Buying with blinkers on

Buying with blinkers on.

Alun and Angela have two small children and like so many couples with little kids, they went out house hunting looking for the ideal family home. They originally bought a property in Seaforth thinking that they needed a big block of land because that is what a young family “should” be looking for.

I suspect that they were so focused on what they thought they should be looking for at that stage of their lives that they didn’t sit back and consider the big picture. Not long after moving in, they realised that being close to the action was far more important than having a big block of land. Seaforth was a little quiet for them so they decided to sell and trade locations. They were lucky that the market had moved significantly since they bought and they weren’t penalised for only owning the home for a short time.

The next problem for them is that they wanted a lot of house, even if the land size could be smaller than they had come from, and these types of homes in the suburbs they liked were very sought after. So they started to follow a path fairly well trodden by people in their shoes. So they put another set of blinkers on. This time their thinking was that if they can’t find the perfect home within their budget, then the answer must be to find something to knock down and rebuild.

Trying to bring the mountain to Mohammed.

This is all lovely in theory but oh so complicated. Firstly, you need to find a property that is cheap enough so that you don’t run over budget with the build. Then there are limitations dependent on suburb and each council. And if you manage to get the right site at the right price within a pro-development council area, you then need to find the right design, builder and alternative accommodation until completion. Oh, and then you need to finance it.

Let’s assume that you find a house that fits the bill. The next step is to see whether the council is likely to approve demolition and a new dwelling. And there are loads of pitfalls, for instance in some councils the new house wouldn’t even be able to be as big as the one you are demolishing!

To get the right advice you would need to know the exact block dimensions and the only way to know for sure what these are is to get a survey. Unfortunately it’s not mandatory for vendors to include a survey in the contract of sale, so if one doesn’t exist you will need to organize and pay for one yourself. And in a fast moving real estate market, the property may well sell before you have a chance to get one!

I would recommend getting an architect through to advise you as early as possible in the process. If you call council and ask to speak to the duty planner they will give you some basic info on development restrictions and also a list of local architects.

Here is a general checklist of things to consider if you are still up for the challenge:

  1. Why do you want to build rather than buy existing? Can you really not get what you want in an existing property? What is your building experience?
  2. Remember to factor in holding costs. You will have to pay rent somewhere else while it is being built and it could take more than 12 months for go to woe.
  3. Zoning and planning controls. Exact land size will be a big determinant. Setbacks and site coverage need to be considered. Can you get what you want?
  4. Subdivision potential? If the site is big enough this will open up competition from developers.
  5. Conservation area or heritage considerations. Preserving the streetscape makes for a better long term bet in terms of area desirability.
  6. Renovate or rebuild? It’s cheaper to build from scratch than renovate but be sure to factor in demolition costs.

Downsizing not downgrading.

Downsizing not downgrading.  

What a great couple Sue and Barney were to work with. In their 70s, they had bought and sold numerous properties over the years and generally seemed pretty savvy.

They knew Wagga well, having lived there for many years when their kids were young and also visited many times over recent years as their son and his young family had made it their home. However they hadn’t actually looked at any houses prior to our search. Which meant that we were more on an orientation course than a property search.

The budget they set was a little arbitrary, neither based on the market nor on the limit of what they could afford, rather it was what they wanted to spend and they hoped that it would be enough to get them what they want.

This is one of the reasons why internet searching on its own is not sufficient research. Properties look great online, as real estate agents typically pick the most flattering photos! It’s not until you physically inspect houses that you get a sense of such elements as room sizes, ceiling height, natural light, general state of repair and, possibly most importantly, the neighborhood.

After looking at a few houses, Sue turned to me and said “we are downsizing, not downgrading”. I thought that was a great quote and really summed up the challenge a lot of empty nesters face. Barney was really keen on a double garage and they both wanted a second bathroom. Houses that met their criteria in the more established and desirable suburbs of Wagga were beyond the budget they had given me to work with. Yet their brief could easily be met in the newer housing estates that were located a bit further out of town.

