Monday, August 18, 2008

Tenants, Rental Arrears and Bond

Okay, it's time to get a bit more serious. No more frivolous posts about whacky solutions to common irritating housing problems (at least for now!)

It's easy to get caught up in the excitement of the actual purchase when you're buying your first investment property, but this is the time when you should be completely on your guard. If you're a first home buyer, it's also important to note things like this. I've made this mistake once, and so has a friend buying her investment - all within six months of each other!

If the property is tenanted, you need to be mindful of a few things:

1. Ask the agent if the tenant has their rent up to date. If they are hedgy about telling you, make it a condition of the contract that you find out before the purchase goes ahead. You have two ways to go with this: if the property is to be leased, you have good reason to request vacant possession. The tenants are not worth keeping if they won't pay their rent. It's also important in the case of the following...

2. Ensure that all paperwork relating to the tenancy is held by the agent, as well as a second set of keys. Again, if they are hedgy about it, make it a condition of the purchase contract that you see the lease, and get a copy of the incoming inspection report.

We made the mistake of not checking these things when we bought our first home. We naturally required vacant possession, but we didn't realise that they were in arrears on rent. What we also didn't realise was that their bond, all its related paperwork, and the inspection reports were all missing because they had taken out the lease with a previous, very dodgy agent who had done a runner with everything. We hadn't minded that the landlord waived the arrears rent in order to get them out early for us (our lease was up and we'd already given notice), but there was a catch:

With no paperwork to back us up, the tenants had left and not cleaned the house. There was rubbish hidden down the back of the garage and shed, and the carpets had not been vacuumed, let alone washed. It was a cleaning nightmare. In Australia, you're expected to wash down the walls as well, when you vacate. In this case it took me three buckets of water to clean the walls in each room... Of course, when we went back to the agent to discuss the bond, they couldn't do anything. This was the condition the house had been handed to them in (tenanted), and they had nothing to back them up or even to retrieve the bond.

3. Whether you are buying to live in a house, or buying to let it out, and the tenants are going, make it a condition of the contract that the bond comes to you for cleaning if the state of the house doesn't match the inspection report they came in on. This puts the onus on the landlord to make sure the house is clean, and effectively gives you a discount off the price that can save you the costs of cleaners, or even debris removal if the tenants have trashed the place.

This applies equally in the case of the tenants being in arrears on their rent. Under normal circumstances, their bond returns to the vendor if the tenants are in arrears. This leaves you with a gaping hole in your budget (especially if you're renovating before you re-let the property, or after you've spent your last pennies on the move and the paint to freshen the place up) when you have to spend a week cleaning, or paying $500 for a one-off full-house clean by professionals, or, indeed, hiring skips!

In the case of the friend's investment property (where I project managed the renovation), time was wasted and costs raised immensely because the tenants were both in arrears, and they trashed the place. We had to clean, hire skips, replace damaged doors (because they were annoyed at being evicted...but we could see before we bought that they were trouble and had to go.). The lot!

Avoid the trap, and check your facts.

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