Episode 10 | How to ensure you're protected by your building & pest inspection or strata report | Michael Ferrier, Eyeon

What do unexploded bombs, red flags, lemons and dogs have in common?

Michael Ferrier joined us for a no-holds-barred talk about property inspections. What goes into them, what’s wrong with them and why you need them. He reveals some really important issues for property buyers:

• Circumstances when strata reports won’t be 100% accurate.

• The biggest warning sign to look for in a strata report.

• What’s better to buy: new or old?

• The biggest major issue in new apartments & who is obliged to fix defects.

• When it’s a good idea to get a building & pest inspection on a block of units

• Why he lobbied against compulsory building & pest inspections in contracts.

• The questions to ask before engaging a building inspector.

• The purpose of a building report and the best question to ask the inspector.

• The magic number of inspections a building inspector can do a day before the report suffers

• What “parking inspector” reports are and why they are dangerous.

• The circumstances under which buyers are covered by pre-purchase reports and when they aren’t

Don’t rely on a pre-inspection report until you listen to this episode!

Links

EYEON resources for buyers and sellers:
https://www.eyeon.com.au/resources/

Michael's blog on sales agents:
https://www.eyeon.com.au/2018/03/26/commission-based-sales/

EPISODE TRANSCRIPT: 

Please note that this has been transcribed by half-human-half-robot, so brace yourself for typos and the odd bit of weirdness…

This episode was recorded on 14th June, 2018.

Veronica Morgan: You're listening to The Elephant in the Room Property Podcast where the big things that never get talked about actually get talked about. I'm Veronica Morgan, real estate agent, buyer's agent, and co-host of FOXTEL's Location Location Location Australia.

Chris Bates: And I'm Chris Bates, financial planner, mortgage broker, and wealth coach.

Veronica Morgan: Together, we're going to uncover who's really making the decisions when you buy a property.

Chris Bates: Veronica will introduce our guest in a moment, and I can tell you that you'll want to listen on to find out what he has to say about how new buildings are the ones with the biggest problems.

Michael Ferrier: People buy an apartment, a new place, and think, "Wow. I've got this brand new place to move into." Doesn't stop the fact that you've got to live in a place that's got a lot of defects, and you've got to live in that place potentially for years. If you're trying to rent the place if you're an investor, then that obviously comes back to issues with renting the place if there's works going on in the building.

Chris Bates: Please stick around for this week's Elephant Rider Boot Camp, and we have a cracking Dumbo of the Week coming up. 

Before we get started, everything we talk about on this podcast is general in nature and should never be considered to be personal financial advice. If you're looking to get advice, please seek the help of a licensed financial advisor or buyer's agent. They will tailor and document their advice to your personal circumstances. Now, let's get cracking.

Veronica Morgan: This episode, we're picking the brains of Michael Ferrier, founder and the MD of EYEON Property Inspections, home of the innovative open access inspections model, which basically means when agents or vendors are providing the building & pest and strata reports for property buyers. Correct, Michael?

Michael Ferrier: Yeah. That's right. We do inspections. The vendor pays us a fee, and it means that buyers can access that report and our follow-up for a much lower cost. It cuts the risk for buyers and makes it easier and quicker for them to get information.

Veronica Morgan: Michael's had over 30 years of experience across government policy, financial services, banking, franchising, and property. We have it on good authority that he's spent a similar amount of time trying new beers and red wines. Now, Michael says that he likes problems because it's fun to find solutions. The challenge is to find solutions that also provide good business opportunities. What we really want to hear about are some of the hidden dangers your reports protect property buyers from. Thank you for joining us, Michael.

Michael Ferrier: Glad to be here.

Chris Bates: Thank you, Michael. Thanks for joining us. One of the things that I've noticed with buyers a lot is they're scared to ask questions, and they're scared to look at building and pest reports and do the due diligence they need to actually buy the asset. Do you mind just going a bit more detail around buyers and do they actually do the due diligence they need to?

Michael Ferrier: It's a really interesting subject, and I think that buying property is a very emotional process. People see a property, they like the property, they love that property. Sometimes checking the property up properly like bringing up some issues they don't really want to see because they really just want to buy the property. What they finish up doing is even if they're spending money getting due diligence reports, they're just ticking a box. They're not actually properly checking the place out and sometimes that works out okay. Other times, they finish up with the property that's got problems and sometimes they'll look at a property and think, "This property looks right for the money," and there's a reason for that usually.

Veronica Morgan: Wow.

Michael Ferrier: Sometimes people don't get past the fact, I think that this is a great bargain. We've got to grab this property, but often the reason it's a bargain is those issues.

Veronica Morgan: Interesting you say all of that. The elephant obviously is a metaphor for the subconscious mind or the emotions, and there's various studies that suggest that 80% of our decisions are made by the elephant, not by our right or the rational mind. It's very interesting what you say there about it's wishful thinking, isn't it? It's that confirmation buyers kicking in as well that, "I like that property. I want to buy that property. I know that I should do due diligence, so I'm going to get these reports and then I'll tick the box. I may not even read them. I just feel good that I got them and I'm just going to put my fingers in my ears and say, 'La, la, la. I don't want to know. I don't want to hear.'"

Michael Ferrier: Yeah. Absolutely. Look, we see often people getting the reports on the same day they exchange contracts. Almost that if it's an after effect thought or their conveyance or a lawyer has said to them, "You really need to get these reports," and they have to give that advice obviously, so they get the report, but don't really look at it. Outside of the lawyer ...

Oh, anything on it, but the lawyer can't really give them advice on it. Then, they never ask. They don't ring and ask questions as often as they should, and often that can actually give them comfort about the property, if they ring and get some explanation about terms and issues that they probably don't really understand. The reality is that all properties have defects, right?

