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August 2006 we purchased a rundown war service home with a DA in place in the old state housing part of Ashburton VIC (IE: south of High St between the railway and Warrigal Rd) for $465000. The idiot valuer from Commonwealth Bank said we paid too much! Challenged them and got it revalued to the purchase price.
Two weekends ago beautifully renovated and extended version of our rundown old house 100 metres around the corner sold for $783,000.
To prove it wasn't just the "value-add" of a renovation, last weekend we went to another rundown war service home two blocks away in the same area and bid to $680,000 and it eventually sold for $740,000.
That Commonwealth Bank valuer should eat his shorts!
Red hot market? I'll say!
We are about to conclude a purchase of a DA approved site with a view to build a pair of townhouses in Ashburton VIC.
During the process of financing it, the finance broker was bemoaning his business’ fate because he says that bank valuations are all coming in low at the moment. It seems that with the interest rate rises and more on the way, the banks are using lower valuations to keep their LVR’s more conservative.
The low valuation on the Brisbane flat might be more as a result of the banks going into a self protection mode more than a reflection of market value.
The irony is that the banks response will become a self fulfilling prophecy. When money tightens up, values fall.
More than ever we as real estate investors are going to have to be vigilant about locating properties with the right fundamentals so as to not get killed by bad valuations. It took us ages to locate the Ashburton site as a result but the valuations, both pre and post building came in at the high end of the range.
We are in Victoria and 3 years ago we bought a block in Perth, and then engaged a builder to build on it. 3 trips only:
– first to select a design and sign up
– second to see the slab down and measured it up to ensure it complied with plans (past experience showed that this is the most critical part where any problems are often expensive or difficult to rectify later)
– last to collect the keysI had the builder email us digital photos during construction to confirm progress.
I wouldn’t be frightened of trying to manage a builder by remote control. Pick one of the big guys and you are usually OK. A previous post about getting references etc is an excellent technique.
Where are you located? Some states have bodies you can appeal to. EG: in Victoria if the council drags the chain you have the right to go to VCAT.
Having said that, I usually find working with the council is your best bet. Book a meeting between you, your architect, and the council. Set the agenda as finding out what their issues are that are delaying approval. Don’t go there to argue with them, just go to listen. You may be surprised that it is very minor things that are holding you up. My experience dealing with councils has found that is usually the problem.
Good luck.
G’day Commodore
Thanks for the question.
The direct answer to your direct question is identical offers with the only difference being deposit terms, as the vendor, take the better deposit.
I don’t disagree with anything you said. Vendors set their terms either on what the market will bear, what their agent’s convince them, or some other personal circumstance. (had one once that needed terms to protect his pension). Sometimes that is 10% and 30 days if the market is in their favour.
But the original poster wasn’t framing their post that way. They were battling with the agent presenting that items like 10% deposits and terms of that ilk as if the terms were somehow cast in stone.
My rather longwinded post was saying that what many agents tell buyers is “the process” is not necessarily so. The flipside is what they will be telling the vendor at the same time! Try this some time: get a mate to ring up the agent as a potential buyer for a property you are selling. I have and its a hoot. I once had an agent who represented to his vendor that a multiple choice offer we put forward was two different buyers! Go figure….
Some agents are terrific. But they are in a minority. If you find them treasure them and treat them like gold. PM me for a couple that I would trust implicitly. Laws of libel and slander prevent me from naming those that I wouldn’t!
At the risk of stating the bleeding obvious, there are few rules beyond those of contract law and some real estate law (EG: cooling off, vendor declarations, etc, state by state) that govern a real estate transaction. If you want a clause that the vendor mows your lawn every day for a year you can put it in and if they accept it they must do it. A contract must have “consideration” to be a contract which usually means a dollar, not the 10% that the agents usually insist you have to shell out.
For new players the message is don’t be intimidated or stampeded because the agent presents a certain view of the world likely coloured by their self interest. Weigh up what you really want out of the deal and stick to your guns. It is your decision and the vendor’s acceptance if you want to pay 10% deposits, short settlements, long settlements, mow the vendors lawn, whatever: it is not the agent’s decision.
Happy trading!
Hear hear ozsparky.
What you describe is what I termed the “developers premium”.
It doesn’t always work. That is when lifex’s proposition kicks in.
However odds are in your favour going down the build road instead of the one year old road. The caveat is to research first.
What is the population of the town where this house is located?
Most lenders will not give you better than a 70-80% LVR if the town has less than 10,000 people in it.
Touchy touchy lifex.
Very sensible!