So the age old debate of house versus location becomes the subject of yet another search. I suspect that Barney and Sue will probably stretch their original limit because otherwise they were really looking at the same properties that young families would be considering, without the same stamina for either compromise or renovation. And there is nothing like competing with a first home buyer to make you feel like you have gone backwards down the property ladder!

The importance of getting your brief right

The importance of getting your brief right.  And researching before making a tree change.

Wow, there were a lot of issues with this search. As is often the with tree and sea changers, I was concerned that Suzie’s decision to set up a vegan B&B and animal retreat in the Byron Bay hinterland was both romantic and naive in equal measure.

It concerned me that she had not invested any time or resources into developing a plan, local connections or gaining relevant experience, let alone spent any significant time in the area. There were many things that Suzie simply didn’t know anything about:

  • Gardening
  • Running a B&B
  • Suitable animals for different climates (hoofs and wet soil, for instance)
  • Composting toilets
  • Illegal dwellings

Originally we had a budget of up to $900K to work with. Acreage is a slow moving property sector in this area, so there was quite a bit to choose from, much of which had been on the market for some time. In the end she decided to go for a property that was much cheaper. She was no doubt looking at these regional properties with a Sydney price mentality and so the $399k price tag was especially tempting. In fact, tempting enough for her to overlook issues that were previously very important such as within an easy commute to Mullumbimby.

City slickers need to take extra care in the country!

Suzie took one look at this property and fell for a classic real estate trick. The agent had organised for a few people to look at the property at the same time and one of these other buyers looked like they were interested, which of course the agent took advantage of. Fear of missing out then led her to make an offer on the spot without first considering value. Of course it was accepted straight away!  She threw away her right to negotiate and I believe there is a good chance she gave away money unnecessarily

I get that Susie liked the idea of minimizing risk by buying a cheaper property (whether she was consciously aware of this or not), however she dived in head first and didn’t take the time to question whether this property actually carried more risks than a more expensive option. And in my view she made her offer too hastily (after her first and only inspection and before doing any due diligence) and she will never know if she paid too much.

I had a conversation with the agent after she made the offer and it transpired that the property had been on the market for some years, originally targeting a price in the mid $400Ks.  It had an aborted auction campaign where the one and only interested person made an offer that was accepted but failed to secure finance.  Given the price point, this property was likely to appeal to first home buyers, however these are precisely the buyers with minimal deposits and the banks are very wary of lending to hem to buy acreage.

This information suggests to me that the was definitely an opportunity to negotiate hard on this property. Such a shame that we will never know what could have been achieved!

There are three lessons to learn from this experience.

Firstly when a buyer has a dream to make such a major life change, it’s folly not to have a plan and invest in research. I couldn’t help wondering whether Suzie was a bit scared of testing the viability of her dream.

Secondly, it is crucial that you learn local market dynamics and pricing so that you don’t overpay through having a city mentality. The same rules simply do not apply.

Thirdly, never buy a property after only one inspection! It doesn’t matter where it is.

 

Keep sales agents on side.

Keep sales agents on side.

Before coming on the show Sarah and Scott had found it difficult to work out how to handle selling agents.  They had made an offer on a property that went nowhere. They were prepared to increase but they didn’t know how to progress when the agent clearly didn’t take them seriously. Lazy or disinterested agents are difficult to deal with. They weren’t even sure their offer had been presented to the vendor.

Buyers often make a mistake of using the asking price as the starting point for negotiations instead of first working out what the market value of the property is. If you know what it is worth and make a really low offer that goes nowhere you can have confidence to increase your offer.  But if you have no idea what it is really worth you may fall into the trap of thinking “I don’t want to compete with myself”.  You are not competing with yourself if you are nowhere near market value!  The agent and owner will simply wait till another buyer is found who will pay market price.  Which is what happened in this case.

And then some agents can be very annoying, unhelpful and frankly unlikeable. So the temptation for a buyer to say “stuff them” is very real.  You have to overcome this if you want to buy the property.

Couples need to be on the same page.

