Overseas Real Estate Blog

Part 3 of Legal Due Diligence...

Top Tip No. 8: Maintenance Contract

If you are buying a property where there are common areas in the building or grounds then you will usually need to see a maintenance contract. This is an important part of the due diligence because quality maintenance enhances your resale value. Neglect can have a negative impact on rental and capital appreciation.

Check for the maintenance fee and what it includes and what it is for and when it must be paid. Specify when payment should start, for example building completion or opening of the facilities? Look out for VAT and future price rises. Are these specified? Are they index linked? Typically maintenance is expressed as an amount or as an amount per m2. Check whether a fund is being established for major repairs or if this will be extra. Check how often external woodwork will be primed/re stained.

Top Tip No. 9: Rental Guarantees

If there is a contractual guarantee you need to check these terms carefully. Check the exact amount is correct as you may have a percentage. How much own use are you allowed and which weeks are you not allowed to use. Check also when monies are actually paid and whether they are net or gross of maintenance charges.

Check who is actually giving the guarantee. Typically the developer but it could be their or another property management company. What is the risk this will be not honoured?

There are times when you are best not taking an offered rental guarantee because local rentals are very strong and you can negotiate a guarantee and/or rental management agreement with a specialist organisation. Some owners in Dubai recently have found they are betting doing this because the rental market is so strong there.

Top Tip No. 10: Listen to your lawyer (but its you who should direct)

Try to become involved in a discussion with your lawyer. Often terms need clarifying and make sure he does this. Sometimes lawyers can aggravate disagreements. Consider carefully which points are really worth arguing over and which are being highlighted for more "point scoring" purposes. Focus on the key points that can make a real difference.

BONUS TIPS: There are many more due diligence tips. If you have found these useful then please subscribe for more free advice on www.jet2letproperty.com . Please specify on registration page that wish to receive weekly overseas property buying tips. NOTE: Your details are confidential and can never be passed to third parties.

I thought that might get your attention...

Today I start the debate with my views on whether agents are trying to do the best for their clients. Many do for sure, but some I think just don't have a clue.

I was prompted to comment on the question of "Do real estate agents have a clue?" after it I spoke to a "first time overseas" husband and wife investor team had taken at face value all the information they had been given by an agent. The problem was that they were originally enquiring about a single property but instead were told that they stand to make more in a property scheme termed as a "property investment fund".

Where's the detail?

Whilst a slick brochure seemed to answer their every conceivable question, and pointed out some of the risks involved, it was clear to me that they had no real understanding of the true risks involved. More than this, a property investment fund was not what they were after. It then transpired that the agent had simply followed a well rehearsed presentation which sounded respectable and seemed affordable. Those "developer profits" seemed like a good idea and she was ready to sign.

Luckily, the couple realised just in time that they should seek alternative advice and asked a friend who suggested to stick to their guns and buy a property outright. In hindsight, she admitted that she was close to investing in something that was a long way from what she really wanted - which was a nice place on the beach with sea view and was hot from October to May. She and her husband plan to retire there in the winter. They have just got back from a weeks trip having had a good trip prepared and well equipped. They went understanding the areas to focus on so they felt happy to reserve. As a bonus, they paid less for their property than they thought was possible -just £51,450 in Hurghada Egypt.

I was recently exploring a new development site and was staggered to discover a project that looked great in theory but had a huge shortfall in due diligence work. I was told that the due diligence pack was complete and the other agent was happy. Clueless agent you think - well it is not uncommon for agents to ask precious few questions before taking properties on. Fine for a simple resale in Reigate perhaps but I have learnt that emerging markets require a savvy approach to help avoid poor decisions.


Integrity Pays

Your agent often fails you when they fail to be forceful about the facts of buying a particular property in a particular market. Take this recent example: a client came to us after trying to buy land and rural house in Bulgaria. There are huge risks to deals here known by those, like me who have done this. The agent failed the buyer by not explaining all the many risks and explain the way the deal should really be done. Why? They don't want to tell a buyer what they would rather not want want to hear.

Here I feel that some agents fail themselves as well as their client, because their client will quickly get disillusioned when issues, such as last minute price rises, complex ownership, unclear permissions, road access, utility supply and other complexities emerge that lose the deal. Deal lost, and agent gets no commission. More stories welcome...