After viewing 1781 Rewi Street three weeks ago now we immediately put an offer to purchase the property. It had been on the market for three months already, and perhaps was slightly overpriced to begin with at $415,000. The rateable value was $390,000 (August 2019).
It was a standard 1950’s three bedroom house, on a cross lease section. The house was a good size with a tidy yard, single garage, but was in need of a cosmetic renovation. It looked tired, dated and in need of a fresh look despite having great potential.
Our offer was accepted at $375,300. We reached this figure by working backwards from an expected market value of $420,000 at the end of the renovation, less $30,000 renovation costs and $5k of holding costs (rates, interest, legals on purchase etc). This allowed a small increase in value once purchased.
Our plan after the renovation was to rent the property for $440 per week, making it cash flow positive. Unfortunately, it wasn’t to be…
After meeting all other pre-purchase conditions, we got the meth report back and it had a reading of 58! The standard NZ level required is 1.5 or up to 15 in some rentals. This was more than having meth smoked in the house, it was clearly a meth lab where they had manufactured it. Warning bells went off, but also potential opportunity.
After careful consideration, we went back to the agent asking for a reduced purchase price of $250,000. This was subject to further testing to try to determine the extent of the problem (and still having a get out of jail free card).
The purchase price allowed for a $100k renovation (full interior refit), $10k of holding costs, plus a generous contingent allowance or $60k for the time and effort required. $250k + $170k = $420k end of project valuation. The contingent allowance factored in that the house was potentially always going to be a ‘meth house’, and if anything went wrong (meth in the framing), or other time delays etc.
While the vendor didn’t accept our updated offer of $250k (she has decided to do the renovation herself), it was an interesting process to go through, think about, and consider risk vs reward on these types of projects.
Learnings and things, I’d do differently
Difficult to think about on this experience. It was almost too good to be true and it would have made an amazing first rental property if it didn’t have the meth. Some ideas that pop to mind:
Look for properties that have been on the market for 2 + months already and find out why they haven’t sold. In this situation the asking price was $415k, and no offers in two months. This led to our offer being seriously considered and ultimately accepted (albeit $40k under the asking price).
Having pre-approval finance is important. We delayed the meth test report until the finance was approved. If we didn’t need to wait for finance approval, we would have found out earlier and not been down the track so far.
Removing emotion. We were so close to having a deal. Then, it’s almost like it was taken at the last minute; like a punch to the stomach. I’ve read before that often its harder emotionally to lose something, or once you have something, you value that more than what it cost you; all of these psychological effects play a role.
Reflections
This would have been Frances first time buying a house and she was contributing most of the cash (long term savings) towards the purchase price. I can understand having some uncertainty over the situation and it being quite a risky first venture into property. While walking away now, it has removed some tension if things had turned out bad.
Perhaps we should have tried to create a win/win situation with the vendor rather than rush to a new purchase price. For example, we do the renovation and then sell and split the profits above a certain price. I’m not sure on this, but we didn’t really consider many other options except cancel the contract, or go back with a lower offer that covered enough reward for the risk of buying a meth lab.
Onwards and upwards. Have one viewing already in the calendar for next week.