The other issue is that all briefs need development.  Sarah and Scott came to us with what seemed like a comprehensive brief where they were both firmly on the same page. But there were some subtle differences in what each of them wanted, which made it hard for them to come to a point of decision. They were lucky that Hobart real estate was moving as fast as houses in other capital cities! Instead they did have the luxury of time.

I always find it interesting to test whether there really are no differences between a couple.  Because often you cannot buy a property until those differences are uncovered.  They have to be identified and acknowledged before compromises can be agreed upon.  Couples who are scared to disagree often float around making no commitments.

So I was glad that the houses we showed Sarah and Scott were able to put a spotlight on the way in which their tastes were polarized. Once the deal breakers for each partner were on the table and discussed at length, they were able to work out which compromises they could both live with. This is why it is important for both partners to be actively involved in the property search.

Chasing the market

It’s really tough when you are trying to buy a property in a rising market. Just when you feel that you have come to grips with sale prices, another one sells that has you scratching your head. This is what happened to Garry and Anna. They started looking when the market was already strong, and then it surged!

The Sydney property market moved suddenly in 2013 and agents and buyers alike got taken by surprise. When an agent lists a property, he/she quotes a price based on recent comparable sales and when the market suddenly spikes they find that competition can push prices way in excess of their initial expectations. It takes a while for their price guides to catch up and reflect actual sale prices.  So, after a few months, you see the gap narrowing between advertised and actual prices.

That said, agents never like to quote exactly what they think the property should sell for.  There is a delicate dance that goes on.  Buyers expect agents to quote low.  So if an agent goes against the grain and quotes accurately, buyers will assume that the vendor wants too much for the property. As a consequence they don’t compete. From a buyer’s perspective, this is a perfect storm! This could be an opportunity to pick up a property for a reasonable price in a hot market.

So how do you avoid chasing the runaway train?

  • You have to be diligent in looking every weekend at property and if a house has it’s first open midweek, you need to be there.
  • You have to quickly react to moving prices, recognize that the market is on the move and be prepared to pay a premium for a quality property.
  • But remain cool headed – don’t panic and pay too much for anything sub standard – you need to pick and choose the properties to pay a premium for.

In a hot market not all properties are created equal. Some will end up being fair value and others overpriced. For example, we showed Garry & Anna a property that needed work and we also showed them one that had been completely renovated. If that first property sold for early-mid $800s (as the agent was indicating) and the last one sold for high $800s-$900K, that shows the craziness of the market.  The first property was not well maintained, the floorplan was all wrong and I don’t think the street was as good as the last.  To make the necessary changes Garry and Anna would need to invest a whole lot more than $50K.  Forget the time and hassle!

The key is to be prepared: ready to buy, know what you are prepared to compromise on and armed with recent market intelligence.  Because when you find the right property you will need to pounce and be decisive.

The steps you need to take to be prepared are:

Finance.

Have your pre approval ready and talk to your bank or broker about what needs to happen to make that an unconditional approval (usually a bank valuation).

Have your deposit ready (a cheque book is ideal).

Due diligence.

Have a building/pest inspector or strata report people on short dial.

Get the contract to a solicitor or conveyancer for review.

Check things like neighboring DA applications, general noise levels, natural light at different times of the day.

Price research.

Be constantly up to date with recent sales information and try to inspect as many other competing or comparable properties as possible.

When you find the right home in a hot market, you do not have time to think.  You need to know what you want, know when you have found it and know what to pay for it.  All that without panicking!

It’s hard to believe that $900,000 doesn’t buy much!

It’s hard to believe that $900,000 doesn’t buy much!

Juliet was buying in a very desirable part of Sydney in a hot market and even though she had a healthy budget, it wasn’t quite enough to get her what she wanted.  It’s tough when your budget is borderline, as so many properties look tantalisingly within your reach but someone with deeper pockets can very easily make them unaffordable.  It can be heartbreaking to keep turning up to auction after having spent money on building inspections and conveyancing to keep missing out by only a small amount of money.

The options open to you are to change location or accept a property with sufficient compromises. But you need to be aware that the second option can affect long term capital growth.  When buying an investment you can be less fussy with regards to location but when you are buying a place to call home, the suburb choice becomes so much more important.

