However, like any big purchase, buying or building a property doesn’t come without risks, especially when you’re new to the market and unfamiliar with the processes involved.
Your first home will likely hold key implications in getting you closer to your desired lifestyle, but importantly, it can also play a crucial role in helping you progress towards your future financial goals. Done right, and this first purchase could generate the equity you need to achieve your longer-term targets – whether that be upgrading into a bigger home further down the line or purchasing an investment property to start building that future nest egg.
However, while your first home can be a great foundation for these lifestyle and finance goals, in our time as property advisors, we’ve also seen many buyers whose first home has stagnated, or worse, dropped in value due to mistakes being made early on in the process, which has in turn impacted their ability to achieve their longer-term needs. So, what are some of the fundamental mistakes to avoid?
Buying in oversupplied areas
Like the value of any goods or services, property prices are largely driven by supply and demand. While many first-home buyers will consider demand when choosing a location (i.e. proximity to employment and local amenity), they will overlook the impact of local property supply on the price growth of a property over time.
Supply not evenly distributed
The supply of properties is never evenly distributed across the market. In every city, there are suburbs that are tightly held, where buyers are regularly competing to secure a property and there is limited new supply coming on stream. This regular buyer demand and competition is what places upwards pressure on prices over time, leading to growth in property values. By contrast, there are other locations, particularly outer suburbs, that often have a significant supply of new properties (such as from land estates nearby) and/or a regular resale of existing properties into the market. This means that when buyers come to sell in future, they will often be competing with a lot of similar stock. Not only this, but more often than not, there will be more supply to come in future from new developments in these areas, which means buyers will also be competing with an influx of newer houses. This can not only hold back their property’s value, but will often make these areas more vulnerable to price declines in a market downturn. As a result, those who buy in these oversupplied locations can find themselves waiting years for the next ‘boom’ to reach their goals instead of enjoying the steady capital growth they might achieve from areas where supply is more restricted.
Overlooking the importance of land value
Another common factor first-home buyers will overlook in selecting a property is the importance of land value. There are several components to consider here.
- Is new always best?
New properties look appealing, and hold potential for lower maintenance costs in the first few years of ownership, so it’s easy to see why many buyers are drawn to them. However, a newer property isn’t always the best play in terms of capital growth. This is because it’s the underlying land that’s the appreciating asset.
While houses slowly depreciate in value as they weather from wear and tear, well-located land can grow significantly in value over time. This improved land value is often what helps home owners sell at a gain and leverage the extra equity they need to upgrade their home or finance another property. This isn’t to say that buyers won’t be able to purchase or build a new property with a strong land value component. However, it does mean that the location in which they do it will be extremely important, and they may be paying a premium for the brand new asset.
- Size isn’t everything
The important thing to remember when it comes to land is that size doesn’t always correlate with value – some buyers will think they’re making the right move by purchasing or building a house on a larger block in outer suburbs, when a smaller property or lot closer to the city might offer a better land value advantage. Depending on its location, a brand new house and land package will often have less than 50% of its value in the land, while a villa or townhouse closer to the city and in a similar price range will often have a land value component of 50-60% or higher, and hence will be a safer investment in the long run.
Listening to the wrong advice
There’s a lot of noise and information out there for first-home buyers, especially with the release of the new stimulus. Unfortunately, not all of this will be in your long-term interests. Many buyers will often rely on the information provided to them by selling agents and builders when making investment decisions. While not necessarily bad advice, it’s important to remember that these parties, by the nature of their role, aren’t representing you as a buyer, and as such they won’t necessarily be putting your financial and longer-term needs first in the information they provide.
As buyer’s agents, it’s our primary role to represent you as the buyer throughout the purchase process, whether that be by helping you research and identify the right areas and properties, providing you with unbiased advice, or representing you throughout the negotiation process to help you achieve the best possible value from your first-home purchase.
When it’s time to buy a home, most buyers research their purchasing budget and mortgage interest costs, carefully comparing one loan or property deal to another.
What buyers often miss are a number of additional hidden costs during the purchasing process, some of which come to light at settlement and lead to disputes with sellers. If left unresolved, this can often lead to an unwelcome cash outlay for the buyer when moving in. Other costs might not be discovered by the buyer until well after settlement, adding to the cash flow demands of holding the property over the longer term.