Shop for your finance. There are now lenders for commercial property that will do LVRs better than 70%. The other bummer about commercial is that lenders would reassess the loan every couple of years. There are now lenders who won’t do the review. Finally, it is often hard to get interest only on commercial properties. A couple of lenders are now offereing interest only for the first five years before reverting to P&I.
One I know of is http://www.resi.com.au
I have to be somewhat contrarian here. Statements like “widely accepted” tends to stop people rechecking the fundamentals of a deal at a point in time.
There is a thing called the “developers premium” that comes into play when building versus buying a 1-2 year old property. We built new homes and sold them for greater profits than buying a 1-2 year old property and then selling. The reason is that the new property often has features that even one year old properties don’t have but the market wants and this creates the “developers premium”. Think about the craze for “home theatre” rooms. If you bought the year old property that didn’t have one versus building the new one that does, you missed out on market percieved value.
So before accepting maxims that might be “widely accepted” examine them for fundamental facts first. Then make your decision for those reasons. Don’t make your decision by following the crowd and their “widely accepted” maxims.
Happy investing.
Real Estate agents are driven by self interest. Don’t let anyone tell you otherwise. For them, the best outcome is large deposit, no conditions, and short settlements. Given that they work on small percentages to calculate the commission, they aren’t even that much worried about how much it sells for! EG: At 2% commission the difference between selling a house for another $30k more equates to only $600: after the principles of the agency get paid the agent is not often getting enough to worry about – easier to turn over two properties at lower dollars instead of squeeze the price up on one.
So understand this dynamic when they talk to you. They want 10% deposit because THEY will get paid if you default on the contract: a contract is a contract because there is “consideration” which can be $1. They want short finance conditions so that their commissions are assured. They want short settlements so that they get paid sooner. Sure the poor bloody vendor gets some benefit from these terms but that is less than half of why the agents push for the terms.
How do I know this? Real estate booms are wonderful things because a lot of wannabe agents sign up for a new career. They are easier to “trip up” with carefully crafted lines of questions than their more seasoned colleagues that have been around for years. Over the course of many deals I have been able to get the newbies to spill their guts on what really motivates agents.
Of course, I have also been a seller. Watch how fast an agent will try to convince you to drop your price if they can’t get an offer in the first 48 hours! For agents turnover is the name of the game and that is only achieved by conditioning the market (both vendors and buyers) to the agents view of the world. And they have done a marvellous job! Your post indicates how many people think that you MUST buy property on 10% deposit! Nonsense!
I have found that the rigidity of agents differs from state to state. In Victoria they have the market well and truly suckered. A lot harder to get alternative terms in Melbourne than, say, Perth. WA agents seem more flexible but I wish I had $0.05 for each time they told me “we don’t do that here in WA”. Queensland is somewhere in the middle.
I am sure I will now get howls of outrage from real estate agents on this site. We have encountered agents that are not the same as what I have described but they are few and far between. If you think you are different, PM me. You are the type of agent we will deal with. But you are in a minority.
So, write the terms YOU want. If the agent of vendor won’t play, go find another deal somewhere else. We do it all the time and have done very well out of sticking to OUR business rules and NOT those of the agent.
Good luck!
Disappointing that Kitty has not acknowledged the responses so far.
Still there Kitty? What’s happening?
This can get very tricky.
The only fair value for the property is what the market will pay.
Licensed valuers are usually conservative in their assessment to what the “true” price is to avoid malpractice suits. So I wouldn’t recommend that as a solution.
You could put it to a public auction and have your relatives bid against the open market. That would be fair but would have costs attached to it such as auctioneers fees and maybe even agent’s commissions.
A lateral solution is that you turn the property into a rental property where your relative pays you 50% of market value rental. Use the local real estate agents to all give you an appraisal and then choose the maximum or the average as a figure. If you need your capital back, refinance to get it out. Then when your relatives eventually want to move you sell into the open market and the proceeds split 50/50 less any financing drawings.
Otherwise I would recommend that you maintain the original strategy and purpose which was to sell the finished product. Like the auction, they can trump the highest offer if they want to buy it. Agents commissions will likely still apply unless you find an agent that will sign the agency agreement to exclude sales found by the vendor.
Post back what you all eventually decide.
IMHO taking control of your investing affairs, including Super, is ALLWAYS a good idea.
Unfortunately, in its effort to protect average joes from themselves, government legislation and regulation enshrines mediocrity in the results possible by traditional “safe” investments. Worse is, if you read and believe books like Prophecy by Robert Kiyosaki, the government might have legislated a guaranteed loss of money for the general population by being so paternalistic.
The solution is knowledge. Most average joes are too lazy to seek it and too lazy to give up their Saturday arvos at the football to study it.
