4 Ways to avoid risk when buying property this Autumn

It may be a buyer’s market, but when property prices are falling, buyer confidence often goes with it. However, the possibility of paying too much is not the only risk a home buyer or property investor can face when market conditions are undergoing significant change, as they are now. In this article, we outline some of the other potential pit-falls and tell you how you can avoid them when buying a home this Autumn.

Pre-approvals are more important than ever

A loan pre-approval means a lender has assessed your financial situation and determined how much you can borrow. It’s a good indication they’ll give you a formal loan approval later.

Banks have been tightening their lending criteria and this is one of the things influencing falling property prices. Fewer loans are being approved, and the size of loans being approved has also reduced. Home buyers who could easily get finance a year ago, are now facing much more rigorous tests to get loan approval.

Under no circumstances should you place a deposit on a property until your loan pre-approval is confirmed – otherwise you may risk losing your money.

Get lender approval on your property selection

Did you know that a lender can reject the property you want to buy, even if they have given you a pre-approval on a loan big enough to buy it? You can reduce the risk of lenders rejecting your home selection by asking us to confirm you have chosen a viable property before putting down your deposit.

There are several reasons why a lender may not give you final approval on a loan for the property you want to buy. The main reason is negative equity risk.

Negative equity is when the amount you have borrowed becomes more than the market value of the home. There is a risk this can occur due to falling home values. For example, in 2018 many off-the-plan homes were unexpectedly valued at less than the contract price upon completion and some buyers were unable to get the loan approval they needed to complete their purchase without topping up their deposit.

To avoid a negative equity situation, a deposit of at least 20% is recommended. If buying off-the-plan, it is also recommended you insert a clause in the sales contract confirming the final price will not be more than the market value of the property upon completion.

The other reasons a lender may not approve your loan is if the property is in poor condition, in a remote or unpopular location, or is too small (less than 52sqm).

Ask more questions

Research is key when buying in a falling market. Ask more questions about the underlying factors that drive capital growth to ensure the property will hold its value and you’re not paying too much – look at local employment rates, proximity to schools, public transport and other important amenities, rental demand etc. You can also contact us to access free reports that have this information.

Keep your broker in the loop!

Remember, it’s a buyer’s market and with careful research you can buy with confidence. If you want to secure a bargain this Autumn, then call us now to confirm your borrowing capacity and get pre-approval on a loan. In addition to helping to protect you from risk, a pre-approval will help you move quickly when you find the right property and negotiate strongly to get the right price. Call us for a chat about your plans today.

Buying a property off the plan

Considering buying a property off the plan? It sounds good in theory, with the possibility of stamp duty concessions and other benefits for first home buyers. But in 2018 there were quite a few people who got caught out by the hidden risks. Read on to find out what you need to know if you’re thinking about buying off the plan this year, or if you’re having second thoughts about an off the plan purchase.

What does ‘buying off the plan’ mean?

When you buy ‘off the plan’, it means the property you’re buying is not built yet. Typically, you’ll only have to pay the deposit upfront, then the balance of the purchase price once the property is completed. Because an off the plan purchase is a new build home, you may qualify for stamp duty exemptions or first home owner concessions, depending on your circumstances. (Check your state or territory’s rules online).

What are the risks?

Lenders may offer conditional approval for off-the plan purchases, but they won’t lend you the funds until they have performed a valuation of the property upon completion. In 2018, many buyers were caught out because their off-the-plan property was valued at less than the agreed purchase price and the lender would not lend the amount required to complete the sale.

There may also be other risks with purchasing an off the plan property, including:

The final product may differ from your expectations.

There may be delays or the development may not proceed. Your deposit should be refunded if this happens, but in the meantime, your money will have been tied up.

If the developer holds on to your deposit (rather than putting it in a trust account), your money may be at risk if the developer goes bankrupt.

Terminating an off-the-plan contract

Terminating an off-the plan contract can be tricky, but there may be grounds to do so. For example, if the vendor has engaged in misleading conduct or the developer doesn’t complete construction before the sunset date, you may be able to terminate the contract.

