Real estate is often spruiked as the best investment in your portfolio and there are literally thousands of "gurus" out there promoting property investment strategies. But, weirdly, there are some details about the purchasing process that are rarely spoken about.
I'm currently working through the the final stages of the purchase of my third property. This third purchasing experience has taught me a lot. Through the purchasing process I've noticed just how many errors I made when buying my first property. I'll run through some of these errors in this post, however I will probably spread these errors across a few posts given the amount of content that can be created on this topic.
My second purchase was quite different in that I used a buyers agent for the purchase. The buyers agent inspected many, many properties for me, made many decisions on my behalf, negotiated on my behalf to ensure that I received a good deal and made all efforts to ensure that the buying process was as smooth as possible. This did come at a cost however; somewhere in the order of $12,000. Was it worth spending $12,000 to buy a house? In my case it was. I bought a house located on the other side of the country without even inspecting the place myself before signing contracts for the purchase of the property. Using a buyers agent in this instance (in my opinion) was very worthwhile.
I wont bother discussing the process of securing a house deposit and applying for finance in this post. For this post I simply want to discuss the process of purchasing a home. The process of securing a deposit and applying for finance is largely simple. I will say one thing though, using a mortgage broker can be incredibly beneficial. There are many people who believe that a broker is useless. However, in my experience, a broker can greatly assist you in gaining the best possible finance for your property. I will always recommend the use of a good broker.
Buying a home - whether it be your first home or simply an investment
Once you've secured a deposit and have confirmation from the bank that you can buy a home, the process you follow can be broken up into a few steps. These steps would typically be as follows:
- identifying the locations where you are willing to purchase in
- deciding on what you want to buy - i.e. unit, townhouse, house etc.
- house hunting - finding the perfect home
- making an offer
- negotiating final purchase price
- settlement (finalising the purchase)
Some of these steps are simple. When you decide to buy a home, you typically already know where you want to buy said home. And, your lifestyle will typically inform the type of dwelling that you want to live in. For me, I am married and have large dogs. So if I am buying a home to live in then a house with a reasonable backyard is the only real option for me. If I am buying for investment purposes then I typically choose a home that meets the following criteria:
- it must provide a reasonably short commute to a city CBD
- have decent public transport available
- be within a good school district
- have at least 3 bedrooms and ideally 2 bathrooms
So the first three steps are pretty simple. The only thing to really keep in mind is that when you look at a house for the first time, you'll normally be wearing rose tinted glasses. Everything will look incredible. Often, the real estate agent will have dressed the home perfectly, and any defects disguised very well. So take a second or third look at the houses you like. After seeing a property a number if times, you'll know whether it is really the home you are looking for.
The game really begins when you go to make an offer on the home that you love.
Once you have found your ideal home and want to make an offer to purchase the home, it pays to understand a few things before you decide on a suitable purchase price and submit your offer.
- what is the competition like? Are there likely to be multiple offers being submitted?
- what are the seller's circumstances? For example, do they need a quick sale?
- what is the actual value of the home in comparison to the asking price? Your mortgage broker can often provide quick valuations on properties for you.
Competition
You can get a feel for the people you are competing against to buy the property through observation at the home opens. I normally try to listen in to how people are discussing the home and attempt (often poorly) to determine if they are investors or people wanting to live in the property. I also keep an eye out for home many people take offer forms with them. Sometimes you'll even see people completing offer forms on the spot which is a great indication as to the level of interest in a property.
If a property is considered sought after, you'll know that your offer will need to be competitive. And offering in the lower range of the asking asking price is likely to be out bid.
Seller's circumstances
One of the most important things to learn is how urgently a seller needs to offload their property. They might be under financial strain, or they might need to sell their property in order to purchase a property themselves. So often knowing the seller's circumstances will help you determine the settlement conditions that will be favourable to them.
The actual property value
Typically, real estate agents will place a relatively accurate valuation on a home. But sometimes they misjudge the value. For example, the home that I just purchased was actually valued at a higher value than the asking price. I ended up offering above the actual asking price but slightly below the estimated value of the home. So, in my circumstance, I purchased a home below the estimated value but at a higher price than the seller's anticipated on receiving. I'm fine with this, it was a highly competitive purchase, but my offer met the seller's needs better than anyone else's.
Making the offer
So, to sum up, when you make your offer on a home it needs to be just as strategic as when you are looking for the ideal home.
- Your offer needs to take into consideration how many people you are competing against, which will inform how attractive you need to make your offer to the seller.
- You need to make the settlement conditions attractive to the seller, such as offering a short settlement period if the seller urgently needs to sell or a longer settlement period if the seller needs time to arrange their own home purchase.
- and finally, you need to understand the actual value of the home so that your offer can be as attractive as possible and so that you can have confidence that you are not offering above the properties actual value.
How I secured my home
When putting an offer on my new home I was confronted by a highly competitive purchasing environment. My offer had to be very attractive to even get looked at with any level of seriousness. There were more than 15 offers placed on the home by the time I submitted my offer. Thankfully, I had done my due diligence on the home.
The home was valued by the bank at roughly $500,000. The seller's asking price was $450,000 to $480,000. The house was a rental property for the seller, who lives interstate and was attempting to buy a home where they live. The house had been vacant for a couple of months by the time they decided to sell, so it was expensive to hold without tenants paying rent.
I offered the seller $490,000 for the home with a 30 day settlement period.
I had one other trick up my sleeve that I haven't mentioned above. I stated on my letter of offer that I would complete all my building and pest inspections during the 2 day cooling off period after the contract of sale had been signed. Most buyers will want to complete these inspections prior to the contract of sale being generated, and this slows down the sale of the property. So by doing these inspections during the cooling off period, I was able to speed up the sale which was very attractive to the seller.
So, through some smart strategies I was able to out compete more than 15 other home buyers in a very competitive market.
Hopefully this information is useful to anyone out there looking to buy a home in this market. Of course, there's a tonne that can be written about this topic. So in my next post I'll write about re-negotiating the purchase price after you've signed the contract of sale.