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'Do' Diligence: Pitfalls to watch out for when investing in real estate

11/10/2014

 
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The real work begins AFTER you find the real estate property you want to invest in - because disclosure laws have important loopholes.  Since real estate agent only gets paid commission when transaction closes, they are incentivized to close the deal at all costs - even at client's expense.

Massive oversight. You’ve just bought a residence right next door to soon-to-be constructed 20,000-seater stadium. So how on earth did you and your lawyer miss this?  Well, sadly, because there’s no obligation for this sort of info to be disclosed in buying process.

In UK, searches don’t have to reveal any information on nearby properties or planned private developments at all.  Only pertain only to generic public work such as road or urban renewal, or commercial centre developments. Unless you know to ask seller or estate agent specifically about private developments, they’re not obliged to offer info at all. 

Until recently, estate agents were not obliged to disclose information about any external factors that may affect property being marketed, such as train lines, flood plains or flight paths. At least, not unless they were specifically asked about such matters.  This changed in 2014 with repeal of Property Misdescriptions Act, which shifted industry to oversight of Consumer Protection from Unfair Trading Act in October 2013. From now on agents obliged to provide all price-sensitive info they have on property to prospective buyers.

Unfortunately, there’s still blurry line on what constitutes price-sensitive information. Typically understood to mean factors that materially alter residential experience.   

Every real estate agent would happily publicise a respected author, politician or playwright once having lived in property they are marketing. It makes sense because there’s value to be exploited. But what about the opposite?  Grey area is discovering property’s murky or spooky history.  Has a murder taken place in the property?  Were previous owners running brothel or drug lab on premises?   What if previous owners convinced house was haunted?  Unfortunately, no clear system to help prospective buyer acquire this info.

Real estate agent’s best strategy would be to obscure this info or market property to foreign buyer unfamiliar with local concerns.

If it's too good to be true, it is.  Better to lose a good deal, then win a bad one.  Caveat emptor, especially when no one has your best interests in mind because they are incentivzed against it.

Source: http://www.ft.com/intl/cms/s/2/08ea7f5a-601a-11e4-98e6-00144feabdc0.html#axzz3IddbN0g4 


CKB Solutions is all about real solutions for the real world.  To learn how we can help your business, contact Greg Kovacic in Hong Kong.


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    Author

    Greg Kovacic is a Director with CKB Solutions in Hong Kong. He advises senior executives and entrepreneurs on strategy, corporate finance, operations and marketing with a focus on crafting real solutions for the real world.  
    You can contact Greg at: greg@ckbsolutions.com

    View my profile on LinkedIn

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