Veronica Morgan: They do.

Michael Ferrier: But that doesn't mean they're bad properties, and people just need to understand what it is they're buying.

Chris Bates: It comes down to, in Australian culture, "It should be right, mate. It will be okay. Let's just buy it. Let's not ask questions because we'll find out things that we don't really even know," and I think that's a biggest thing for buyers is they over invest themselves in the emotion of actually owning this property and seeing their life there that when it comes to the building report, they're already too far down the journey and they don't actually want to know the truth that they might not buy this property. It's a very ...

Veronica Morgan: You want the truth, but you can't handle the truth.

Chris Bates: Yeah.

Michael Ferrier: Yeah.

Chris Bates: I guess it's this strata and then there’s building and pest and with strata, it's getting a report, but how do you even go about that? Let's say you get a strata report. What should you do next? Should you review it? Should you get a professional?

Michael Ferrier: If you get one of our reports, the first thing we say in the report is ringing and ask us questions. Often, one of the issues with people buying apartments is they don't really understand what they buy and they don't understand strata. They don't know what an owner's corporation is. They know that they've got to pay levies, but they don't necessarily understand what those levies are designed to cover. They don't really know what's happening in the building and that's really what the strata report is telling you. It's a snapshot of the current situation in the building, whether it's finances, whether it's defects in the building, whether it's insurance and so on, whether you can have an animal in the building, all of those things or what a strata report is telling you. To varying degrees, those things will be more or less important to different buyers, but it's really important for them to understand what they're getting into.

Chris Bates: Is there any way for owners of apartments and buildings to keep things out of strata reports? Is a strata report always going to be 100% accurate?

Michael Ferrier: No, and for a few reasons. You will get strata committees who push the line a little bit in terms of what goes in the records and what's kept out of the written record for the building, so that's one thing. You will also get situations in apartments where you have individuals on the strata committee who are really trying to run that building to their own personal agenda. This can cause big problems because buildings gradually deteriorate because these people don't want to spend money on the building. They want to keep their levies low. Then, what they're doing is they're damaging the asset, and that's a really important issue over the longer term. Ultimately, that building is going to have to get brought back up to standard and that's going to cost money. The owners who were there at the time are the ones who are going to have to pay for that.

Chris Bates: I guess if you do own an apartment, was it advisable to try to join the strata committee?

Michael Ferrier: I think if you want to have an active interest in how the building is run and how well it's maintained, it's important to be involved. If you own a house, then obviously you want to keep it maintained, but some people are better at that than others. It will be the same with apartments, but I think if you want to live in a good building and a building that's well run, then get involved.

Veronica Morgan: What are some of the warning signs? This is the thing, I think a lot of people think, they're buying in the strata and they don't want to because of high levies for instance, and yet you've just alluded to a situation where a low levies might be a bit of a problem, but fundamentally, the problem is people, isn't it? What are some of the signs that people can look for when they're reading a strata report to give them the red flag?

Michael Ferrier: Oh, there's a lot and it varies from building to building. Look, lack of money is a major red flag. If there's not much money in the bank. A strata building will have two funds, an admin fund which just should be pretty much break even every year and then they should have a capital works fund or it used to be called a sinking fund. That's designed to cover future major expenditure that there needs to be money in the bank to do that. If you have a decent sized apartment building, it needs to be painted in three years time that might cost $100,000 as an example, or if it's got a lift and lift maintenance is expensive, so you need to have money to pay for that.

Michael Ferrier: If you're looking at a building and it hasn't got much money, then major red flag. That's probably the most important thing because one of the biggest fears that people have with apartments is having a special levy that usually extend themselves as much as they possibly can to buy that apartment. The last thing they want is to then get a bill for $10,000 and we've seen bills in the hundreds of thousands of dollars. Believe me.

Veronica Morgan: Yeah.

Chris Bates: I was just going to ask you that, can you just give us some examples on how big some bills are on some buildings? Because a client recently was going to buy an older apartment, cracking location, loved it, has fallen in love with it, but then finally they've got a look at the strata report and there's $70,000 in the next two years of levies just to find, this is an older apartment. What some of these, any examples of huge levies?

Michael Ferrier: Yeah. Look, we saw one recently in the eastern suburbs where they had to spend $19 million on the building over the next four years.

Veronica Morgan: Wow.

Michael Ferrier: Now, that was because they had to completely redo the façade of the building and to replace all of the windows and so on, and you can just ...

Veronica Morgan: Salt damage?

Michael Ferrier: Sorry?

Veronica Morgan: Salt damage?

Michael Ferrier: I can't remember the details now, but $19 million.

Veronica Morgan: How many apartments?

Michael Ferrier: It was a fairly big building. About 70 apartments, I think, but it's a lot of money. Some people are saying, "Right. I need to get out of here."

Chris Bates: What's your choice there? As an investor, you either pay the levy or you sell?

Michael Ferrier: Yes.

Chris Bates: If you sell, it's in the strata report.

Michael Ferrier: Correct.

Chris Bates: The next buyer's going to be looking at the strata report and isn't going to want to pay what it's worth.

Michael Ferrier: No.

Chris Bates: Because they're going to have to pay for the levy?

Michael Ferrier: Correct. They'll be discounting the value of the property by the future cost of those levies. Yes.

Chris Bates: Well, probably even more because as an investor, you actually haven't got the money to pay for the levy and a bank won't lend you for it.

Michael Ferrier: No. Look, the other thing with investors of course is if you're buying into a building that's going to have four years of works going on, who's going to rent it?

Veronica Morgan: Yeah.

Chris Bates: Yeah.

Michael Ferrier: How do you get a return on your investment?