From an investment point of view, the focus is usually very much on future capital growth.  

Owner occupiers pay less attention to this – but I personally believe they should consider this aspect more than they often do.  You see, by making location the number one criteria, the property’s attributes become the things that have to give.  But a property in a great location with loads of negative features will most likely grow in value at a slower rate than a better property in a lesser location.

Some of the compromises that owner occupiers will make to be in their desired suburb include:

  • buying on a main road,
  • an architectural style that is out of keeping with the area,
  • a smaller or odd-shaped block of land,
  • an unappealing outlook,
  • lack of natural light,
  • lack of privacy,
  • a smaller home (like one less bedroom than they could afford elsewhere)
  • no parking
  • less renovated
  • next to a pub, electrical substation or a petrol station, for example.

Some of these compromises will affect future capital growth more than others. For instance, being next to an electrical substation would be a deal breaker in my view, since you can never overcome this negative. On the other hand, a home where the neighbours look right in may be able to be improved by some clever landscaping.

After looking at all the houses we showed her, Juliet decided that Leichhardt was the suburb that she wanted to be in.  Yet the house had the most compromises of the lot!  The main one I was concerned about when considering resale value was that the second bedroom is tiny because of the staircase placement.  This did not affect Juliet as she could see that the room layout suited her perfectly as she would mostly be using it as a home office and the balcony it offered was a real bonus.  However for other buyers who want a more typical second bedroom, this would be a deal breaker.

Juliet bought that house – but with her eyes well and truly wide open.  I could see that it would suit her needs but I also wanted her to be aware that other buyers would not view it so positively.  After inspecting it another two times and spending time hanging out in cafes and shops in the area, Juliet decided that she felt right at home in Leichhardt and was completely in love with the house.  And ultimately it was the most affordable of all four properties, so she had the added benefit of a smaller mortgage!

Property searching for the time poor.

This search had so many issues to deal with!

Property searching for the time poor.

When you have a busy life it is difficult to allocate the necessary time to ensure you inspect every property that might suit your needs. And as well as actually looking for the right property, you need to educate yourself about the market and prices.

These guys were particularly time poor, so they were learning on the hop. Michael & Naomi’s brief was wide and accepting at the outset. But we very quickly established what was important to them by looking across a wide spectrum of property within a short time frame.

Most searches do not happen like this. Buyers spend many weekends searching in a specific geographic area and never compare different options in real time. So they might only venture to the Lower North Shore, for instance, after many weeks or even months traipsing through open houses in the Eastern Suburbs. In the time it takes to get your head around one area, the rest of the market has been growing in value and you can easily find yourself priced out of what you could have afforded at the beginning of the search.

So, while it may initially take a large commitment of time to search in more than one area, in the long term it will save time as you can come to a quicker decision on preferred area.

Auction underquoting.

It’s a common complaint of buyers: that agents underquote on auction properties. Sometimes it is very deliberate, after all, they are trying to quote low in order to generate the maximum amount of competition. Other times they really don’t know themselves.

For instance, with Michael and Naomi’s search, it was easier to judge where the Bondi property would sell for as there were similar properties around that had sold over the previous 6 months.  In the end it sold prior to auction for $2.41M and we had been discussing a figure around the $2.4M mark, so no surprises there.

It was a lot harder to pin down the price of the Dover Heights property as there we no direct comparables and very few sales at all to review over the previous 6 months.  And as it so happened, the market in that price bracket suddenly surged, which resulted in enough buyers being interested to create a competitive auction and push the price way over what was quoted.

Now we always knew it was going to be a long shot and Michael and Naomi stretched themselves to $2.5M so they could know that they gave it their all.  The agent, however, had been quoting under that figure and the reserve turned out to be closer to $2.8M, as I deduced by the way the auction ran.  A classic case of “quote it low and watch it go”.

It’s really hard when you fall in love with a property that is borderline affordable. There is a lot of money and energy to invest in order to give yourself what is probably only a slim chance. But on the flipside, you would kick yourself if you didn’t go for it and it sold within your means.

