How to piss off the seller of your new home

In a front page article in todays NZ Herald was the story of Joanne & Nick, a couple wanting to move from the big city to a small town for their family. Joanne & Nick listed their property and their real estate agent found an investor who purchased the property to rent initially but with the intention of subdivision as it is a large property that can be subdivided. The property sold to the investor above the asking price, a happy event for most but in this case when the couple went to sign papers to settle they found out from their lawyer that the property had already been on-sold and the new owner had made an extra $81K out of the deal. The lawyer found out as the buyers lawyer accidentally sent a fax regarding it to the wrong legal firm.

This on top of the new owner advertising the property for rent online before settlement and took a group of people over to the house with Joanne & Nicks real estate agent. This made Joanne & Nick not very happy at all to say the least, after all they stated that the additional money would have seen them mortgage free.

Where this seems quite unscrupulous I must play the devils advocate here as quite honestly Joanne & Nick didn’t have anyone willing to pay the additional $81K and the investor claims to have purchased the property as his own investment, not a flipper.

Now here is something new, the investor has a history of flipping properties for big profits, he apparently flipped 1 property multiple times and made a $1-million profit on it. I must ask, do we believe that the investor purchased it to rent and not as a flipper? Not entirely, it sounds to me that the investor would prefer to flip the house for a quick buck but he hedged his bets and put it on the market for rent just incase the flip didn’t happen. But should this matter? Does this actually make a difference? I don’t think so as Joanne & Nick still sold their house for the most money they could get and that was over the asking price.

So was the deal fair? To answer this we need to first do some maths and then assess based on our own values if it was fair.

First we will work out what Joanne & Nick probably made on their house, they purchased the house for $410K in 2011, 5 years later in 2016 they sold it for $819K making them a minimum profit of $409K, but that doesn’t count the equity that they had in the house so, lets assume for a minute that they started with the biggest possible mortgage at the time on a property of this value, around $274K in mortgage, taking into account the best interest rate I could find in 2011 being 6.15% p.a., the equity in the house at the lower end should be about $133K so the couple in fact made a minimum profit of around $542K in total, this is just under $109K per year they owned the house.

Next, the investor purchased the house for $819K and then around a month or so later sold it for $900K making him $81K in around 1 month.

The truth is however that the amount of money made by each of these parties shouldn’t matter at all, it is the conduct surrounding the deal, effectively selling the house before you own it. Advertising the house for rent before you own it.

So if this was my planet how would I address this type of situation? Think about it, I don’t want to penalise investors who have the contacts and ability to do such a deal but, I also don’t want to encourage people to do shady real estate transactions that could hurt others, so these would be my rules on my planet:

  1. Flipping is all good but if you sell more than 1 house in a given 12 month period you need to be registered as a flipper (inspiration from the motor vehicle industry)
    1. Failing to be registered as a flipper will see your profits being taxed at 80%
  2. Flippers pay tax of 40% on their profits
  3. Houses cannot be on-sold within 30 days of settlement
  4. Flippers can get a maximum mortgage of:
    1. 1 house per year: 70% of the properties value
    2. 2 houses per year: 50% of the properties value
    3. 3 or 4 houses per year: 30% of the properties value
    4. more than 4 houses per year: no mortgages are available

Basically these rules will simply slow down flippers, make sure that the new buyers purchasing from the flipper have sufficient time to check the market; it is limiting the financial options a flipper can get to purchase a property and putting the limits on a sliding scale; making sure that flippers are aware of the law and if they violate it they will get a financial penalty in the transaction making it not worth evading the flipper registration.

Overall there would be less flippers and more owner occupiers/landlords in the market keeping stock available at a more reasonable price that what it is available at now.

At the end of the day I think what Joanne & Nick got was fair, would I be unhappy if I were them? Probably but I couldn’t get that offer so what I am complaining about? Next time I will use a better real estate agent.

Related posts