Beware of money pits
No- one wants to buy a money pit. Yet it happens and it can be costly financially and psychologically. Even those who intentionally buy a home that requires work usually need to double their budget for the work, says property lawyer Nick Kearney, of Schnauer and Co.
Lemons come in various flavours. The home may be leaky even though the vendors swear it’s not. It could be built on unstable land. There could be flooding issues. Works may not have been consented.
Lawyers, accountants, mortgage brokers, and building inspectors all manage to save some of their clients from the clutches of lemons. Sadly, some slip through the net.
One of the problems when it comes to buying money pits is that buyers often fool themselves into thinking it will be a cheap fix. This often happens when the human tendency towards confirmation bias takes over. This is where the buyer has come to a conclusion about the property and creates a narrative with the “facts” to justify the conclusion.
More than a few stories of such lemons grace the complaints database of the Real Estate Agents Authority. One buyer complained after buying a property where the stairs leading to a deck were unconsented.
The agent told the buyer verbally at an open home that the stairs weren’t consented. But the Real Estate Agents Authority said he should have flagged this in emails to the buyer.
Had the buyer’s attention been drawn in writing to the problem his lawyer could have sought a warranty from the vendor over the unconsented works.
Kearney has stopped more than one buyer taking on a leaky home. Even at land value alone, a leaky home isn’t always a good financial prospect.
“It’s not until you get in behind the cladding that you know how big the problem is,” Kearney says. Vendors aren’t always keen on buyers carrying out invasive testing, which is the only real way to put a proper estimate on remediation costs.
Leaking showers and baths can also be money pits, says Kearney. So can bad piping in the home, which may burst, and isn’t covered by most home insurance policies.
Records of unconsented works are often held in files if the council is aware of the problem. As a result buyers and/ or their lawyers should view as well the council file as the Land Information Memorandum ( LIM).
Some councils, Kearney says, include almost all the information on the council file in a LIM. Others provide relatively slim LIMs that don’t include vital information for buyers. Kearney has seen six- page LIMs from the ThamesCoromandel District Council and 200- page documents from the Far North District council.
It’s essential to get pre- purchase building reports when buying any secondhand property.
A good inspector can spot rotting beams, rusting roofs, old wiring and the multitude of other problems.
It’s a really sound idea to ensure the inspector has good qualifications because almost anyone can hang up his or her shingle and start offering pre- purchase building inspection reports.
It’s something that concerns the Royal Institution of Chartered Surveyors ( RICS). The organisation argues that clients of less qualified inspectors could be given bad or even negligent advice.
It’s a really good idea for buyers to make sure the inspection report covers leaks. It may be worth going one step further for homes built or renovated from 1994 to 2005 and getting leak testing done.
Another money pit for buyers, says Kearney is leasehold properties. Buyers are often not aware of how much the ground rent may rise by following an introductory period.
In the case of some buildings in Auckland, that has been five or 10 times in one go. Buyers need to read and understand the review clause of their lease.