Veronica Morgan: You're going to want a big, big, big discount to buy that one and there's risk involved too because the thing is that unless you get involved in the strata, you're not going to have a lot of control over how those works are done either.

Michael Ferrier: No, that's right. Look, often if you've ever had work done on your own property, you'll know it takes longer and it cost more than you think it's going to. They might say it's a 12-month or a two-year program, but often you don't really know how long that's going to go. You really want to get working up at 7:00 a.m. by major works going on.

Veronica Morgan: No, it's miserable. Dust and lots of a crap.

Chris Bates: But if that levy is actually fixed, are they always going to say the same, or can they rise and who controls that?

Michael Ferrier: No. Well look, they should rise and that's just because of inflation. The admin fund levies probably should ... They've got to meet the cost. Cost will gradually rise over the years, so levies should rise to meet those costs. With the capital works fund levies, then it depends on the building. Some buildings don't have a lot of capital work requirements, so there may be no lifts. They might not require painting. It might be brick buildings, for example. Those buildings will need less money than a building that's got lifts, needs to be painted, it has pool and other plant as well that's got to be maintained. It really varies.

Veronica Morgan: What about GST?

Michael Ferrier: Well, it depends. It's the usual rules. It depends how big the building is, so how much money are they collecting? Do they go over the threshold for GST and if they do then, you've got to pay GST.

Veronica Morgan: You're going to get a 10% increase when that happens?

Michael Ferrier: Yes. That can happen too, for sure. Yeah.

Veronica Morgan: Yeah. I don't think a lot of people realize that.

Michael Ferrier: Yeah. I don't know whether that threshold has ever changed, it’s $75,000, I think and I don't know whether it's ever going up.

Veronica Morgan: No, or 150,000 if it's nonprofit. I think some of them argue they're nonprofit, but either or, even a special levy can take it over the threshold.

Michael Ferrier: Yes. I've seen recently some buildings describing special levies as additional levies, and they argue the reason they do that is for tax reasons. Now, I think it's a bit tricky too because sometimes it looks like they're trying to hide the special levies in the building. I'm not saying that they're doing that but describing it as something different is ...

Chris Bates: Reframing.

Michael Ferrier: Yes. A little bit.

Veronica Morgan: Tax avoidance versus minimization.

Michael Ferrier: Yes. Yeah.

Chris Bates: Now, new versus old buildings. Okay? There's a huge difference in terms of the amount of apartments, the quality of the build, etc.

Michael Ferrier: Yep.

Chris Bates: New apartments, are they free of these big special levies or are they some of the more guilty ones?

Michael Ferrier: No. Sadly, they're not. Look, some of the biggest problems we see are in new builds and what happens is a bit of a rhythm to this is that all of the units get sold, people move in. There's a defects process, which is normal and then once all those defects are identified, then there can sometimes be legal action between the developer and the builder, and then both of those people in the owner's corporation about who is obliged to fix those defects. Now, we often see these defects running into the millions of dollars and often when it gets settled with a developer, there's still a shortfall and the owners will have to pay for that. You do see special levies in pretty new buildings, and what a penetration, I've got to say is probably the most common problem that we see. That can be a major issue. If none of the balconies are sealed, the water is getting into the unit, so you can imagine that's a problem. People buy an apartment, a new place and think, "Well, I've got this brand new place to move into," and then ...

Chris Bates: It rains.

Michael Ferrier: Well, it rains. Then, there's also there's work got to go on then for the next two years to fix problems.

Veronica Morgan: Yeah. Or the bathroom starts leaking or pools on roofs, what do you think about them?

Michael Ferrier: Well, yeah. Gravity. Gravity will do it.

Veronica Morgan: Yeah. Water takes the path of least resistance. I just don't like them personally.

Michael Ferrier: Yeah. Well look, it's easy to generalize, but yes, we do see a lot of issues with newer buildings.

Chris Bates: Fundamentally, a builder, a lot of new apartments, they're there to make a profit and the biggest thing that drives their profit is how long it takes and how cheap they do the build really, and so when times are tough and a build's got to be done in three months time, it doesn't take much for corners to be cut and materials to not be the best quality.

Michael Ferrier: Absolutely.

Chris Bates: Finally, they get this ... Because there's a huge penalty if they don't hit this date, and they've got finance and they could lose their... and the construction company could go under it if it doesn't hit.

Michael Ferrier: Yeah.

Chris Bates: You can mention all this pressure that ends up being a poor product that gets produced sometimes, and then the person who has to deal with that is the buyer at the end, and that process to fix it are going for years, couldn't it?

Michael Ferrier: Look, it can. Many years in some cases, and even a good builder and developer who says, "Yeah. We'll fix everything," doesn't stop the fact that you've got to live in a place that's got a lot of defects, and you've got to live in that place potentially for years.

Veronica Morgan: Yes.

Michael Ferrier: If you're trying to rent the place, if you're an investor, then that obviously comes back to what we're talking about before with issues with renting the place if there's works going on in the building.

Veronica Morgan: None of these things get fixed quickly either, do they?

Michael Ferrier: No, they don't.

Veronica Morgan: Particularly, there's water that can create problems that you're living with for some periods of time and nothing really happens in strata quickly anyway, does it? When you've got a situation where all the stakeholders are trying to pass the buck and really trying to establish who's actually ultimately responsible, I've seen some buildings where while the litigation is going on, they're funding that until the insurance pay out or they're waiting for a court win, and in the meantime, the owners are actually funding that litigation. It can be ...

Michael Ferrier: Yes. That's definitely true. We see that a lot. We see large legal fees because the owners’ corporation needs to be represented and that lawyers are not cheap. You see that happening and of course, that's all got to happen before you get any settlement whether it's insurance or whether it's an agreement with the developer and it goes on a long time. As I say, we see this like a new building and then five years after the building is finished, often there's continuing issues.

