Ten Big Mistakes in Buying Property

Let’s expand on these points a bit further…

1. Lack of Preparedness:

Legal:

Get your legal team ready. In more complex property transactions, a lawyer is preferential over a conveyancer typically. Conveyancers can be cost-effective, but they are often limited only to property conveyances (transfer). Like any professional utilizing the right professional with the right expertise is essential.

Get a commitment from your legal representative about time responses to your requests, price indications for the cost to review purchase contracts (while shortlisting), and the final cost of a full contract review to purchase a property. Many will do one review for free.

Finance:

Getting your finances in place before your search is the number 1 problem I encounter. There is no point in looking if you can’t purchase.

Start discussions with your bank or finance broker immediately to ascertain your capability for finance and the size of potential borrowings. Take time to understand your commitments and affordability. The bank credit departments will fully analyse your income and revenue capability but will offset that will debt and your ability to service any borrowings. This will also be stress tested for several interest rate points above their quoted rates. E.g., you will be assessed on your capability to repay at 5% rates when the quoted rate is 2.5%

Borrowings can also be affected by the borrowing structure you have, dependants, length of employment, type of employment, and your history. What about you… now, what about the property itself? Some banks may have limitations on the exposure they want to a type of property in a suburb e.g. There could be a massive supply of 2-bedroom units in Sydney and surrounds and the banks ant no more exposure to them. Another scenario is that a contracted sale price is not a guarantee of a loan set against the sale price.

On some occasions, banks will discount the Loan to Value ratio (LVR) when they are not happy with the price paid for a property in a location. i.e., instead of providing a 90% loan against the property value, they may reduce it to 80% to cover their perceived risk. You then must cover the shortfall on settlement. Why? Because they are protecting the bank and its shareholder’s interests. Remember you are only the custodian on the title while your repayments are good, if you default, the lender will have ‘step in’ rights and will take over the property. If they do, do they keep all additional profit from a forced sale.

And by the way…a note about Home Loan products

It's safe to say many people can find home loans confusing, particularly if you're a first home buyer. As a first-time buyer, it can be hard to wrap your head around all the different home loan products on the market. Consider these points:

· Fixed versus variable rates

· Principal and interest payments versus interest-only

· Split home loans and lines of credit.

· Offset accounts and redraw facilities.

· Comparison rates versus the advertised rate

It's enough to give you a headache!

Utilising the correct offset accounts in your banking structure can save you a lot of interest owing over time as the money accumulated in the account is offset against the balance and interest owed. Very worthwhile.

Many loans will incur Lender’s Mortgage Insurance (LMI) a one-off premium that is expensive but covers the Lender (not you) against any loan default. This is applied when a loan applicant has an insufficient deposit (usually less than 10%) and then the bank will apply this insurance premium. Some banking professional packages will remove this criterion based on the client’s financial or income-earning capability.

Underestimating Additional Costs

The initial deposit isn’t the only cost to factor in when buying a home or property. Many forget that the home loan has additional costs – some are upfront (application fees, establishment fees, etc) and then there will be ongoing fees within the loan itself. Some brokers will want an upfront fee to assess your position accurately, so they better place your requirements and circumstances with the best lender.

Other costs such as Stamp Duty, bank fees, building and pest inspections, other consultants, agents fees, and conveyancing or legal fees have to be considered and budgeted for. Property purchasing does have a lot of costs.

Another often forgotten cost is that of insurance which can be a condition of finance approval. This would be insurance for loss of the property (storm, tempest, events, etc) and the cost of its replacement. Household insurance is a personal expense but can cover a lot of circumstances in an event not covered by the other policy.

2. Not Knowing Your Purchasing Capability – What is your Price point / Affordability?

Understanding your purchasing ability is critical to understanding what you will be able to purchase. Common sense you would think, however, many people start their search with a mistaken belief that a loan will be easy to get. They are searching based on emotional desire versus financial reality.

Understand your financial situation and deposit-paying ability as soon as you can. Start your inquiry with Mortgage Brokers and your bank and advise them of your intentions. Do not assume your current bank will look after you, research at least three alternate funding avenues. Remember to inquire about any submissions attracting attention to your credit rating. Protect this at all costs. Reduce any borrowings and commitments such as credit cards, personal, Education loans, tax debt, etc where possible as these are taken into account and discounted against your borrowing capacity.

