Investing or speculating? Which one are you doing.

Hi All

I read this post on another property forum and took the liberty of posting it here verbatum on this forum for the information of the community (Please forgive me if it’s against forum rules)

There are many points of discussion here, but my main thread is that it can be extremely hazardous to your wealth to

(i) depend on capital growth, and/or
(ii) buy OTP without carrying out proper due diligence and/or
(iii) buy property based on the assertions of commission-based sales people as your ‘investing’ strategy.

Unfortunately this ‘investor/speculator’ is now finding this out to their cost.

Please feel free to comment on the post below

Regards

David U

Hi,

I have a query regarding an off-the-plan purchase that is due for settlement in the next few weeks. This is a Melbourne “boutique” apartment (1 bedroom, 1 study, 1 bathroom, carspace, etc.) with a contract price for 340K.

I’ve paid a deposit bond for 3,430 (1% of 340K) at the end of 2000. The property was due for completion for November 2002 but is now extended to March 2003 with an anticipated capital growth to 400K.

Although the property market seems to have cooled down and I am learning from other investors in the development that valuations for the same property (1 bedroom, 1 study) in the same development have been valued at below the contract price at 330K and 320K.

Although my contract price is 340K, the developer offered me a rebate for 50K, meaning that my purchase price is 290K at settlement which included stamp duty costs and a furniture package.

By allowing for capital growth of this off-the-plan purchase, I was assured that I would be able to get this property at a wholesale price without putting any money down but due to recent valuations, at (80% of 330K) I have to borrow another 28K to top up the loan using my own savings or by using existing equity from my other investment property.

So far, I have received two explanations for this:
1. The Melbourne property market in general is on a downturn and capital growth has stagnated or slowed and banks are now very strict and conservative with valuations as compared to two-three years ago.

2. Some banks/valuers are aware of the rebate scheme with this particular development and are expecting the purchaser to put in “hurt money” and will not allow for capital growth and value the property at only contract price (340K).

To be honest, I’m finding the above excuses very hard to accept. Even if the Melbourne property market is slow, there should of been at least some capital growth (5% p.a) factored over the last 2.5 years, or does this mean this property has been overpriced from the beginning?

I feel that I have been mislead in the fact that with this rebate, there was no need for me to put down any money. On top of that I’ve had to fork out $14,500 in commissions to the developer for this “bargain”. In summary, the damage works out as follows:
Contract Price: $340K

Purchase Price (inc. Stamp duty): $290,000
Commissions: $14,500.00
Loan costs: $2,000.00
Total Loan: $306,500.00

Should I hold on this property and wait for capital gains or should I get out of this deal ASAP? I would really appreciate any wise feedback.

Thanks

Orlando