Veronica Morgan: Yeah. You say that you see this sort of thing a lot with new buildings, and obviously from the buyer's perspective, they generally pay a premium to buy into a brand new building and then they're continuing to pay afterwards or this sort of thief if they've got a bad building. What sort of period of time do you think you should leave it before you're looking at a building? Is seven years enough? 10 years?

Michael Ferrier: Look, it's going to depend on the building and this is where the strata report can help you if you're looking at a building because it will give you an idea of what's happened?

Chris Bates: Yep.

Michael Ferrier: Where it's up to? In some cases, the building could be fine after two years. Some buildings obviously will always be okay. There won't be major defects, but some will be fine after two years. Sometimes after five years, there's still lots of stuff going on. This is where checking what's been happening in the building is really important in a new building. If you do want to buy into a new building, you love the location, it's near where you want to live and so on, then that's when checking the detail would be really important.

Chris Bates: I guess it's just always a risk when you are buying something that hasn't got a track record, you're just not going to ... You're not sure. I guess as an investment when you are investing 500, 700, a million, $1.2 million in an apartment, that you really want to be taking a risk on something that potentially could have problems. One of the big risk with buying apartments is you have got strata, you have got to have building that you need to keep maintained and you got to really think through when you are buying it, can you afford a special levy?

Michael Ferrier: Absolutely.

Chris Bates: If you can't, then you shouldn't even be considering it.

Michael Ferrier: Look, I agree. I think there's more risk in buying newer apartments. The other risk that we see commonly is increasing levies. In a new building, the levies get set but as you say, there's no track record. They don't really know what it costs... I mean, they get somebody who's experienced to come in an estimate that, but very commonly, we see levies, the marketing levies or the introductory levies can be a bit lower and then we can see some pretty substantial increases in levies in the first few years because the cost of running that building is much higher than they thought.

Chris Bates: If I'm Mr Developer and I'm trying to sell my apartments, I want those levies on the marketing material to be as low as possible, don't I?

Michael Ferrier: Look, they do and even in older buildings, you see this as well that the lower levies become a marketing opportunity.

Veronica Morgan: Yes.

Michael Ferrier: Yeah. It attracts buyers because the ongoing cost is going to be a bit lower, but often that can be one of the red flags, Veronica, that you mentioned before.

Veronica Morgan: Absolutely.

Michael Ferrier: Because those low levies can mean that that building is not being looked after the way it should.

Veronica Morgan: Yeah. Yeah. Golden tip there.

Michael Ferrier: Yeah.

Veronica Morgan: With the new building or with any building for that matter, it's quite expensive to get a building and pest inspection on the actual whole building, isn't it?

Michael Ferrier: On an apartment building, do you mean?

Veronica Morgan: Yeah. Yeah.

Michael Ferrier: Very hard.

Veronica Morgan: It's hard to do, right?

Michael Ferrier: Well, it's hard to do because the inspector would have to get access to every apartment. Remember that when you're buying an apartment, you're really just buying the air space between the walls. The owner's corporation owns the building and you own the space between the walls crudely. Yeah.

Veronica Morgan: From the paint in.

Michael Ferrier: Yeah. That's right. We get people asking us to do building inspections on units. You can inspect that unit and if it's a top floor unit, you might be able to get on the roof and have a look at the roof or if it's a ground floor unit and you can get ... Is there a subfloor, you can get access to that and obviously the common areas, but you can't get access to all the other parts of the building. Often, if they're a few stories tall, the inspector can't climb out the sides of it. It's just not possible.

Veronica Morgan: No.

Michael Ferrier: Yes. The inspection of those is limited.

Veronica Morgan: Are they useful though in some circumstances?

Michael Ferrier: Well, yes. In some circumstances. Older buildings, particularly smaller blocks of floor or something like that, particularly if they've got wooden floors, there can be issues with termites and people should be checking out. Rising damp, there's an issue in older blocks in some areas as well. Those things can be checked out with the building inspection. Ground floor units and top floor units are probably where the value is because you might get water leaks from the ceiling and obviously those things should be fixed by the owner's corporation, but then it's a question of how long it takes to get fixed and what barriers are put up in front of you.

Veronica Morgan: Yeah. Not only that, but if you're in a small block of floor, a lot of people is, "Oh, I only want to buy a small block." Well then, you've got people paying all the costs.

Michael Ferrier: Yeah.

Veronica Morgan: That's the negative of being really small block, you don't have a lot of people to share the load.

Michael Ferrier: Yeah. Take that small block analogy. That older building may need a new roof, and that could be, I don't know, 50,000, $100,000 to replace the roof. Now at some point, those four owners might then have to stamped up $25,000 each to cover the cost of that roof.

Veronica Morgan: Yeah.

Michael Ferrier: Now, that's going to happen eventually. How far down the track it is? You don't know unless you check it out.

Chris Bates: From an investment point of view, it does make sense to go for the smaller blocks if you can afford the levies, you are getting more land generally.

Michael Ferrier: Yes.

Chris Bates: If there's any four apartments rather than 40, and lands the ... The majority of what goes up. It makes sense, but you're right that if you're just putting a levy four ways instead of 12 ways, it's a much bigger hit to the pocket. Just want to take different tack now and move more to building and pest inspections with real estate agents.

Michael Ferrier: Yes.

Chris Bates: Now, there's one line of thought now and a lot of agents were actually providing the building and pest. Can we really trust that? Can we actually use the building and pest that an agent provides or should we do our own due diligence and get our own independent report?

