# Question on buying a Mortgagee In Possession unit



## sails (27 May 2009)

We are looking at purchasing a unit in quite a large complex where there are a number of units being offered for sale.

It looks like the developer has gone under.  The management rights have not been sold, and appears to be no one looking after the place.  From the surface, it appears the body corporate has absolutely no funds as they have been soaked up by the receivers.

I realise this may be a bit out of the scope of a stock forum - but thought I would ask the question should anyone be able to offer some useful suggestions.  We have never done this before and, I imagine, this is rather more complex than a normal mortgagee in possession house sale.  

It's one thing to get something cheap, but not if there are hidden, large liabilities.  BrisC comes to mind... 

Just wondering if anyone knows any pitfalls to watch out for or any suggestions in general. Could there any potential hidden liabilities?


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## skyQuake (27 May 2009)

Best advice would be to do this through a solicitor, check carefully the title search for any encumberments .. In in NSW, the curtain principle should help you.
If you're buying through an agent, ask why they're selling it for so cheap.

Also look out for potential levies or charges.

Good Luck


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## sails (27 May 2009)

Thanks for the response, SkyQuake.  

Yes, treading very carefully, asking lots of questions, re fees, future commitments, etc.  Of course, wouldn't proceed without solicitor, just thought it would be interesting to hear from anyone that might have had some experience in this area.


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## awg (27 May 2009)

you need a solicitor that has experience with a matter like this.

They often are very aware of cheap local sales, as they conveyance them 

some things that come to mind.

Is all work complete?


do the unit/building have all the relevant completion and occupation certificates?

believe me, this can be complicated, as you can buy and sell without them, but theres lots of gotchas.

Also, Strata Title laws are very strict, and there needs to be body corporate, with sinking funds etc

As a final tip, I would be very careful about building quality, especially the big things that cant be changed. (engineering)

If any alarm bells go off, back away.

avail yourself of all the problems and dont make an offer until you are sure that it is  lowball  

you can also use a consultant, or get a friend to scope out low prices 

bargains should be around

the right solicitor is the key to the best price, if you can find the one, IMO


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## Sir Osisofliver (27 May 2009)

Sails you probably won't like what I am about to say as I will make you question your investment choice.

I've been known to dabble in property a bit, and what you have just described is one of the reasons why I stay away from units. Yes I know that many investors have made good money from units (My RE and Buyers agent keep trying to convince me of this), but that damn Body Corporate and connected liability really grates my cheese.

Body corporate increases over time - which cuts into the yield of the property, so it's generally longer until you hit positive gearing, or you need to make a larger reserve to cover any cashflow shortfalls you may experience. Sure the unit may be cheaper than a residential house...but there is a reason for that.

Me I stay away from units.  Burned and now shy.

Cheers

Sir O


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## Happy (27 May 2009)

Sir Osisofliver said:


> Sails you probably won't like what I am about to say as I will make you question your investment choice.
> 
> I've been known to dabble in property a bit, and what you have just described is one of the reasons why I stay away from units. Yes I know that many investors have made good money from units (My RE and Buyers agent keep trying to convince me of this), but that damn Body Corporate and connected liability really grates my cheese.
> 
> ...




Exactly, especially that what you say is that there is no Body Corporate yet, nobody lives there yet, nobody owns anything there yet.

By law at some stage Body Corporate must be up and running, not sure exactly when.

But builder or developer, whoever owns the place, should insure empty complex. Usually transitional period is bit of the mess, but during boom times sooner rather than later all units pick up their owners and authorities look the other way before everything is sorted out.

Body Corporate = very high administrative costs (milking cow for professional B Corp managers) and if there are not many owners who is going to pay cash for the lot, if builder goes under?
Some money can be recovered from fire sale, but it can be messy and cost build up quickly and it can be messy all right.


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## sails (28 May 2009)

Thanks for the replies, guys!

It's not for investment as we have a sale contract on our home.  Initially we were planning to rent until we found something suitable, but then this came up and got us thinking.

Some of the units have already been sold prior to the developer going broke and there is already a body corporate committee in place.  There is a small percentage that haven't been completed on the inside, but I don't think they are available for sale.  The ones currently for sale have been completed, and in fact, some have been previously tenanted (vacated now).

We have owned strata titled units before and have also done a couple of short stints in management rights, so have some general knowledge in that department.  Enough to know we need to be careful and would have to get it at a low price.