So, what are some of these hidden costs that catch buyers unaware?
Unexpected repairs at settlement
Most buyers have an expectation that all appliances and fixtures will be working at settlement, only to find that there are significant repairs required when they move in. This can stem from several causes (and sometimes more than one at a time). For example, the buyers may not have a “Good Working Order” clause on their contract, which requires the sellers to fix any items which aren’t working. In this instance, the seller is only required to keep the property in the same condition it was in at the time of purchase.
Case study
We worked with a client in the purchase of a family home in Perth’s southern suburbs, close to universities and in a good school catchment. During the property viewing, the buyer noted that the property had reverse cycle ducted air-conditioning, as well as a split system unit elsewhere in the house.
At the final inspection, our buyer’s agent tested the ducted air-conditioning, however the panel was not responding. When the selling agent called her client to check how to operate it, she then found out that the cooling unit in the ceiling had actually been decommissioned and removed!
The seller and their agent made the argument that, as the appliance unit had been removed from the property prior to the offer, it wasn’t included in the “good working order” clause (covering all fixed appliances). This presented not only a negative experience to the buyer, it also weakened the rental appeal of the property to potential tenants who would want air-conditioning throughout.
With the help of the settlement agent, our buyer’s agent sent a formal response citing not only our contract clauses, but also several other legal and regulatory standards the agent and their seller were in breach of, including false advertising (the AC ducting was visible in marketing photos as well as noted at the property). The wording of our custom contract clauses gave us extra leverage in these negotiations, as it allowed us to withhold funds at settlement if the issue was not resolved.
The buyer and the seller agreed on the compromise of an additional split system supplied and installed to extend the cooling throughout the house.
Buyer saving: $2500
Ongoing holding and maintenance costs
Some properties have higher ongoing costs than others. As an example, character homes will often involve higher maintenance costs or may require improvements further down the line. These properties don’t necessarily make for a bad purchase; in fact, they will often attract high demand due to their limited supply on the market. However, this option may not be suitable for buyers on a tight budget who can’t afford to save a cash buffer to cover unexpected repairs (or equally for buyers who are likely to overcapitalise on renovations!).
Similarly, buyers who are purchasing a property in a strata complex will need to do their due diligence on any ongoing strata fees, which are used to cover shared costs such as insurance and maintenance and future repairs to common areas.
It’s important to factor these ongoing expenses into your budget and the impact these will place on your finances when searching for properties and weighing up their long-term potential.
Case study: Headaches from hidden plumbing costs
Many of our clients opt to purchase older houses on 600-800sqm blocks of land, due to their land value and (in some cases) the opportunity to add value and/or subdivide in the future.
One issue that can come up after settlement is ongoing plumbing issues, which can be hard to detect at a final inspection. In some locations, older plumbing fixtures have worn down or tree roots have made their way into clay pipes, which can result in regular calls to the property manager for blocked toilets and drains.
When we’re purchasing in areas and/or housing types susceptible to these issues, we recommend to our buyers that they engage a plumber for a pre-settlement inspection. As these inspections can be costly, some buyers will instead opt to put money aside in a contingency account for larger fixture upgrades like this to reduce financial stress in the future.
While land value is an important factor to consider with an investment, not every investor has the cash flow and/or the appetite to deal with the ongoing maintenance that older houses present. We work closely with our clients to understand their cash flow and risk appetite early in the process, and match properties that are a good fit for them in the long term.
“Trial and error” is expensive – hire experience instead
Most property buyers only make a property purchase occasionally, so it’s not surprising that they may miss some of these hidden costs at the time of purchase. Even a friendly and diligent selling agent will be unaware of some of the property’s features and issues and may overlook communicating information that they assume the buyer already knows.
Having negotiated on over 1200 transactions, our buyer’s agents have seen a wide range of issues and offer this perspective and experience for our client’s benefit. With a thorough due diligence process, a team of specialist inspectors and in-house quality assurance support, our team help buyers to reduce their risk of surprise costs and protect their financial position during a property purchase.
To find out how our buyer’s agents can save you money and increase your peace of mind, get in touch with us for an obligation-free consultation. You can also click here to download a brochure that highlights how our negotiation and due diligence service helps home buyers.
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