Michael Ferrier: There's a few different models out there. When you write, yes, agents are doing this more. We have a product that's designed to work with vendors and what that enables is allows buyers to access the report at a much lower cost, so that they can then take less risk in doing that due diligence in a financial sense. Instead of costing them $500, it cost them $99. If they buy the property, they pay a top up fee, but if they don't buy the property, they've only lost the $99. Now in an auction environment where you have to have done your due diligence before you bid, it's really important to have looked at a report.

People get worn down by the building and pest process. They look at a few properties. They spend 500 here, 500 there, it adds up and it's money coming out of their pocket. It's cash. Unlike a lot of the other costs with property, they get a combination of debt and equity from previous properties, for example. They tend to skimp on this eventually, and sometimes we see people ... The property they buy, they don't get a report at all because they've got worn out with the process.

Veronica Morgan: Yeah. They spent 500 on each of three reports, then they finally said, "Bugger it. I'll look at someone else unless you may have done it. If they're bidding on, I'm going to buy it."

Michael Ferrier: That's the story, a long way to answer your question. If an agent is just giving a report out, think about what that means. What incentive does the inspector have to answer your questions and follow up with you? He's not getting paid anything to do that? How much does that inspector rely on the real estate agent for his business and does that cost him to be a little less ...

Veronica Morgan: Diligent.

Michael Ferrier: Objective or diligent about the process? Now, real estate agents don't have great trust with buyers. Now, if a real estate is just giving you report, are you going to trust that as much, but if you go with third party and get a report, and then you can follow up with that third party directly. That will give you a higher level of trust.

Veronica Morgan: Let's go and rewind that a little bit.

Michael Ferrier: Yeah.

Veronica Morgan: With say your model, who pays for the initial report?

Michael Ferrier: The vendor pays us a fee, which is it's not the full cost of the report. It's a discounted amount.

Veronica Morgan: Yeah.

Michael Ferrier: Then, each buyer who accesses their report, they come to us to get the report. All the reports get downloaded from our website that pay us $99 if it's a building and pest, or $69 if it's a strata report. Then, if one of the people who download the report buy the property, they pay a top up fee, but they still finish up paying a bit less than they would just to get a standard report.

Veronica Morgan: On the 99 or the 69, are they still able to actually call you and talk to the inspector?

Michael Ferrier: Oh, absolutely. Absolutely. We really encourage that. That's a really important part of the service, and what I would say is that there's a real distinction here between a report and a service. I actually did a bit of lobbying with the New South Wales government. They were talking about making building and pest reports compulsory, and I lobbied against it because what you finish up is just a report. You get no service, and in the ACT, they've had compulsory reports for quite a few years and what's happened there is that the quality of the reports has really dropped. The people who looked at the reports, the buyers don't feel like they're a customer of the building inspectors that they can't follow up. I just think that the quality of service really dropped.

Veronica Morgan: Right. Distinction.

Michael Ferrier: Yeah. I think that's a really important thing for buyers to think about here. Yes. They can follow up with us, ask us many questions as they want, but there's also benefits of vendors in this as well because often, they are then able to understand what the issues are with their property and they know how to deal with that upfront rather than having this ... I sometimes describe this an unexploded bomb that could be sitting there and two days before the auction, all of a sudden, this issue arises. We had a situation just last week where a property was due to go to auction last weekend. We did an inspection for buyer, and active termites were in the property. Now then, they've got this massive problem to deal with. Now, if they want somebody in earlier and found that problem, then they could have done something to fix the issue.

Veronica Morgan: Yeah. Before they put it on the market.

Michael Ferrier: It's not about hiding issues for vendors here, it's about creating an environment where they feel a bit more confident about the property they're selling. Right? That creates confidence for buyers too.

Chris Bates: I guess there's a few issues here. If you have owner property and it's like owning your car that's a bit old and maybe you got a bit of rust, you don't want to identify issues for buyers, but I think you're being a little bit ignorant in thinking the buyers aren't going to go to their own due diligence and find these issues anyway. I guess when we're talking about the elephant in the room in the podcast, it's really just the agents, if you're not trying to bringing these issues to the front and actually discussing them, you're really just turning off buyers because buyers are going to say the issues and just .

Michael Ferrier: Yeah. I think the word that I think is important is transparency. There's not enough transparency in property transactions, and I think creating a bit of transparency in terms of access to information about the property is really important. There's lots of glossy marketing stuff and the property looks great, but let's be a bit more open about what's under the bonnet to take a used car analogy.

Veronica Morgan: Being on the front foot and actually getting out there and declaring these things to buyers is actually better for the agent better. I've got two questions for you about agents. The first one is recently and offline, I'll tell you who the agent is here, but they have one of your reports that they're offering for a property that they're selling, and they're not offering it $99, they're offering it at $399.

Michael Ferrier: Well, we've had a few issues with agents who are using our service and because the vendor is paying a fee, they get to see what's in the report. We've had a few issues with agents then giving those reports out, which completely defeats the purpose of the service.

Veronica Morgan: That's the opposite. These ones, I think they're making a profit.

Michael Ferrier: If agents are then marketing our own report, then yeah, that's a big issue for us. Look, part od the reason it's a big issue is that we don't know whether the report they're selling for 399 is exactly the same report that we did. This is a really real big issue for us.

Veronica Morgan: Oh, wow.

Michael Ferrier: Is that buyers normally come to us to get the report. We know what they've got, but they've got it from the agent. We can't guarantee if it’s been doctored.

Veronica Morgan: What's being doctored?

Michael Ferrier: We don't know. I'm not saying that they would do that. What I'm saying is that from our perspective, it's really important that we provide the report and we provide the follow up report.

Veronica Morgan: Yeah. The other question I have on agents is have you ever had an owner or an agent try to get or try to influence you in terms of the report contents?