Certainly taking on board the suggestions of getting top quality legal advice as well as plenty of due dilligence as well.  AWG - you raise some good points which we will follow up - thanks.

Not jumping into this lightly and appreciate the imput.


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## awg (28 May 2009)

check if anyone has control of the body corp..ie the bank

water and drainage are my paranoid items.

If there is even the slightest doubt on them, find somewhere else

parking rights!

are any neighbours ar$es?

I sold several units in a development that I was involved with about 6 years ago.

there was problems with water getting into the roof 

i paid for my units to get fixed, out of my own pocket.

I then sold them all, without the final occupation cert.

years later, both the water and the final occ certs are STILL causing probs 
( not for me, I sold for a good profit, at the top of the market)


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## adobee (28 May 2009)

I am assuming that this is a brand new complex of apartments ????
NSW or QLD ? Complete or Not ? Size of complex - walk up or lifts 10 or100 units ?

no1. Get the a copy of the contract. The front page will clearly show who is the owner .. ?  Ie if it is a mortgagee in posession it will show that there is a morgagee in posession (ANZ ATF Joe Blow Investments) .. Even if its a company it will show which bank is excersiing their rights..

no.2 Find out if the project is finished and if there are occupation certificates
(If not find out from the bank when this will be happening as you couldnt settle to then)

no. 2.1 Is the builder broke or still around and are they licenced, well known (ie built by grocon / multiplex or built by dodgy brothers)

no.3 Find out if there is a current paid building insurance policy and if the bank or anyone else will be implementing a quatity surveyor or builder etc to undertake a defects inspection. (You should be able to get a reasonable idea of the quality of the build from walking around somewhat, do this finishes look okay, is there render falling off the walls, is there water pooled on the balconies, do doors and windows shut flush.) If there is no insurance forget about it all together.. If there is insurance you need to either get onto the bank about a defects inspection for the whole complex (common areas, fire inspections / dampers included) or else the body corporate when it is formed.  We also need to find out if the developer is the one bankrupt and the builder is seperate (if so this is not so bad) who is the builder.

no.4 If you are looking at a large complex with lifts check out who installed the lifts, if they have been paid and what the warranty on them is (lifts are very expensive), are the lifts on a service contract and what does this involve, what are the costs. (Some times there are contracts for maintainance signed a huge costs and low install fees, sometimes they company doesnt exist and nobody else can work on the technology)

no.5 If management rights etc have not been sold this is not bad.. My understanding is that they contracts can be ratiffied till the first agm anyway..  The first AGM is done when a certain percentage of the units are sold. This gives you an opportunity to get involved, if possible dont agree and either a have the management handled by the bodycorporate appointing a caretaker (say one made or two - size of contract on $60k a year) reporting directly to strata managers and fireable if not doing job etc.. Forget about a ten year plus ten year contract. etc etc..


If there is alot for sale make a low ball offer and see what they say..

Get a solicitor who knows what he is talking about rather than a fool who will just tell you all is okay or who will look at it all and be scared and say no no..


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## Julia (28 May 2009)

Sails, are you committed to living in a unit, rather than a stand alone residence?

I have friends who live in units and - as the others have said - they have had huge problems with body corporate or getting other unit owners to agree about necessary work etc.

In one instance (in Canada) the building began to subside two years ago.
No one could agree on what should be done.  Multiple engineers' reports were obtained, at considerable fees.  Many meetings were held.  No one could agree.  Consequently the problem is now twice as bad and none of the owners are likely to even be able to sell their units, such is the state of the place.

It's still stalemate.

If you own your own land and don't have to share anything with any other owner/tenant, you don't have any of these problems.

Even a simple duplex with minimal land (if it's a garden you want to avoid) would offer uncomplicated situation compared to unit block.


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## sails (31 May 2009)

adobee said:


> I am assuming that this is a brand new complex of apartments ????
> NSW or QLD ? Complete or Not ? Size of complex - walk up or lifts 10 or100 units ?




Almost brand new.  Some of the units have already been sold in the last few months and some of the unsold ones were tenanted.  There are some unfinished, but we are not looking at those - they would really be out of our abilities!

In QLD.  Most are four storey.  One lift to about every eight units (I think) which is a worry as lifts can cause ongoing expense.  130+ units in the complex.