The sum of all your resources, comfort level, and repayment ability will dictate your purchasing range. Stick to the range. With this knowledge at hand, you can start your search for price-relevant properties.

Tip: Just locate the median price of a similar house to what you seek in your targeted area. This price will give you a baseline of what properties are transacting at…it will also save a lot of time and money when you look for price-appropriate property. Having champagne tastes on a beer budget only leads to heartache and frustration.

3. Getting in your way – competing against themselves with Agents

Often purchasers will make the mistake of getting very close to selling agents. Let’s face it many agents have achieved a rock star status in the rapidly increasing market. The problem is that listening and taking advice from the selling agent as to what they should be paying is risky for obvious reasons – they represent the vendor’s best interests. The value should be determined independently via third-party data or professional assistance.

The problem arises when purchasers in some of these relationships are making offers for the property and often, they are competing against themselves or believing in the speak of where the price is at. An auction will defy this process ultimately...but what about when many sales occur before the auction? In these cases, the vendor accepts the early price because it satisfies their requirement often, and they are anxious as to whether the price will reach the anticipated prices.

Higher prices are obtained by stimulating the purchasers to make substantial offers to take the property off the market, fear of missing out, and being left behind by the market. The emotionally-driven scenario with the fear of missing out often leads to the offer and acceptance being made. What if offers were placed strategically without the emotion and interruption of believing the market hype? Get out of your own and try to remove emotion and involvement in a negotiation or making of an offer.

4. Not researching the market properly and understanding value

A great way to get insight into the area you are looking to purchase in is to research the median price value for a comparative home. This figure gives the median prices being paid for a certain period. It becomes a centerline. Buying under this is usually a very good thing. Purchasing above this line is not detrimental if the property condition, quality, and location represent a higher value. All areas have blue ribbon streets or the best attributes or aspects that attract a premium.

Learning to understand the market nuances is critical to not overpaying and finding great value. There are so many online sites and tools that can assist in forming an opinion on the prices of a property and its location. Create a rating system and check the box for items you want or do not want. This creates a checklist to compare the properties. I advocate giving each property a score out of ten for all factors. This will help focus your attention and search.

The ultimate assessment of property comes from doing the miles… the physical inspections and property comparisons. Rarely are two properties the same. A differentiation could be as simple as different fittings and natural floorboards versus floating tiles. The list can go on.

There is no substitute for inspecting the houses on your shortlist. Each house should be rated after the inspection. On every inspection ask the Agent about the property, the market, what their indication of price is, and what their opinion of price is.

Remember that when a property sells it can take 6 weeks to register at the land titles office with the sale price, in a fast-moving market this is a long time. It is also a price based on the past. This is the inherent problem with valuation, it is pegged to past pricing as opposed to a fast market or unique property where values run. Trying to apply logic to the price sees many properties missed.

Portals such as Domain, Real Estate.com.au, and many banks of property valuation portals if you look. These give a good guide to understanding value.

Not researching the market property together with its drivers such as facilities, infrastructure, schools, road, rail, food shopping, beaches, etc., can lead to major disappointment. Many out-of-area buyers have deluded visions of what they will acquire for their funds. Many times, their budget capability is not competitive at all, and they have seriously wasted their time and resources because they did not invest time researching the market and what their budget could likely achieve.

5. Unrealistic expectations - ‘Champagne taste on a beer budget”

Having a champagne taste on a beer budget will only lead to frustration. An example was a professional person from interstate who sought a 1-acre block in a prime blue-ribbon Sydney North suburb with a house newly built, 4 bedrooms, 3 bathrooms, and 3 cars and expecting to acquire this for $1.8 million.

The median price for a block 500m2 and, 3 bedrooms, 1 bath was achieving this price. A home they wanted was double this price and more. Their expectations and capabilities were not aligned.

