07 Sep Is it wise to buy property with friends and relations? – Mark Armstrong
While buying a property off the plan may come with some traps, so too can buying a property with a friend or relation. Mark Armstrong says that while it might seem like a good idea at the start, you need to make sure some commercial sense is added to the value judgement.
Kevin: It may seem like a good idea to want to buy a property with a friend or relation because you might get on well with them in a friendship. But there’s an old saying that if you want to wreck a friendship, just go into a partnership with the person. Let’s talk about this with Mark Armstrong. Mark is the co-founder of RateMyAgent.com.
Good day, Mark. How are you doing?
Mark: Good, Kevin. How are you?
Kevin: Good, mate. Have you ever been tempted to go into partnership in a property transaction with a friend or relation?
Mark: I actually started… My first investment property that I bought when I was 19 years old, I went in partnership with my brother. And it worked out really well.
Kevin: Tell us some of the things that you went through in that process and where it could have gone horribly wrong.
Mark: There’s an old saying that it’s very easy to get into bed with someone, but it’s very hard to get out of bed the next morning. That’s really what it is when you’re looking to buy a property with someone. It’s not so much the buying of the asset that you really need to focus on; it’s exiting the asset that really needs to be the focus of your attention.
When my brother and I bought our first investment property, we made a commitment to each other that we would never sell the property, and we held onto the property for a good 20 years or so. We did eventually sell it, but the commitment was that we would hold the asset for the long term and then we would use the asset as a point of leverage to do other things that we wanted to down the track.
Kevin: But sometimes things do go wrong, don’t they? Even those agreements, they need to really be put in writing. But shouldn’t you also have an exit strategy, Mark?
Mark: The exit strategy is the most important part. Whether it’s a timeframe that you’re going to hold the asset for a certain amount of time, that’s really important.
Look, I tend to advise people not to do it. Even though I did it with my brother, my standard advice is not to do it, because people go through so many life changes, whether it’s settling down and getting married, having a family, losing a job, getting ill. There is a whole range of things that can happen in your life that can really make any written or verbal agreement obsolete because you’re forced to make decisions that you don’t want to make.
My general rule of thumb is I would say don’t buy with family or friends unless it’s really a financial imperative – you have no other choice because financially, you just can’t do it any other way.
Kevin: But there could be a time when maybe you might use that relationship to actually get some leverage to get in there with an agreement that you’ll buy that person out in a couple of years’ time. That’s probably a different scenario, isn’t it?
Mark: Absolutely. But problems arise like how do you value the property in the future? Obviously, whoever wants to buy it will have a different value to it than the person who wants to sell it. So, there are whole lot of issues there.
I remember working with some people a number of years ago who wanted to buy a property together. I looked at their situation and I said, “You don’t have to buy together. You actually both have the financial capacity to buy individually.”
Their reasoning for buying together, I guess, was because they wanted that support of knowing someone else was in there with them. I just thought that was a mistake, because financially, they could have done it individually and they could have started off their portfolio, buying their first property.
Doing it for the reasons of wanting to be in a partnership with someone is certainly not the right reason to do it because so many things can go wrong.
Kevin: I guess the bottom line is if you find that you need to do this or you still want to do it after listening to that advice, make sure you talk to a solicitor who is skilled at putting an agreement together and understanding that that exit strategy has to be in place before you even get into the agreement.
Mark: Absolutely. My advice to the exit strategy is that it should just be a clean sale of the property, because then there is no discrepancy on value, everyone is working in the same direction, they’re working to sell the property for as much as possible. Otherwise, you can see significant problems arise.
Kevin: Are you talking there about one out, all out?
Mark: Absolutely. That’s really simple. Everyone is following the same path. Everyone is pulling in the same direction. Problems arise when people are pulling in different directions, someone wants to hold and someone wants to sell. But if you make a very clear commitment that we’re going to buy this property, we’re going to hold it for ten years, and then we’re going to sell it, everyone is on the same page and everyone is pulling in the same direction.
Kevin: Hey, Mark. Before I let you go, I mentioned in the intro there that your website, RateMyAgent.com, is in operation. It’s been in operation in Australia for quite some time, very successfully, too. But you just launched into the States, I understand.
Mark: Yes, we launched into the States a few weeks ago. We were in San Francisco at a conference, and we’ve taken the big step into a market that’s a good ten times bigger than the Australian market. And so far, so good. We’ve had a number of agents claim their profiles and requesting reviews, so early signs are that it’s traveling very well.
Kevin: What’s behind the site? How does it work, Mark?
Mark: Rate My Agent is a platform that primarily helps vendors select their agent to sell their property.
A vendor can come into Rate My Agent and they can type any suburb in the country. They can find out which agents are active within those markets. They can see which agent has sold the most property over the last 12 months, which agent has the highest average sale price, total sales value. Then they can drill down into an agent’s profile and read reviews that the agent has received for the sale of those properties.
At the moment, we get around about 4000 reviews posted every week, and it represents a review for one in three properties sold across the country each month.
Kevin: The website is RateMyAgent.com. My guest has been Mark Armstrong. Mark, thank you so much for your time.
Mark: Pleasure. Thanks, Kevin.