> no1. Get the a copy of the contract. The front page will clearly show who is the owner .. ?  Ie if it is a mortgagee in posession it will show that there is a morgagee in posession (ANZ ATF Joe Blow Investments) .. Even if its a company it will show which bank is excersiing their rights..




Yes, on a couple of contracts we have seen, the sellers are financial institutions.



> no.2 Find out if the project is finished and if there are occupation certificates
> (If not find out from the bank when this will be happening as you couldnt settle to then)




They have already been occupied with tenants - so am I correct in assuming that couldn't happen unless occupation certificates have been completed?



> no. 2.1 Is the builder broke or still around and are they licenced, well known (ie built by grocon / multiplex or built by dodgy brothers)



I think the builder has gone broke.  Well known developer up here.



> no.3 Find out if there is a current paid building insurance policy and if the bank or anyone else will be implementing a quatity surveyor or builder etc to undertake a defects inspection. (You should be able to get a reasonable idea of the quality of the build from walking around somewhat, do this finishes look okay, is there render falling off the walls, is there water pooled on the balconies, do doors and windows shut flush.) If there is no insurance forget about it all together.. If there is insurance you need to either get onto the bank about a defects inspection for the whole complex (common areas, fire inspections / dampers included) or else the body corporate when it is formed.  We also need to find out if the developer is the one bankrupt and the builder is seperate (if so this is not so bad) who is the builder.




Will find out more about building insurance.  Apart from some dampness in the underground carpark walls (following extreme wet - note the floods up here a couple of weeks ago!) nothing else was obvious.  Agree with you that if no building insurance, then no offer.



> no.4 If you are looking at a large complex with lifts check out who installed the lifts, if they have been paid and what the warranty on them is (lifts are very expensive), are the lifts on a service contract and what does this involve, what are the costs. (Some times there are contracts for maintainance signed a huge costs and low install fees, sometimes they company doesnt exist and nobody else can work on the technology)




Yes, looking into this.  One of the REs had an auction on Saturday and we met up with an investor with building experience.  He was factoring in expense on the lifts.  We feel this is a negative with so few owners to share the cost of each lift.



> no.5 If management rights etc have not been sold this is not bad.. My understanding is that they contracts can be ratiffied till the first agm anyway..  The first AGM is done when a certain percentage of the units are sold. This gives you an opportunity to get involved, if possible dont agree and either a have the management handled by the bodycorporate appointing a caretaker (say one made or two - size of contract on $60k a year) reporting directly to strata managers and fireable if not doing job etc.. Forget about a ten year plus ten year contract. etc etc..




Management rights haven't been sold.  So that does leave options for the body corporate to decide on the best action.




> If there is alot for sale make a low ball offer and see what they say..
> 
> Get a solicitor who knows what he is talking about rather than a fool who will just tell you all is okay or who will look at it all and be scared and say no no..




There are issues with the place, so low ball offer would be the only way to go.  If low enough, it would compensate for potential future expenses.  We would be asking a solicitor to pick it to bits - we are unemotional about it and a solicitor would not feel they had to "please" us.

Thanks Adobee, your input is much appreciated


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## sails (31 May 2009)

Julia said:


> Sails, are you committed to living in a unit, rather than a stand alone residence?
> 
> I have friends who live in units and - as the others have said - they have had huge problems with body corporate or getting other unit owners to agree about necessary work etc.
> 
> ...




Julia, that is terrible for your friends.  I do hope something gets resolved for them soon.

We always do a thorough search on body corporate documents prior to buying into a complex to ensure there are no major difficulties such as the one you describe.  There will always be a bit of nit picking going on, so it's the major problems we look for.  Although, if a problem hadn't surfaced prior to purchase, it would be possible to still be caught with something.


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## ROE (31 May 2009)

Sir Osisofliver said:


> Sails you probably won't like what I am about to say as I will make you question your investment choice.
> 
> I've been known to dabble in property a bit, and what you have just described is one of the reasons why I stay away from units. Yes I know that many investors have made good money from units (My RE and Buyers agent keep trying to convince me of this), but that damn Body Corporate and connected liability really grates my cheese.
> 
> ...




