“I was too weak to defend, so I attacked!” General Robert E. Lee talking about the battle of Chancellorsville.
It was early February 2009. I had signed a contract to purchase a house in Chinchilla, Queensland. I’d been working with Brian from the Cameron Bird Company. He was very helpful and I enjoyed working with him. But, the deal wasn’t stacking up. It was falling apart before my eyes.
For $324,000 I could get a brand new 3 bedroom house on 861 square meters of land. Already rented to the Origin (gas company) corporation for $530 a week. Overall the deal looked like a “no-brainer.” The only catch for me was “where’s Chinchilla.”
I did the research and it seemed alright. Good place to invest. No worries there. But, my main concern – as always – does the deal stack up right now. And, it did. At least at the beginning.
The first “chink in the armor” was the finance. The bank valuation came back lower than the purchase price. I had a contract to pay $324,000 for the house. The bank said it was only worth $310,000! Why was the valuation coming in lower? Am I paying too much for this property? Not a good sign.
Next, the bank came back and said they would only lend 70% instead of the normal 80%. Apparently, for the bank, Chinchilla is a higher risk area. If the bank thinks it’s risky should I as well? Does the bank know something I don’t know? I received another warning sign.
Finally, I contacted the property management team and found out more bad news; show-stopping news. The company renting the property – Origin – was not renewing their lease. The lease ended in April. I then asked about the prospects of getting another lease – with a solid corporate tenant – at $530 or more per week. The answer was not encouraging. “The market is soft right now … We’re not sure if we can lease it again at that price.”
I called my solicitor in Brisbane and explained the situation. He advised I could pull out of the deal simply based on the finance clause. Finance is not acceptable. Essentially, the bank valuation came in low therefore finance is not acceptable to me. I made a decision. Call off the deal. He would inform the other solicitor of my decision.
Here’s the email I sent canceling the contract.
Wednesday, 18 February, 2009, 7:05 PM
Hello Jamie,
Just got off the phone with Brian (Cameron Bird) and notified him deal does not work. Pease terminate 33 Sheridan St, Chinchilla contract based on unsuitable finance.
1) Lend 70% instead of normal 80% due to remote location.
2) Bank valuation came in at $310k; selling price is $324k
3) Origin energy has given notice they will not renew lease. Vacating on 22 Apr 09.
4) Very soft rental market in Chinchilla right now (Terry at Chinchilla 1st National Real Estate)
If you have any questions, let me know.
Regards,
Dave
But, the deal breaker for me wasn’t the finance. It was the lease. Without the lease and without a good prospect for leasing it again at the $530 per week figure, I lost interest fast.
I could handle the bank valuation coming in low. The bank – like the casino – doesn’t like to take any risks. According to the banks, Chinchilla is a rural and remote location. They consider it a riskier location. With the Global Financial Crisis (GFC) hitting Australia, it was becoming common for bank valuations to come in low for these rural areas. Anyway, that’s the feedback I was getting.
But, if I had a solid one year lease to a reputable company at $530 per week, I’d have gone through with the deal. But, the lease was shaky and the prospects were even shakier.
That was the first time I ever stopped a signed residential contract from proceeding. I felt very awkward doing it. But, it seemed like the right thing to do. My awkward feeling comes from the fear of finding out one day that rents and house prices in Chinchilla are skyrocketing. But, I believe in looking at the deal as it stands right now; not speculating on what it’ll be someday. The deal wasn’t good enough right now.
So, I set out on a new search, but this time a little closer to home.
Story continues; Read Part 5