The execution may be to hire experts but you need the knowledge first in order to properly instruct them and to properly assess the quality of their expertise.
So, get savvy, then go for it!
Go to http://www.clearyhoare.com.au and get their contact details. Ask them about JVs with a self managed super fund (SMSF).
What you are trying to do only works with SMSF and there are strict rules.
WRT the question about the financing. We operate a financing strategy where we took out an initial three separate mortgages on three different properties. We then manage the investment time cycle so we are buying the next property as we are selling the reno’d property. With the right clauses in contract of sale you are able to pick the date of settlement on both so you can roll over the finance from the sold property to the purchased property by doing a substitution of security on a double settlement. Your costs reduce because there is only valuation and minor service fees to handle the substitution of security on the mortgage.
In summary, benefits of this strategy are:
– lowered change costs for each deal
– no requalification for serviceability, etc, that would happen if you went for fresh finance
– offers can be “subject to valuation” instead of “subject to finance” which for some reason seems more attractive to vendors
– you are not constantly popping up on BayCorp as a serial loan applicant.There are some limitations to this strategy but if you know and understand them, it works great:
– the size of the mortgage limits the type and value of property you can trade
– finding vendors that will give you the settlement terms needed can be tricky. We mitigate this problem by researching carefully and offering full asking or better to get the terms we need. This needs to be balanced against what it would cost for going for a fresh loan.Our $0.02 worth. Works for us.
Here is our story.
We started off in Victoria where we live back in 2000. We watched it race away so cashed out and moved our focus to Brisbane. We bought and renovated up there and watched QLD race away. Again we cashed out and then moved our focus to Perth in 2003.
Having watched Victoria and Queensland get caught in a wave of hype and making money out of them, we went aggressively into the Perth market and lined up 6 properties on long settlements and little money down by offering over the asking price. The greed button of the sellers kicked in and they were happy to take our money. This meant we were buying in Mandurah for low 200’s, Maida Vale under 200, etc etc.
The long settlements allowed spectacular growth in the WA market that we had previously seen over here in the East. By the time settlement came we were often borrowing 100% of contract price.
However, being mindful of what happened here in the East, we began to exit our position in Perth earlier this year. We have one left and will shortly be exiting that as well.
An earlier poster predicted that the Beijing Olympics will ring the bell to end the WA boom. I am not sure but the signs of pending downturn that we saw here in the East are all big and bold in the West:
– Real Estate agents arrogant beyond belief
– this business of Expressions of Interest and lately For Sale By Tender
– agents not returning calls
– hysteria in the press about “unconscionable behavior” by agents and buyers EG: paying backpackers to camp out at land releases
– speculators all over the market
– distress in the mums and dads looking for PPORs.There may only be 6 months left in the boom or there may be 18 months left. But a wise investor tries to go for the bottom of a cycle instead of trying to pick the top of a cycle. If it hits the top and you haven’t sold, you are left holding and have to wait for the next cycle to recoup your losses.
Personally I think Melbourne and Sydney now represent the better value having hit the bottom of their cycles, particularly Melbourne. When I see houses in Bedford going for $600k plus it makes Melbourne look very attractive!
My $0.02 worth.
You post says Homebuyers Centre which I think is a WA builder. Am I right?
Regardless of which state you are in, you need to read your original contract carefully.
If you changed stuff after the contract signing, they usually give you a variation order that details the change, the cost, and get you to sign.
If not, check your contract for each line item in the Schedule and see if the words Provisional Sum, PS, or something like it are listed against the line item. This gives the builder the right to pass on the cost to you if the actual cost exceeds the provisional sum.
This passing on of costs is very common for site costs like additional excavation, uprated slab or foundations, or increases in materials and labour costs. An earlier poster is correct that there is usually a cap on the maximum amount they can pass on but most builders incorporate the passing on of costs in their contracts.
Is it fair? Not really. The builder passes all risk on to the customer with these clauses. However, in WA where the market is overheated, you would not get any builder to take on a project without these clauses.
If you can’t get finance from anyone your best option is to approach the building company with an offer of payment. You might get lucky.
BUT, if you are in WA I can bet you have been waiting 18 months or longer for this house to complete. I suggest you call around other lenders and get it revalued. I will go IT if you can’t get a better valuation and have someone else mortgage the house for you covering the $5k shortfall. WA prices have boomed so would give you more than enough equity to satisfy another lender if your bank won’t play.
Good luck! Post back with how you went.
We drive a matched pair of Holden VXII Calais’.
Identical colour, drive train, etc.
Bought them on a runout for the model change from VX to VZ and used the proceeds of a creative vehicle financing deal to fund the deposit on an IP.