6. “The property is only worth this much” … You can’t control the market

A common comment from purchasers who have studied a market and particularly apply all the online price guides or use RP DATA Or Pricefinder products to ascertain the value of the property is that “The property is only worth this much” so that’s all I will be paying” – the floor in this argument is that those prices are generalities and based on algorithms that are predictive but not an exact science. They often have an indicative gauge of ‘low confidence’, “medium” or “high confidence”. This will often reflect the number of data samples within the area or the lack of them. If there is no price guide given you know the property is uniqueness or differentiated by way of age, size, etc and there is nothing to compare it to. There is no substitute for physical inspections and comparisons as no properties are identical.

Forming a price opinion is essential, however, like all markets when someone dictates prices, they can be embarrassed. You can’t control the market prices, it does not react to your budget constraints, it will respond to overall sentiment and will sell to the person who offers more than or meets the vendor’s price expectation. It is about supply and demand.

A great example of this situation is attending auctions where a purchaser has an expectation and chequebook ready at $2.1 Million and the ultimate sale price is $2.5 Million and three bidders were pushing this till the end. It is simply demand.

The argument from buyers that the price should reflect the work they need to do to make a property suitable for themselves can also be invalid. In these circumstances, the market will gauge the base price of value and their interpretation could be more or less valuable than your assessment or wants. You can’t control the market.

7. Listening to the Selling Agent and not understanding Fair Market Value

Listening to the agent is discussed in point 3. Simply put they are the vendor’s representative, and they have a fiduciary role to represent the vendor’s best interests, they are agents for the vendor. Their key role is to market and present a property for sale to obtain the best sale price possible. They do this by building rapport, influencing, and employing salesmanship skills to attain the highest possible price within the sale period. Nothing new. Surprisingly many people especially women will absorb and become very influenced by the agent’s personality and sales pitch. the above content is discussed regarding listening to the agent (point 3). Remaining detached and aloof at inspections does ultimately have its advantage.

Learning to understand the Fair Value of property is an essential thing to do if you don’t want to pay excessively and want to obtain true value. Fair Value is a benchmark price range that you will conduct your negotiations around. Sometimes Fair Value could be more than what an agent is asking – this occurs where there are areas of value that have been missed (zoning, new planning, a quick sale, deceased estate, poor marketing, quality, etc)

Fair Value is determined by pulling together multiple data sources and price indications (online valuations, algorithmic, and through agents and others, past sales history, and doing inspections on comparable properties, or through professional valuation. Fair Value is important as it relates to the property you intend to buy and will create the centerline for how you negotiate with a vendor or their agent.

8. Not properly inspecting a property – especially under the house, foundations, or water penetration areas

Firstly, get a high-quality building inspection done. There are many building and pest inspectors (not necessarily together) often franchise operators in this space, but quality does count. Most final reports are full of disclaimers and exclusions, but the content can be enlightening. Often private specialist operators in this space are the best.

Purchasers often baulk, are hesitant, or disregard these inspections – do this at your peril. I have also seen others consciously disregard the advice when they are emotionally charged when purchasing a property. This can be an expensive and frustrating experience. It has in circumstances also affected the insurability and finance of a property.

Advice from a trusted builder and trades can be invaluable for insight on the existing building state, cost of repair or remediation, or any new renovations that you might desire. The cost of these inspections is cheap insurance ultimately or in any case, can provide the foundation for a strong price negotiation if these problems are acceptable.

In a hot market, it is hard to get these professional services, and often the quality of the inspection is not as good as it should be as they are time-pressured or not able to get access to certain areas of the property.

Blocking access to key inspection points or obscuring them such as under-house entry points and manholes is a trick some agents will use to deny access. Don’t be afraid to demand access to these areas.

I like to go under the house. Here you can see leaking water services, water flows and drainage situations, whether the foundations have been eroded or underscored, and whether there is obvious termite activity or stored debris. Great insights into a property can be found if you look.

Drainage and water flow are common issues. Having a plumber look at contentious areas or a good landscape gardener can pay good dividends.

Be mindful of fresh paint works especially in areas that are sub-terrain or on lower floor levels as they may have covered a mold problem. This could be hiding rising damp or water seepage issues. The same with ceiling and rooflines, check for missing roof caping, broken tiles, poor seals, guttering and downpipes, and roof penetration areas such as Satellite or TV antenna fixings as they can all allow the weather to penetrate. Often there will be evidence of this. Looking at wood items and structures for wood rot and termite infestation. Termites are impressed with how they can encroach within a property and to areas and distances you would not expect. Most inspections are cursory and shallow as invasive inspection with drilling is not permitted on someone else home unless agreed.

