Home' API Magazine : September 2014 Contents 68
API SEPTEMBER 2014
SEPTEMBER 2014 API
Partner of MBA Lawyers at the Gold Coast and the author
of the ‘Made Simple’ series of publications available from
If you’re in the property investment game for the long haul
then you need to view life more like a game, rather than a high
This neutrality doesn’t add or subtract from the panorama of life
as a property investor, but it allows you to view the journey from
the ground. So, with this view in mind, I want to share again with
you some real life examples and issues that have come across my
desk as a property solicitor where the rubber hits the road.
¿ BUILDING CONTRACTS
Do you sign a fixed price contract or cost plus? When it comes
to pricing and building contracts, a starting point is to decide
whether to have a fixed price contract or cost plus contract.
For my money I’ve always been more of a fan of a cost plus
contract. I’ve never been driven by the joy of driving the builder
down to the bottom line and then locking the deal into a fixed
price contract with him. I’ve never needed to get the very last
dollar out of my fellow man.
Instead, I prefer to pay a fair price for quality work in the
knowledge that my builder won’t be looking for a way to
cut corners and purge his regrets at signing up too cheaply.
Remember there will be always be variations to building
contracts and this is where a disgruntled builder can ramp
the price up to recover some of his losses under his too
The way I usually look at it is that if the owner pays for the cost
of all materials, trades, supplies etc. as they’re invoiced and then
pays the builder a percentage on top of that, this is fair to all.
If there are any unexpected blowouts, such as the builder
encounters rock, requiring a stronger and more expensive
slab, this is just another genuine cost. Under a fixed price
arrangement, the builder would have to absorb this extra and
I believe that would be unfair to him.
With serious renovations, a cost plus contract is probably the
best way to go anyway as you often don’t know what you’ll
encounter once the reno gets under way. But with a cost plus
contract you should understand there’s a lot of trust on your part
with the builder. I mean, how do you really know if the invoices
that he delivers to you are genuine?
You might make it a requirement of the contract that he gets
three quotes for every job, but then there are quotes and there
are ‘quotes’. People in the building industry all have mates and
in return for giving a mate a high second or third quote, so the
builder’s preferred supplier or tradesman gets the job, the favour
will be returned later when your builder’s mate calls your builder
next time to give a second or ‘loaded’ quote.
And how would you know, as the owner, that the plumber, say,
has just lost a job and they have a free two-week break in their
calendar over the next month? They need to fill it and whereas
they would normally have charged $50,000 for this job, for you
they’re prepared now to do it for $40,000 as their people are just
sitting around. You’re trusting your builder to take advantage of
that opportunity and save you the $10,000 , but they may decide
to keep that as a favour for themselves on another job and tell the
plumber to submit the invoice for $50,000.
You can, of course, ask the builder at the start to give you a
schedule of anticipated costs for each trade and supplier etc. to
try and keep him honest but at the end of this is just a ‘belts and
braces’ approach. You can also engage a quantity surveyor to
check this schedule to ensure proper and reasonable amounts are
allowed for each of the trades and suppliers etc. to minimise the
risk, but this doesn’t guarantee transparency on the costings.
So, you can now see the trust issue, can’t you? That’s why, on
balance, with most building contracts, unless you have this high
level of trust between you and the builder, in my opinion it’s
preferable to use a fixed price contract.
And if there’s a genuine unexpected blow out, there’s nothing
stopping you paying the builder a bonus of say an extra $20,000
to cover these genuine unexpected costs. If you think this is the
right thing to do.
¿ SOME MORE TIPS FOR NEGOTIATION
Never underestimate the importance of the real estate agent
in a transaction. The parties to the sale usually often assume
they’re the most important person in the transaction e.g . the
investor believes they’re the only real buyer for the property and
so deserve a special deal, and the seller who owns the property
that people are queuing up to inspect when it’s first listed on a
Saturday morning also feels very special. They’re both wrong.
Usually it’s the real estate agent that’s the most powerful person
in the transaction. Think about it.
They’re the only one who can make contact with the buyer
and the seller, their financier, valuer or solicitor. Neither of the
parties nor their solicitors have such open and complete access
to everybody in the transaction.
So, never attempt to ‘back door’ the agent by going direct to
the seller as this will only encourage them to promote someone
else’s offer rather than your contract to say the least. This can
have a particularly nasty outcome if they have control of the
property under a sole or exclusive agency agreement. Your offer
may never see the light of day.
But don’t fall into the trap of believing they’re your friends
either. The reality is they’re in business for themselves, like
most people in sales. Understand too they’ll always be better
negotiators than you, so be alert.
Listen to what the agent tells you and don’t volunteer things as
it could eventually be used against you. You might pride yourself
on being the best researcher of property in your investor club
and you’re a whiz at finding your way around RP Data and other
internet tools, but you’re dealing with someone who does this
24/7, and for a living, so they’ll be ‘match-fit’ . T hey’ll be playing
their shots off the net. You, however, will be struggling to return
serve from the baseline. And how do you bridge that difference?
Education is the key. Become a student of negotiation. API
Life as a property investor
LEGAL HELP DESK // ROB BALANDA
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