However, if you want to terminate the contract because a lender has valued the completed property at less than the agreed purchase price, you may have difficulty. You could potentially lose your deposit and may have to compensate the developer for any loss.

Seek legal advice about your options if you wish to terminate an off-the-plan contract. More importantly, ask your solicitor to examine any contract before you sign, to ensure you have appropriate exit clauses in place – more about this below.

Selling before settlement date

Some buyers decide they want to sell the property before settlement. This is legal under most off-the-plan contracts and can prove to be lucrative if the property’s value has gone up, but there are risks involved.

Key considerations:

Have your conveyancer check that the contract allows for re-sales prior to settlement.

Speak to your accountant about the tax implications of reselling the property (you’ll likely be up for capital gains tax).

You’ll have to pay stamp duty, additional legal fees and any agent’s commission, so be sure to factor these costs into your calculations.

If you find a buyer but your contract with them falls through, you’ll still be bound to settle with the developer.

Ask the developer to include a clause in the contract that allows you to terminate it if the completed property is valued at less than the agreed price.

Talk with me before you get started

If you do decide to go ahead with your off the plan purchase, I can help to organise pre-approval on your home loan and help you choose a lender that will work with you on this type of purchase. I can also refer you to a reliable conveyancer or solicitor to help you avoid the legal pitfalls. If you’re having difficulty organising finance to complete an off the plan purchase, please get in touch asap!

When buying a home, is bigger better?

When it comes to buying a home, bigger is better, right? Maybe not. All over the world, people are changing their attitude to the size of home they live in. This is particularly true amongst millennials, and if you’re looking to build your first home to take advantage of stamp duty concessions and first home owner grants, there may be many advantages to thinking small.

What are the benefits of building a small home?

They cost less to build because they require less labour and materials

Can often be pre-fabricated, so can be built more quickly

A small home requires a smaller plot of land

They use less energy – it’s easier to minimise your carbon footprint

Less maintenance costs

You can pay off your mortgage sooner

What qualifies as a small home?

A small home can be anything from a cabin in the woods to a city high-rise apartment, or a unit in the suburbs. The concept also paves the way for a much more creative approach to home design, and many smaller homes are made from re-cycled materials like old shipping containers, or wood and bricks from demolished homes.

If you’re interested in building a small home, you could consider employing a reputable builder of granny flats and/or modular homes. In Australia there are a great many to choose from, and this option has benefits like helping you build a more luxurious small space home, as you can collaborate on the design. These builders often create small space homes in the factory, then transport it to your site partially built, which helps to save on costs.

In Australia, it can be difficult to get a mortgage for a home or apartment that is less than 50 square meters and many councils will not approve plans to build homes or apartments smaller than this. Before you build or put down your deposit on a small home, you should check with your local council about relevant building regulations in your area and talk with your mortgage broker to ensure finance can be arranged.

What is the Tiny House Movement?

The Tiny House Movement is a group of people all over the world choosing to live in houses or apartments with no more than 50 square metres of interior space. That’s about one quarter of the size of the average home. In the USA, the movement is so popular that it’s driven at least three successful TV shows dedicated to tiny house living. However, here in Australia, if your tiny home has wheels, you could find it bogged down in red tape.

Things to note about building a tiny or smaller home

Almost all councils in Australia treat small homes the same way they would any other building on your property, however if it has wheels it may be considered a caravan or trailer, regardless of whether it is rurally located or in the suburbs. You need to check with local authorities first before you build anything and get the proper approvals on your plans.

Building regulations apply to all homes, not just small homes and ones with wheels. If you are converting a couple of shipping containers into a home, for example, you will still have to ensure you modify them in such a way that your new home meets local building codes.

Additionally, not all lenders have an appetite for financing tiny homes or small space apartments and units. It pays to chat with me, your mortgage broker, about your plans before proceeding. That way, we can get pre-approval on your construction loan with a suitable lender, so you can go ahead with confidence. There are several ways to finance a new-build home, whether it’s tiny or not, so please give me a call today to get the ball rolling.