Inspecting the drainage lines and sewer where possible is advisable. Find the sewer lines and the connection points for water, sewer, and electricity. Easements and sewer should be contained in the contract of sale.

Inspect the boundary lines to see if there are no obvious discrepancies. I have seen properties for sale where neighbours have fully encroached past their boundaries onto the subject property to subtly reclaim the land… with extended gardens, misaligned fences, walkways, etc. These can create issues later but should be cleared and defined at the time of purchase.

9. Disregarding professional advice – legal, pest, building

Disregard professional advice at your own risk. Sometimes it can be appropriate but then it is identified, and considered decisions can then be made. Blatant disregard for professional advice can have expensive and litigious consequences.

The reports and reviews of your lawyers or conveyancers should be heeded. They were employed to review and protect your position so listen to their advice. There are so many examples of potholes and pitfalls that can happen with property purchasers. E.g., It could be buying a strata unit and finding you are liable to special levy raisings to cover new building works, or the previous owner had illegally built over easements or sewer lines, or a lot of building works were not compliant or certified. So it goes. These can be contingent problems that raise their head later when you attempt to do future development or renovation or try to refinance, and these issues are discovered, and the finance is rejected pending remediation or rectification.

A sad example is a northern beach property that was purchased for more than $6 million despite a report indicating extensive active termite damage. Within 12 months the new owner had to undergo major renovations and extensive costs to rectify the problem when they started experiencing some structural failures. This could have been avoided.

Transactional advice regarding the terms of the sale contract must be reviewed. Attention to special conditions and vendors’ stipulations can also be trapped. For example, trying to get the purchasers to pay vendors’ land tax obligations, pay excessive penalty rates of interest for delayed contract performance (what about co-vid and lawyers being unable to meet for settlements), release deposits early, or higher penalty clauses for any delay. Items of interest or fittings that should or need to be retained on the property should be included in the contracts. or attending an auction and getting pre-arranged and extended or shortened settlement dates. The concept is risk identification in the contract and transaction terms. Additionally reviewing and understanding where easements and building lines are recorded versus where they are in reality.

Engaging professional pest and building inspections or other trades and professionals for the house is about identifying, understanding, and mitigating the risk around the physical property itself. A Sale Agreement is for the Sale of Land with a house thereon. Risk identification is about the land, the house, and the contract that frames the sale. Caveat emptor! (Buyer beware)

10. Letting emotions take over logic

Emotions are high in residential transactions. Markets are driven by greed and fear and property is often no different. Residential property is about people’s homes, families, status, and sense of belonging. Emotion when fuelled by a fear of missing out (FOMO) can create some interesting pressure on property prices and logic.

In a hot market people will often commit to a purchase by paying well more than their intended budgets, or when bowing to social pressures or their peers will acquire properties or aspire to lifestyles above their means. These emotions can also affect judgment on issues that logically should not be carried out or avoided. For example, the termite house example above or the over-commitment at auction to a new purchase.

Removing emotion where possible or identifying it as a weakness in the property acquisition process can be very advantageous. Some intending purchasers will engage a buyer’s agent to create this situation. With a buyer’s agent or advocate involved there is no emotion and objectivity increases substantially. They can facilitate risk assessment, assist in understanding value, create a strategy, negotiate, and make offers by effectively executing the processes.

By focusing on three core areas of Time, Value and Execution we can see where people need help to contain emotion and use logic in the process to control how they participate in buying a property.

The vendors and agents cannot be controlled, they can be influenced, however, the purchaser can control how they prepare, investigate, and participate in the purchase process. Logic over emotion is a lot safer approach.

Buying property is a big purchase, go about it professionally enjoy the process and get a quality property for the right value. Prepare your finances, search and shortlist the properties, understand the fair value, set your strategy, and execute it.

Save Time, Save Money, Remove Stress - get an Advanced Buyers Agent on your team

Contact me at gary@advancedbuyersagents.com.au for further information.

Dedicated to your Success!