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Case Study 10

Over-valued investment property purchase

Courtney and Will of Victoria attended a free public seminar sponsored by a leading real estate agency to learn about property investment. They particularly wanted to make money from property investment to enable them to care for their disabled child and to assist with Courtney’s elderly father’s expenses.

In July 2001, they paid approximately $5,000 to attend a property investment course conducted by a company specialising in investment education and subsequently paid that organisation another $2,500 as a "source fee" to entitle them to buy investment apartments at "discounted" prices - the wholesale prices being at least $5,000 below "market value".

Mid-way through their property investment course they inspected an apartment complex with a representative of the vendor and the education company. They eventually decided on a particular apartment. They were given a detailed "property investment analysis" for the unit showing various capital growth and other projections. A 2 year 6% rental guarantee was also included in the deal.

They were shown a Certified Practising Valuer’s valuation stating that the apartment was worth $630,000. The apartment was available for sale to them as course participants of the investment property education company at the "discounted" price of approximately $570,000 providing they signed the contract without delay.

They purchased the unit relying on the fact that they had been promised a way of making a quick and sizeable profit. They also relied upon the vendor’s capital growth profit projections and the mistaken belief that the rental guarantee was transferable to the next purchaser.

They were led to believe that they could make a substantial profit on re-sale of the unit in a short time.

They did not know that the $630,000 valuation had been conducted before the unit was even constructed. The vendors had a second valuation which valued the unit (post construction) at $587,000. The purchasers were not shown this document until after they had signed the contract.

The purchasers prior to settlement arranged their own sworn valuation which indicated that the unit was then worth $515,000.

A recent inspection by a Jenman agent states that the unit is probably only worth in "the high $400,000s". Additionally, the total area of the unit / balcony was over-stated by the vendor’s agent.

The purchasers’ conveyancing solicitor was recommended to them by the investment property education company. The director of that company is also a director of the company which brokered the necessary finance for the purchasers. The conveyancing solicitor at the relevant time also conducted legal seminars for the investment education company.

The conveyancing solicitor appears not to have been able to recognise the potential for conflict of interest in representing the purchasers and the investment education company at the same time. The law firm provided advice to the purchasers when they tried to cancel the contract. That advice may have breached the lawyer’s obligation to avoid conflict once the purchasers complained about the actions of the investment education company and the finance broker.

Legal opinion has been obtained as to the prospects of initiating actions against the property investment education company, the finance broker, the vendor and the vendor’s agent for various possible breaches of the Estate Agents Act 1980 (Vic), Trade Practices Act 1974 (C’th) and the Fair Trading Act (Vic).

A complaint against the conveyancing solicitor is also being considered for filing with the relevant authority (Legal Ombudsman, Recognised Professional Association or the Legal Practice Board).

Detailed statements are presently being taken from the purchasers and other parties with the intention of progressing those actions.


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