Michael Ferrier: Yes, we have. Yes. Agents will occasionally try to get issues played down. We have to be really strong with this because a thin end of the wedge applies here. You can't let them influence what you do and in fact in a few cases, we've just said, "We won't deal with you anymore," because we have to remain independent. If our service isn't independent, nobody can trust it. That's a really important line in the sand for us. 

Chris Bates: That's an aspect of your service, probably the challenges of actually implementing it is actually getting agents to commit because sometimes they're going to have to get listings that aren't going to be great from a property report point of view.

Michael Ferrier: Yeah.

Chris Bates: Really if they're going to always have every single property to have this process, some properties they might not want to give the report on. They want to just hope that people won't go and do their due diligence. I guess that's probably one of the challenges. Always just remember a property I looked at a few years ago, and it looks stunning from the outside. A beautiful white, fresh chalked paint, everything around the property looks perfect, but when we actually got a builder in, we found more issues than you can think about.

Michael Ferrier: Yeah.

Chris Bates: Does it really matter how pretty the property is or is that even a warning sign to say, "This could just be a touch up job basically."

Veronica Morgan: Lipstick on a pig.

Chris Bates: Yeah.

Michael Ferrier: Yeah. That Chris, have reminded of an example. A few years ago, we did a report on this really well renovated house in the Eastern Suburbs. It really looked fantastic, and this older couple were looking to downsize into this cottage type place, and looked really good. When our inspector went to the property, it made it a new roof. Everything had been renovated but the roof was pretty much gone, and it was 30,000 or I can't remember how much, but around that sort of money to get it done and they walked because they didn't want to have to go through that process. They wanted to buy a property where everything was done. They could walk in and enjoy, and the agent was furious, but the reality was they were selling this fully renovated property and it had 100-year-old roof. 

Chris Bates: Yeah. White chalk paint. I know that's something that if you are trying to hide kind of marks in the wall and you do want to maybe hide a bit of damp and some cracking, and some order and some of the tricks that buyers or sellers use to, I guess gloss it up.

Veronica Morgan: Mask.

Michael Ferrier: Yeah. Look, obviously painting can hide a lot of things and that type of thing. A building inspection process isn't perfect. It's a visual inspection. The inspector can't go in there, start putting screw drivers into walls and stuff because obviously they'll damage the property, but the inspectors are experienced. They know what to look for. They'll be looking for tell tale signs of leaks using a moisture meter to check whether there's moisture in the walls, the paint looks great, but the moisture meter can tell them what all ... They just know that a particular style, say a terrace. They know that those buildings have got rising damp. Take that example for a buyers that want to buy an older building. They've just got to appreciate that it comes with a territory. That some of those defects like rising damp come with that style of building because of the way they were built.

Veronica Morgan: This is one of the things that I think is important to ... One of the questions that is important to ask the inspector is how does it compare with others of a similar age and condition?

Michael Ferrier: Really important, Veronica, that you bring that up because that's the purpose of the report. It is a comparative analysis. When the inspector comes to a conclusion about that property, is it average? Is it above average? Is it below average? They're comparing it with similar properties. Similar age and a similar type of style. They're seeing lots of properties and then they're making that comparative judgment.

Chris Bates: Well, that's right. Because a building inspector, if they're professional and they're doing well, then they might be doing what? 10, 20, 50 reports a week.

Michael Ferrier: We think an inspector can realistically only do about three a day.

Chris Bates: Three a day?

Michael Ferrier: Yep. We know there are some inspection businesses where people are doing six a day, they can't be doing them properly.

Veronica Morgan: No.

Michael Ferrier: Through the day, 15 a week. They're seeing a lot of property. They're seeing 500, 600 properties in a year.

Chris Bates: Funny you say that because I remember a conversation with a building inspector a few years ago, and he said that he got there 3:30 with the agent, and the agent is letting him in, and then agent is saying, "Look, mate. It can only be 15 minutes. I've got to get to my next appointment." He might be able to [inaudible 00:34:32] to look at the property and saying, "Mate, I'm going to be an hour. We're going to have to go through this," and the agent was trying to speed up the builder and it was up to the builder to push back on the agent and say, "Look, I'm going to do this properly." What you're talking about there is probably a good question is to ask a builder is how many are you doing a day? If they're doing six or seven, then it's probably a red flag that they're not doing a great job.

Michael Ferrier: Yeah. You got to do them in daylight hours. Travel in Sydney or Melbourne or wherever it is means that you just can't realistically do it. I've also got a generator report based on that inspection. It's not possible to do a proper job doing more than three a day.

Veronica Morgan: Then, how about building and pest inspectors that overly negative in an effort to actually continue to get in sales business?

Michael Ferrier: Yeah. We see these two, and so I'd call these people the parking inspector type approach. Often what happens with these reports is they littered with minor defects.

Chris Bates: Yeah.

Veronica Morgan: Pulling up a bit.

Michael Ferrier: Yeah. Just about any property can be made, they look like a real problem.

Veronica Morgan: Yeah.

Michael Ferrier: A real lemon. I don't know. I'm not saying a lot of inspectors do this, but it's hard to find customers. If you're working for a buyer and you can get two or three inspections out of each buyer, then that's better business for you. The first inspection they do would well be, "Well, I wouldn't touch this one."

Veronica Morgan: Yeah.

Michael Ferrier: "But we'll find you a good one. Don't worry." Then, they think that building inspectors really saved them, and so they finished up spending on two or three inspections.

Veronica Morgan: Years ago when I was selling, I had a vendor who ... A little weatherboard cottage and it was a flat market. It's a little tough market too. We had this bar and though it got to the building and pest stage and my vendor had renovated. I knew that she'd done a good job, a thorough job. When I read the report that said, "Don't touch this." It had photographs of the sub-floor with all the original bearers and joists just left lying on the ground and with broken bits of timber everywhere, an absolute mess, and I thought, "I just don't believe it looks like they're under there." I crawled under the house and took photos and they were not of the same house, but the damage was already done with that buyer and even though I took the buyer back there and showed her, she would not and did not buy that property. That was a glaring example of a doctored report.

