What to do? Difficult situation/opportunity

I wasn't quite sure where to post this as it covers a few different topics.

We are in the process of formulating an investment strategy and planned to buy our first IP in the coming months. Although not finalised, the strategy we have been looking at is to buy, renovate, subdivide and sell off the vacant land to keep our LVR lower and help with ongoing servicing.

We currently live in a duplex half, and we're going to stay here for another 4-5 years and then purchase a new PPOR. The plan, if it works for our strategy at the time, is to turn this place into an IP, and then approach our neighbour and offer to purchase the other duplex half so we can develop the block in the future.

Sadly, our neighbour passed away over the weekend so we are now faced with the possibility that the property will be for sale sooner than expected. We have been in contact with her next of kin (not about this), and he has mentioned that he actually owns the property already so it won't need to go through probate. He is planning to try and rent it out for the time being while he decides what to do.

So, there's a lot going through my mind right now while we try to work out what we might want to do. Due to the circumstances of the death (suicide inside the property) the house will probably be difficult to either rent or sell, especially as the market is already suppressed here in Perth. As I see it, these are the pros and cons of offering to purchase the property now:

Pros
Likely that we can obtain property under value
We will own a developable block in a capital growth location
We will have control over both halves of the duplex

Cons
Doesn't fit in with our current strategy
We will inherit the problem of trying to rent the house/low rent
Low yield could potentially inhibit our borrowing capacity for the next few years

I'm trying to look at this logically but it is a very emotional situation. Does anyone have any advice, or any pros/cons that I've missed? Ideally I'd like to take more time to process everything and think about it later, but my major project at the moment is pinning down our strategy so we can start actively searching for properties. I have time to spend on this now so I don't want to waste it.

 

They still doing capital growth in Perth are they?

 

Get it while you can - you will be prepared to pay a premium in a few years time.

 

I think you should ignore the property next door, why would you want to make their problems yours? You should find the best investment property for you regardless of it's location (relative to you). It's a classic mistake to only look at your immediate neighborhood when considering an investment property. Decide whether you seek capital growth or income as your primary strategy, then seek the best property wherever it may be - to achieve this goal. Your empathy is commendable but a liability when it comes to deciding on an investment strategy.

 

Wow. I had a similar situation only a month ago! I'm in Darwin....similar dead market.

The two posters above have pretty much highlighted both sides of the argument. Both are right! Dammit!

Don't assume that the vendor will sell cheap. Often private sales are accompanied by lofty expectations.

So I'd get the price first (if they are selling)as that can make your decision a while lot easier!

 

what can you build on the two duplex halves? When would you look to do it?
Can you afford any renos and/or holding costs ?

 

Do you like your current location/size of block? If so, it might be an option to buy next door and hold it for a time. When you're ready to upgrade your PPOR, you knock 1 side down/or renovate while living in the other side. Then when you're ready, sell the other side, or renovate it, or whatever, without the hassle of getting other owner's approval to do anything... if you're going to go this way, talk about purchasing with new owner soon avoid RE agent fees etc.

Otherwise, maybe just stick to your original plan.

 

You don't HAVE to do anything... you're free to sit back and only pick investments that are COMPELLING to you.

If it's difficult to rent out as you say, the owner may be prepared to sell it for much less than market value. If you get a desperate vendor, you may be able to pick it up really cheaply.

 

Have you done a feaso on the property to see what you will potentially profit as well as engaging a surveyor to see what you can accomplish with the property? This would be the starting point before negotiating in a purchase price? The feaso will determine a max purchase price.

Eventually

Use the fact that there has been a death in the property when negotiating a purchase price and dont sound to keen to purchase as this can be used to inflate the price.

I dont think it is illegal to not disclose to a potential tenant about the history of the previous occupants, besides we have had a Renaissance a few centuries ago so superstition is dead (or should be) and ghosts dont actually exist.

 

We would have 911sqm zoned R30, which means three villas or townhouses by my calculations. I don't think we would want to develop until the Perth market starts to rise again. While we could technically afford the holding costs, I'd planned for our first property to have over 5% yield whereas this would have somewhere between 3.2%-4%.

We really like our current location and we would like to stay in the area if we decide to stay in Perth long term (about a 50/50 chance). The block as it is really too big for us, we would be perfectly happy on something smaller with less outdoor space to maintain. Knocking down the duplexes, building three villas or townhouses and keeping one for ourselves would be ideal.

That's the problem, the investment is compelling! I believe has good capital growth prospects in the medium-long term. But I'm worried the hit to our cashflow in the short term would hamstring us at the start of our acquisition phase.

 

Get a broker to run the numbers for you as a "future planning" excersize.

This is an acquisition. Weigh up what is profitable and let the numbers decide for you.

 

If you were going to offer to buy it in future, then why not buy it now?

If the unfortunate circumstances are a deal breaker, then don't, if not, then what is the issue?

 

I often find this is the case. Agent tries to rein in crazy expectations, vendor thinks they're a special, special snowflake and decides to sell privately.

 

Thats what all the spruikers said 12 months ago

 

I used to be a PM many years ago and if I remember correctly you don't need to disclose unless you are directly asked (can anyone confirm this)? But often neighbours talk and then you end up with a high tenant turnover.

In this case, I'm probably the only person on the street who knows the actual circumstances of the death. It would be easy to assume natural causes. So I guess I'm going to have a moral dilemma if someone asks me about it. :/

 

And a question regarding feasos; if you already own a property you are developing, do you use the purchase price or current market value in your calculations?

 

Yes - trying to determine the incremental value it will create- pasr cap gain doesnt make a businesss case- ypur dev then lose money but still show an overall paper profit, think abo ut it

 

If you believe in ghosts and are superstition then it may cause a "moral dilemma" and if not I cant see a problem unless the prospective tenants ask if anyone has died in the property.

I would use current market value to determine an actual profit % of the development or else it will be skewed if you are going of the original purchase price as there sounds like there is built in profit due to increase in value. It is still profit technically but not development profit if you catch my drift?

 

You said "we".....
So do you as a couple own the current unit ?
As you could sell it to your spouse, then you could buy the unit next door.
I would be inclined to buy next door if below MV, reno and move in (depending on how the previous tenant died, equates to level of reno).
Down the track, you could sell both to a developer and not suffer the headaches of developing it yourself