you want it, do it.

If you have to give him a 10% stake paying full market value or pay more than it's worth then it's a poor investment on your part.

 

[raskolnikov]

Yeah I'd just be withdrawing the offer because its getting too muddy and you cant reach a solution

If it something he's willing to start end the friendship over then hes not really much of a friend

Are you actually interested in the property at 370k?

I wouldn't say I'm sold on the place but it would be a good investment as it would be positively geared by a few hundred each fortnight so I wouldn't be in the red. But I would be mainly doing it for my mate, who to this point in time has been a very good mate.

 

[Lyyynnnchy]

I wouldn't say I'm sold on the place but it would be a good investment as it would be positively geared by a few hundred each fortnight so I wouldn't be in the red. But I would be mainly doing it for my mate, who to this point in time has been a very good mate.

Get into $300k+ debt for a mate on a property you clearly havent done any research on? Walk away. I wouldnt consider buying a property without spending hours researching on it.

When you say it's positively geared is that after adding water rates, council rates, allowing for 2 to 4 weeks vaccancy per year, property management fees, landlords insurance, plus other expenses needed to take into account for it to be properly "positively geared" or are you just basing it on, rents $500 a week and repayments are $480. Let me tell you now, a property like that is still largely negatively geared.

You should be looking at comparable sales, comparable rentals, capital gains history for the last 50 years, public transport, future public transport, if there's any gentrification projects going on in the future, if there's any major projects planend for the area in the near future, unemployment levels, income levels, average age of residents, zoning plans.
+
Could you handle the repayments if the interest rates go up 10%, could you handle the repayments if you lost your job, if house prices come down 20% would you be able to make a lump sum payment if requested to by the bank to lower your leverage

All this plus more needs to be considered when thinking about purchasing an investment property

 

[Visions]

You found out the reason why the house was not selling in all those years it was on the market, the price was too high.

As for buying it, being an investment property means its a business decision and you do what's right for you. Will it make you money in future years through rental return and capital gain? Can you improve its value through renovation work? Need to answer those questions yourself by researching before diving into it as that's the whole purpose of investing.

Decisions shouldn't be made because you are helping your friend as you could end up in his position if things go awry. And do not under any circumstances allow your friend to retain any share of the property if you do buy. That's just asking for trouble, especially if he can't get out of his debt.

 

[Yellow Feathers]

Firstly, you should define exactly what you consider an investment property to be.

Are you buying it to sell for a higher price sometime down the track? Investing for captial gains can be very risky. The value of a property is subjective and as you have seen first hand, your friend's $450k property was in reality closer to $370.

Are you planning to live in the property?

Are you going to have it negitavely or positively geared?

Personally, I only consider positively-geared property to be a real investment. Perhaps take a short-term loss but the ultimate goal should be to have cash flowing into your pocket.

You could try renovating the house, or just simply hope that prices go up, and "flip" the property at a higher price, but that's another concept all together. There's also Capital Gains tax associated with that.

My advice? Avoid buying this house... Do you really want to be 370k in debt just to help a friend out? I'm not saying it's a bad investment, but there are so many good investments out there that you shouldn't feel forced to buy this one.