Renovating for sale versus for living.

Both the Bondi property and the Dover Heights properties had been recently renovated. The Bondi one, in particular, had quite an impressive initial impact. But when you looked a little closer you could see that there were a lot of areas that had been facelifted rather than renovated. What I mean by that is that it was renovated to sell instead of being renovated by an owner to live in themselves.

You don’t want to buy something that has just been tarted up yet has structural issues that have not been addressed. “Lipstick on a pig” is how Michael described a renovation that looks better than it is. That said, just because a property has been renovated for sale it doesn’t mean that it is a bad property, but it is important as a buyer that you know what you are getting.

These renovations focus more on impression than substance and will often feature “fashionable” fittings and finishes that can date very easily.  If they aren’t quality inclusions they won’t wear well either and can easily end up looking shabby.

There are some telltale signs. Here are some that I picked up while looking with Michael & Naomi:

  • Tired old aluminum windows left and disguised with plantation shutters.
  • Floating floors laid over existing flooring.  Much cheaper than replacing with a new floor.
  • Unresolved floorplans with quirky flaws like access from the garage through a wardrobe.
  • Practical considerations are often overlooked, like ensuring storage is adequate.

A building inspector I respect says “some houses look better than they are and some are better than they look”. But by being aware of some of these tricks of the trade you can make a buying decision with your eyes wide open.

It’s scary out there for first home buyers!

It’s scary out there for first home buyers!

Helping Jessica to buy her first home was particularly rewarding for me. She was about the same age I was when I bought my first apartment, so I could easily identify with the excitement she felt about the big step she was about to take. She had caring parents who were there to support her every step of the way and yet there was something blocking them when it came to the crunch.

The Perth market was just starting to heat up and as often happens, the most competitive market segment was at entry level. Both first time buyers and investors were competing in the same space and this meant that open houses were crowded and frenetic, with offers often being thrown at agents by numerous buyers at the first inspection. It was understandable then that Jessica and Karen were being scared off property by the sheer weight of numbers at open houses and the speed at which people were making offers. They were easily put off by those who seem to be more aggressive or have a bigger budget. Add to this that it all seemed so fast and they weren’t being given any time to properly consider this most important purchase.

I have to confess that even I can experience a similar reaction at a packed open house. So it is no surprise that anybody who does not do what I do for a living could be completely put off buying at all. And even if you aren’t deterred by all the other clamoring buyers, when new listings are selling in their first weekend, you don’t have time to second guess yourself. It’s uncomfortable to feel pressured to make decisions without being able to take enough time to properly consider the property.

It’s a double edged sword, do you make a snap decision in order to secure a property but run the risk of buying something that you regret? Or do you take your time to think it over and take the risk that another buyer acts so fast that it’s gone before you know whether or not you want it?

There are a few things you can do to beat other buyers in a hot market:

  1. Hire a buyers agent to give you not only a time and tactical advantage but for quality advice on property selection so you can quickly make a wise decision.
  2. Look at as much property in your price bracket as you can so that you are well educated in terms of both values and what characteristics a good property has versus a dud.
  3. Get to now the active agents in your area. Be friendly to them and engage in conversation if possible so they will remember you. This may surprise you but they often have “favorite” buyers and this may give you an inside edge.
  4. Set up database alerts on both domain.com.au and the active local agent websites. They often email their database before new listings go live online.
  5. Look for overpriced listings. Just because it’s been on the market a while doesn’t necessarily mean anything is wrong with the property. But if it priced too high buyers tend not to even inspect it. If you know values and are prepared to make a low offer, you might find that you can negotiate a deal without competition from other buyers.
  6. Auctions can be your friend. Not only are they a transparent sales process but a property with an auction campaign is not as likely to sell after only one open house. Then you have more time to do your due diligence and you may still choose to submit a pre auction offer.

And the final word: don’t give up. Remain positive and keep a handle on value and sale prices and you will end up getting your dream home without buying a lemon or paying too much.