Michael Ferrier: Yeah. Definitely happens. There's good and bad operators in every business as you know, but I do think you've got to be a bit careful. One other things that talked about littered with minor defects, the purpose of the building inspection report isn't really to draw out loads of minor defects. It's really there to alert the major issues or safety issues, and then to give an assessment, an overall assessment of the level of minor defects. I think that's really important because I think particularly if you inspect a relatively good property, inspectors feel like they've got to find stuff. They've got to find stuff to put in their report, so they start putting in lots of minor stuff, which really isn't that important. They're mostly just maintenance items. 

Michael Ferrier: I think the purpose of the report gets a bit lost in that case, and it's something that we talk about in our business is making sure that if you're going to be at the property for an hour or more, that you spend your time looking for major issues, not looking at whether or not there's a doorstop. Seriously, you see this in reports a lot. "Oh, there's no doorstop on that. The handle might damage the wall or something." That seems to me a wasted opportunity.

Chris Bates: I guess that's when you're reading the report. You're basically saying, "It's more minor issue. Call up the inspector. Is this really an issue? No. It cost $500 to fix. Okay. Move on."

Michael Ferrier: Yeah.

Chris Bates: Then it's, "Okay. Actually, you know what? There's a problem with our flooring. There's stilts and maybe this is a big problem." "How big is that?" "Well, we don't know." Then, a real discussion around that could actually give the buyer a lot more confidence to say, "Well, yes. There's a major problem. It's a bit of an unknown, so we need to factor that in," but then we move on to the next item. I guess that's the idea of the report.

Michael Ferrier: Absolutely.

Chris Bates: A lot of buyers like to use a building report as a bargaining tool.

Michael Ferrier: Yeah.

Chris Bates: What's your thoughts on that?

Michael Ferrier: We do see this happen, and we also see people who don't want the agent to know they've done the building inspection report. They want to be secret about everything they do. I don't understand the logic behind it either. Look, it depends on the market. If the market is difficult, then yes. I can see why people might want to use a building inspection report as a bit of a bargaining tool, but that's not really the idea. Really, the way I look at it is buyers don't really want a building inspection report per se, they want to know the property is okay. Right? The report is a mechanism for them to find out whether the property is okay, and a follow up with the inspector is a really important part of understanding the report, but also getting that confirmation over the phone from the inspector that, "These are the things I saw. Actually, this property is pretty good." It's X years old and it's actually fine.

Chris Bates: Just on that while you're there, if the building inspector does say that it's pretty good, what liability or what ... The buyer, if I go back to the builder inspector and say, "You told me X and Y, but it's actually Z."

Veronica Morgan: What's the recourse?

Michael Ferrier: What the building inspector should be saying should be consistent with what they've written in the report first thing, because a report is a written record of the inspection, so that's important, but if the inspector has missed something and they've missed something major and there's a cost there, then the inspector should carry professional indemnity insurance. They're covered and by extension, the buyer is covered and by extension, the buyer is covered.

Veronica Morgan: What's the chance of actually getting claiming on them?

Michael Ferrier: Well, if you hold professional indemnity insurance and a buyer comes to you and says, "I think you've missed this in the report," you're obliged under your insurance to let the insurer to know that. Then, the insurer then will get usually, if they're good insurers, they'll get involved in the correspondent's process with the person. The way we approach it if that happens, and it does occasionally happen where people come back and they feel like there's an issue there is that we will immediately go back to the property with the inspector and then we'll have a look at all those issues, and then we'll respond to their questions. Now usually, it gets sorted out at that level, but we would always inform our insurer of that correspondence so that they... and that's the condition of the insurance.

Chris Bates: Does every building inspector have personal and professional indemnity insurance?

Michael Ferrier: I'm sure they don't, but they should. Yeah.

Veronica Morgan: That's a good question to ask.

Michael Ferrier: In New South Wales, for example, there isn't any registration. There's no formal mechanism to be licensed as a building inspector. Different in Queensland, for example.

Veronica Morgan: Wow. Really?

Michael Ferrier: There used to be years ago, but they got rid of it. Anybody in theory can put their hand up and say they're a building inspector.

Veronica Morgan: Wow. That's a tip for buyers because I tell you what? I didn't even realize that.

Michael Ferrier: Yeah. You'll see a lot of people who perhaps don't have the experience or qualifications they should, and a lot of people who are not carrying insurance. Any buyer should be checking those things out.

Chris Bates: Yeah. A really scary story for a client just recently is they were doing a renovation on their house. It was a nice bathroom and a nice art deck or apartment in the east of Sydney. They found a builder, a personal recommendation from a friend and they looked all okay, but they didn't do the due diligence on the builder and they didn't check his license. He's got good track records, personal introduction. They're busy people, so they think, "Well, this sounds all ." The builder actually started going after they got a bit of money, went AWOL on them and was taking really long and the bathroom's half done, and they sped him up and said, "Look, you've got to keep the pace up." He got a waterproofer in. He did a quick job. They paid him a final amount and then he went, he left and they couldn't get in contact with him. It turned out that he was unlicensed. Then the waterproofer was actually someone of Airtasker.

Veronica Morgan: Oh, dear.

Chris Bates: When you're in a strata building, the building hasn't got a waterproof certificate, you then have to redo the bathroom. $40,000 later, you have to take it all down and do it professionally again.

Veronica Morgan: That has to be our Dumbo over the week.