Second that free holding forever 
body corporate can suck you dry and there is not much avenue to challenge the charge.
plus land appreciate and building depreciate and you have lot more freedom with a piece of land


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## awg (31 May 2009)

sails said:


> Almost brand new.  Some of the units have already been sold in the last few months and some of the unsold ones were tenanted.  There are some unfinished, but we are not looking at those - they would really be out of our abilities!
> 
> In QLD.  Most are four storey.  One lift to about every eight units (I think) which is a worry as lifts can cause ongoing expense.  130+ units in the complex.
> 
> ...




anything can be sold, no occupation cert neccesary !!

usually banks will not allow you to take a mortgage tho

but sometimes they will

also, people occupy without cer all the time

waiting for "interim cert" etc...be wary

see my earlier post, I sold 3 with "interim cert"

council later changed the regs, and would not give final cert without major work

If majority control of the Body Corporate is attained by a individual or group acting in concert, you are at their almost complete discretion.

Check very very carefully re Sinking fund

I personally would not do strata title again, I'd rather live in a shack

check to make sure you wont be able to hear your noisy neighbours.

the only way to do this is to have someone go into the above and adjacent units and bang, thump, talk.

did you say the Gold Coast

their will be a million bargains up there soon


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## Julia (31 May 2009)

sails said:


> We always do a thorough search on body corporate documents prior to buying into a complex to ensure there are no major difficulties such as the one you describe.  There will always be a bit of nit picking going on, so it's the major problems we look for.  Although, if a problem hadn't surfaced prior to purchase, it would be possible to still be caught with something.



Sails, taking the Canadian example, nothing in any body corporate documents could have predicted the massive subsidence that has occurred. 

Then the various owners couldn't agree about whether to have a 'fire sale' to a developer, and then for them to just walk away with whatever they could get, or to get repairs done, this necessitating almost complete rebuilding of the whole complex because of replacement of foundations.  Cost is mind blowing.

Many of the owners, my friend included, don't have the funds to pay for the repairs, i.e. their whole worth is in the property.   No one will lend them money for such a project.   Most of them will hope to sell for a fraction of what they paid, leave repairs to new owners, and have to rent in future.

So what happens in a situation such as the one you're considering if a problem occurs and the residents can't agree on a solution?  Majority decision?  Then what happens if some people can't pay (or won't)?

What happens in the probably common and simple matter of various residents failing to pay their body corporate fees?

I can understand the sense of security in living in an apartment building, but I've been in several where the noise from next door has been, um, just too much information!

Sorry, don't want to be raining on your parade, but all I can think about is the potential disadvantage.  Obviously just my bias for free standing, independent living.


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## sails (7 June 2009)

Julia, that would be pretty hard for your Canadian friends with really no way out of it.  Could it be there was no building insurance?   

The 20 or so original buyers in the building we were considering would also be pretty upset as they paid full price before the developer went under.  We understand they paid in the vicinity of $800k - $1m+ and they now face all the uncertainties and costs ahead as well as paying much more than those buying at present from the mortgagees.  

Anyway, we have decided not to proceed - seems to be too many potential problems down the track with this one.  If purchased at a low enough price, there would be a buffer, but there seems to be quite a few first home buyers and other retirees who want these units which is invariably pushing prices up to more than we were willing to pay.

Thanks again to everyone for the replies.


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## Julia (7 June 2009)

sails said:


> Julia, that would be pretty hard for your Canadian friends with really no way out of it.  Could it be there was no building insurance?



I think the building is about 40 years old so doubt that building insurance would apply.  Besides, there was a recent item on the 7.30 Report here about the worthlessness of so called building insurance.   Only in extreme circumstances is it applicable.  Quite an eye opener and very disappointing.



> Anyway, we have decided not to proceed - seems to be too many potential problems down the track with this one.  If purchased at a low enough price, there would be a buffer, but there seems to be quite a few first home buyers and other retirees who want these units which is invariably pushing prices up to more than we were willing to pay.
> 
> Thanks again to everyone for the replies.




Probably a good decision, Sails.  It just sounded like a situation with too many potential unknowns.


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## sails (9 June 2009)

Julia said:


> I think the building is about 40 years old so doubt that building insurance would apply.  Besides, there was a recent item on the 7.30 Report here about the worthlessness of so called building insurance.   Only in extreme circumstances is it applicable.  Quite an eye opener and very disappointing..




Julia, agree that building insurance may not apply due to the age of the building.  And very likely the body corporate hasn't planned ahead for major expense when calculating the B/C fees.  

Do you happen to have a link for the 7.30 report you mentioned?  I have had a look and tried a few differing searches on the 7.30 site, but can't locate it.  I would be most interested to listen to it if the link can be found...


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