To sell or not to sell this leaky apartment with no sign

[hannah]

Hi all,

Here is a situation for a friend of mine. The apartment (2 double, 1 single bedroom, 70sqm on 2 floors) he bought became leaky and Bodycorp is pursuing litigation. Early estimate is $150000 to fix each apartment. I must say that there is no signs of leaky-ness as yet and only the top apartments are affected as other apartments are on concrete block. He currently holds $280000 mortgage at 8%. He wants to sell the apartment and my early estimate is that this apartment will probably go for at max $140000 and that too if it at all sells. There is a high likelihood that Bodycorp will be able to get some percentage of the money back from the developers as they are still in business. On a conservative scale I would think that my friend will be able to get say $75000.

Now something about this particular apartment. It’s situated very close to the Eden Park in Kingsland area. This is on the top floor and at the corner hence have 270 degree views. Probably the best apartment in the block. Yes I am thinking of Rugby World Cup.

So this is what I think. I think he should not sell it instead move out now to smaller rented place. Then rent out this apartment at $400/pw and top up the rest of the mortgage. Before Rugby World Cup, do internet marketing and rent it out during those 6 weeks at a higher rate. He should be able to rent a one bedroom place for himself at $250/pw in the meanwhile till the remedial work starts.

What do you experts think? I think this is such a nice apartment with sweeping views, he can comfortably live there after the remedial works done and can reap the benefit later on when the market turns, if at all he wants to sell it then. I think the key is that he should move out and rent this place so that it becomes an IP and then he can get the tax benefit as well. He is in the highest tax bracket.

Please critic my thought process. Any suggestion is welcomed.

[VIVAC]

Hi Hannah,

My opinion is that your friend should keep the apartment unless he is prepared to take a loss in the sale. If he had a smaller mortgage it may be worthwhile to sell.
When you add up the estimated cost of repair however once remedial plans are drawn up he may be able to get a post construction valuation which will help him borrow money against the house to be able to pay for the repair.
Keep in mind that (for example) - based on the above figures that the apartment will owe him $430K to break even once remedial work is complete. It's not a silly idea to rent the apartment out during the world cup however if the remedial work is in full swing the rent will probably have to be at a reasonable discount which may defeat the purpose of him moving out in the first place...I have to walk out the door now but I hope my opinions have given you more food for thought

[hannah]

Hi Hannah,

My opinion is that your friend should keep the apartment unless he is prepared to take a loss in the sale. If he had a smaller mortgage it may be worthwhile to sell.
When you add up the estimated cost of repair however once remedial plans are drawn up he may be able to get a post construction valuation which will help him borrow money against the house to be able to pay for the repair.
Keep in mind that (for example) - based on the above figures that the apartment will owe him $430K to break even once remedial work is complete. It's not a silly idea to rent the apartment out during the world cup however if the remedial work is in full swing the rent will probably have to be at a reasonable discount which may defeat the purpose of him moving out in the first place...I have to walk out the door now but I hope my opinions have given you more food for thought

Hey thanks a lot for your input..
Current mortgage is $280K which amount to roughly $450/pw mortgage payment. As this is still not an IP, he could not get any tax refund however when he moves out and rent, this can become IP and hence the tax refund for the shortfall. As mentioned earlier, this can be rented for $400/pw and I believe the shortfall of $50/pw can be partly compensated by tax refund.

Current work related to this block at the stage is exploratory. Well there is chance that remedial work will happen during Rugby World Cup. In that case I suppose he needs to bite the bullet.

If he sells it now, not only he will incur loss, he will also not be elligible if there is any future benefit related to the claims to the builder/constuction company. Obviously this will be going through the long court process. So my point is that he holds the appartment, if there is any money coming through from the builder/constuction company, he will get his share.

Anyone else got any other suggestions please.

[VIVAC]

Hey,
He will still be eligible to claim from the builders/construction company (you'll probably find it's the architects) if he sells as he will sell at a loss hence he is affected no matter what, the only way he will not be able to receive any compensation is if he signs the rights to the claim over to the new purchaser, if he did want to sign the rights to the claim over to the new owner he would sell at less of a loss because the new owner would then get the benefit of receiving compensation (though they would also need to pay any special levies associated with the fix in the meantime) basically it comes down to the stress levels and the possibility that there is more to gain from hanging onto the apartment until it looses the 'leaky' stigma.
Either way you sound like a great friend so at least he has support! also helps if he has a great Body Corporate manager!

[mortgage broker]

The main thing your friend needs to think about is how much will the cost of repairs be at most and what will the property be worth after wards.

[hannah]

As mentioned earlier that this is currently not his IP. This is his pricipal place of residence. And he will be very happy to stay in there once the place is fixed. Hence I suppose quick fire sell after the remedial work is not what he is after. Hence I suppose considering the location and being the corner unit, I tend to think that he should not sell. Let's see what others think.