Chris Bates: Every week, we hear incredible stories of the dumb things property buyers do. Dumb things that end up costing them a whole lot of money and/or creating a whole lot of stress, mistakes that can be avoided. Okay, Michael. Can you give us a property Dumbo? We can all learn what not to do from these stories.

Michael Ferrier: Well, we had a situation a little while back where we got a letter from a lawyer. We're just talking about this. We've got a letter from the lawyer saying that we had not disclosed defects in an apartment building, not too dissimilar from what you're talking about. The first thing we do is identify the customer as one of our customers, and yes, we found that they'd accessed a report that we'd done on that building, but guess what? They got it from our website nine months after they bought the property.

Veronica Morgan: Wow.

Michael Ferrier: The report that we'd done was done before the issues in the apartment building came to light and they thought that they could still come and argue that they'd suffered a lot, which was just crazy.

Veronica Morgan: They didn't even rely on it for their decision making.

Michael Ferrier: We rang the lawyer and I said to him, "Do you realize this?" He was embarrassed, and of course we never said anymore about it, but it's a great example of people just not knowing what they were doing or having buyers remorse and thinking, "God, we shouldn't have bought this place. Who can we..."

Chris Bates: Blame.

Veronica Morgan: Who can we blame?

Michael Ferrier: Who can we blame?

Chris Bates: Yeah.

Veronica Morgan: Wow.

Chris Bates: My takeaway with all of these is would you rather lose $500 or lose 150 or $200,000 if you don't spend the $500.

Veronica Morgan: That’s back to loss aversion though, isn't it? That the 500 is actually more tangible because they are going to pay it as opposed to the rest, which is a might be. That loss aversion causes them to say, "Right. I don't want to lose the 500 because I don't really think I'm going to lose the other."

Michael Ferrier: Absolutely. Yeah. I think you're right. You're right on the money there, and it wears people down. As we're talking about before, yeah, they spend a few 500s and ...

Chris Bates: Head in the sand.

Veronica Morgan: Well actually, I think that sort of wraps us up. Is there anything that you'd like to add?

Michael Ferrier: Look, one thing I'll say is if people, if you're a buyer and here's an offer for anybody out there. Look, we've got on our website, we've got eBooks for buyers, which go through the whole process, so people can obviously just access that stuff. If they can't find that on our website for any reason, just call us, eyeon.com.au. The other thing that we're happy to do, if you've got buyers and they've got somebody else's report and they don't understand stuff, call us. We're happy to talk to you.

Veronica Morgan: Wow.

Michael Ferrier: Happy to talk to you.

Veronica Morgan: That's an offer.

Michael Ferrier: Yeah.

Veronica Morgan: We'll pop the links for your eBooks in our Elephant Memory Bank.

Chris Bates: Right.

Veronica Morgan: Thank you very much for that, and we are all about educating buyers, so they can make better decisions. We really appreciate you coming to meet with us today and talk about these things.

Michael Ferrier: It was fun. Yes.

Veronica Morgan: I'm sure we'll get you back another time because I reckon we could dig deeper even on buying building & pest and strata reports.

Michael Ferrier: Yeah. There's a lot of issues in there and a lot of issues people just don't understand. Yeah.

Veronica Morgan: Yeah.

Chris Bates: Thank you, Michael. Cheers.

Michael Ferrier: Thank you.

Chris Bates: We want to make you a better elephant ride. This week's elephant rider training is ...

Veronica Morgan: A very interesting thing that we learned today from talking to Michael was that you can call the inspector and you should. After you've had a building and pest inspection done, call the inspector, ask questions about anything that you don't understand. Specifically ask how these property stacks up in relation to other properties of a similar age and condition, but also ask whether there are any deal breakers. One of the questions that I like to ask is “would you let your son or daughter buy this property?” Also with the strata report, I think it's really important to realize that you can also call the inspector and ask your questions there.

Veronica Morgan: One of the questions to ask inspectors would be, "What was missing from the records when you did that inspection?" For instance, emails are an important thing. Email correspondence between committee members and the strata management for argument's sake. Often there's not a lot of detail in the minutes of the meetings, but the real goings on come out when you read the email correspondents. That's our Elephant Rider Boot Camp this week, ask questions, pick up the phone, call the inspectors once you've got these reports.

Chris Bates: Veronica, what have we got to add to our Elephant Memory Bank this week?

Veronica Morgan: Well actually, Michael's got something for us.

Michael Ferrier: Agents are sales people and they want to sell the property and if they see an issue they think is going to torpedo that sale, then some of them ... This is a really interesting topic because agents at the moment are trying to become a profession, and I wrote a blog on our website recently saying it's not good enough to be professional most of the time. If you're going to be a profession, you need to be professional all of the time and what happens when the sale gets on the line is sometimes that's where the professionalism falls away.

Veronica Morgan: We'll put the link to that blog on the show notes.

Michael Ferrier: Yeah. Sure. Yeah.

Veronica Morgan: Tune in for next episode when we interview Michael Harris who's a sales agent at Raine & Horne, Newtown. Michael is an absolute epitome of a local expert and we really talk about why that's important. Michael values transparency very highly, and so in our interview, he is very revealing in terms of the types of influencing strategies good agents use when negotiating with buyers.

Chris Bates: The Elephant in The Room Property Podcast is recorded at the Sydney Sound Brewery. This week's podcast was recorded by John Hresc and edited by Gordie Fletcher.

Veronica Morgan: Until next week, don't be a Dumbo. Me again, don't forget, if you've enjoyed this podcast, please tell your friends and we'd love an iTunes review. 

Chris Bates: Be aware, everything that we talk about on this podcast is general in nature and should never be considered to be personal financial advice. If you're looking to get advice, please seek the help of a licensed financial advisor or buyer's agent. They will tailor and document their advice to your personal circumstances.