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Property Buying Special

In This Issue:

1.    Ignore the averages (a.k.a. median)...
2.    Auctions... What's happening?
3.    Using a Buyers Advocate
4.    Finance... 2 Commonly Overlooked Issues
5.    No Time? Pre-approval it!!!

Ignore the averages (a.k.a. median)...

The media always jump over any information and statistics about median housing prices. They will draw conclusions from this data about whether it's a good or bad time to buy or sell property. There are a lot of problems with listening to this noise.

Firstly, medians are just that! If there are 10 sales in an area they will list the sales from highest to lowest and then pick the middle sale (i.e. the 5th sale). This data includes good and bad locations and different types of property. The important thing to note is that there can be pockets of property that perform dramatically different to the "median". For example, the inner-city apartment market has performed significantly worse (in terms of value) than the median over recent times. By contrast, the 'blue chip' properties in Sydney and Melbourne continue to enjoy considerable demand from buyers. Most of these property prices are still increasing (albeit at a lower growth rate than previous years).

The second important factor is that the property data may be limited and/or incomplete. Even the Reserve Bank of Australia has commented recently on the lack of reliable and timely data in Australia. Any data that currently exists in the market may be incomplete and out of date because it is not mandatory to record the sale of a property in a centeralised area. Most property data firms source data from State land titles offices. This means that they will only find out about a sale when a property sale settles. However, the property may settle months after the sale was negotiated and the market could have changed in this time. The average time in Victoria between when the sale is negotiated (i.e. signing of the Contract of Sale) and when the sale is recorded in the land titles office is 90 days. This is particularly important when median pricing data is broken down by suburb. Sometimes this data can be based on a very small number of sales which can provide a misleading snap shot of the market.

Thirdly, consider the properties that are being sold in your area. The newspapers might be saying that housing prices have increased significantly over the last few years. However, it is possible that many people in your area may have been renovating or improving their property. Therefore, the reported increase in property values is probably not a "price increase" per se.

The best thing to do is to tune out all the noise the media makes and complete your own research. Look through the papers, talk to real estate agents, attend open houses and auctions, etc. You can very quickly get a good sense of the market. Observing real estate agents can tell you a lot. If you are a buyer and they are interested in talking to you then it's likely the area isn't going too well. If they don't give you any face time (as a buyer) then you know it's a hot market (too many buyers and not enough properties).

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Auctions... What's happening?

Victoria and NSW have introduced new laws to eradicate the use of dummy bidders at property auctions. NSW laws (introduced in September 2003) require real estate agents to only accept auction bids from registered bidders (e.g. interested parties must register before the auction). The agent can only make one vendor bid. In Victoria, (where new laws were introduced in February 2004), only the auctioneer can make bids on behalf of the vendor and they must clearly announce it's a "vendor bid". Both States have also introduced laws to prevent agents from deliberately under quoting the estimated selling price of a property.

So what's been the effect of these new laws?

Some interesting outcomes of the new property laws include:

•    The amount of properties being sold at auction has significantly decreased. More people are opting for the 'private treaty' method of sale.

•    More properties that are being sold using the auction system tend to be passed in and sold through the traditional 'private treaty' method. This indicates that the "market" (i.e. buyers) prefer the 'private treaty' method rather than buying at auction.

•    Some buyer's advocates have suggested that agents are now employing "dummy negotiators" to hang around at auctions after the property has passed in and pretend to be interested in the property. This is done to pressure the successful bidder (i.e. highest bidder) to negotiate with the Vendor and sign a Contract of Sale.

•    Some agents are finding it difficult selling properties by private treaty because they are so accustomed to the auction selling method.

It is hard to get a true sense of the effect these laws have made on the market because comparing current results with what happened a year ago is not a meaningful comparison (given the slowdown in the property market this year). However, anecdotal evidence seems to suggest that these new laws have gone some way to cleaning up the market.

When you are out there negotiating your property purchases, just be mindful that the real estate agent is working for the Vendor and it's their job to get the highest price. Sometimes this means agents may play games with you. The most common is the emergence of another "interested party" just when you start to show some real interest in the property. Maybe consider getting some professional assistance to negotiate your property purchase.

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Using a Buyers Advocate

With the constant changes in the real estate market, new laws, real estate agents playing games do you really want to be negotiating the purchase of your own property? Notwithstanding these issues, purchasing a property can be a very time consuming task. It can take up many hours on the weekends and at nights searching the Internet.

Buyers Advocates are able to search for a property that meets with your specifications and negotiate the purchase of that property. They work exclusively for you - the buyer. The main two benefits of using a buyer's advocate are:

1.   Save time - they will do all the leg work and prepare a short list of properties that meet with your requirements. This could save you literally days.

2.   Experience - they purchase property every day. How often do you do it? Most buyer's advocates will say that they can actually negotiate the purchase of a property for less than you can, due to their negotiation experience and knowledge of the market.

Buyer's advocates normally charge you a set fee for their service. Most fees will be approximately 1% to 3% of the purchase price. They will often work with you for several months until you find the right property.

Just like anything there are good and bad buyer's advocates. If you are interested, we would recommend you check out Wakelin Property Advisory in Melbourne (www.wakelin.com.au) and Property Buyer in Sydney (www.propertybuyer.com.au).

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Finance... Two Commonly Overlooked Issues

Here are two important issues that most borrowers do not consider.

1.  The cost of Lenders Mortgage Insurance can vary significantly

The cost of Lenders Mortgage Insurance, which applies when someone borrows more than 80% of a property's value, can vary significantly from lender to lender. This cost variance can be in the thousands of dollars.

The cost of mortgage insurance is calculated as a percentage of the loan amount. The relevant percentage cost is influenced by the loan amount and the percentage of property's value being borrowed (i.e. loan to value ratio or LVR). The higher the loan amount and LVR, the higher the cost of mortgage insurance.

What most people don't realise is that the cost of mortgage insurance can vary greatly amongst the banks. For example, if a person borrows 90 percent of a property worth $350,000 (i.e. $315,000) the mortgage insurance premium could be in the range of 1.25% to 1.70% (from a review of 11 major banks). This mean the cost of mortgage insurance could vary by as much as 0.46% (or $1,450 on a loan of $315,000).

Most brokers are too lazy or not diligent enough to compare the cost of mortgage insurance. This is something that you have to insist on. As a guide, the Commonwealth Bank and National Bank appear to be consistently cheaper than most other lenders in Australia.

2.  It's not fixed versus variable

I would rarely suggest anyone fix in 100% of their loan. Often a split loan (i.e. part variable and part fixed) will give borrowers the best of both worlds. Therefore, the common argument of "fixed versus variable" should be more correctly stated as "split versus variable".

Most lenders will offer the flexibility of having a split loan at no extra cost. The proportion of fixed and variable is totally up to you. Most people opt for a 50/50 split.

Our advice is to always fix your rate for the right reasons. The right reason is to protect you from interest rate rises. The wrong reason is because you think that you will be financially better off. The chances are you won't! We completed a historical study about a year ago which concluded that no 3 or 5 year fixed rate borrower was financial better off over the last ten years. You just can't beat the banks. Therefore, realise that you will probably end up paying a premium to fix your interest rate (kind of like insurance).

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No Time? Pre-approval it!!!

Too many people put themselves under undue pressure by looking for (and even purchasing) property without first arranging finance. Then they find themselves in a situation where they have found a property they like and have an offer accepted and only have a few days to get a finance approval. You don't want to rush choosing a home loan because a rushed decision could mean too much interest expenses and fees.

Arranging a pre-approval is not time consuming. It only takes 2 to 3 business days to get an approval and doesn't cost a cent! Best of all it puts you in a stronger negotiating position (compared to purchasers without pre-approvals).

Click here to arrange your FREE Lending Analysis Report... the first step in arranging a pre-approval.

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Topic Idea???

If you have an idea of a topic you would like to see covered in the next edition of our newsletter we would love to hear from you. Just drop us a quick email (info@prosolution.com.au) or give us a call. Thanks.

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