Tips and traps to buying off the plan

Off the plan (OTP) is simply signing a contract for a property that is yet to be built. The design of the property in the form of building plans can be observed however the physical property cannot. There are many factors when determining if purchasing OTP property fits your current needs and future plans.

Advantages

  • The most obvious benefit of buying OTP is the exciting feeling that you will be living in a brand-new property. New furnishings, fixtures, fresh paint and the excitement that no one else has lived in the space prior is a winner for some buyers
  • Locking in a price before the completion of the build is an advantage in some instances. If the area you have purchased in goes up in value during the 1-2 year build is complete, you can have equity within your property before you move in
  • The smaller earlier commitment is a clear benefit when purchasing this form of property as you do not need to take out a loan until the development has been completed. An initial deposit is required however this gives you time to save additional funds during the build.
  • Stamp duty and concession advantages may apply with particular buyers should you be a first-home-buyer and/or you are purchasing under a particular price. For more information then visit the State Revenue Office of Victoria.

Risks 

  • Inflated purchase prices are a big risk with OTP property with the notion that most developers are taking in the consideration the potential growth of the property and then factoring that into the sale price. The excitement or hope that purchasing a property before it is built and then banking on it growing in value may not always be the case. You must factor in the possibility that there is always potential for the market to fall over the course of the build and the risk that you could have over-paid for the property.
  • Over supply leading to a poor valuation is a genuine financial risk when you have a large amount of competition in the area. Being aware that price is a function of demand and supply is critical to ensure your property is not at risk. This can cause an issue with the value of your property particularly in larger blocks where there is competition of 50 or 100 other properties in the same boat.
  • Obtaining the finance is done within 1-3 months of completion of the build. At the time you need to apply for the loan, if your financial position does not allow you to obtain the loan, you will miss settlement and most likely forgo your 10% deposit already paid. Ensuring you are in a position to obtain a loan is critical and planning ahead with the help of a broker will ensure no hiccups at the lending stage.
  • Development bankruptcy is a rare but real risk when purchasing OTP property. You must ensure you are aware of all options should the developers go into liquidation.

Taking the time and weighing up the advantages and risks of purchasing OTP property is essential to see if this property type fits your needs and future goals. A sound understanding of the terms and conditions, recognising any economic changes or growth risk in the area and being fully aware of the developer is critical before signing on the dotted line.

 

 

You’ve just purchased a property… what happens next?

Congratulations! The hardest part is done. Once the excitement settles down, you will need to focus on the items that need to be completed in order to be ready for settlement.

This exciting time does come with a fairly lengthy and systematic process that at times can be confusing and complicated. Below provides a snapshot of what needs to take place before you obtain the keys to your property.

Deposit and Contract of Sale

If you have purchased at an auction then you need to pay a deposit, generally 10% of the purchase price within three business days. On auction day you can transfer a holding amount of around $1,000 using your phone. The outstanding balance can then be transferred on the next business day via EFT.

Legal

A conveyancer needs to be involved in t arranging the correct documentation and distribution of monies at settlement. Both legal parties work with the bank to ensure all land transfer docs are signed correctly and the settlement monies are distributed correctly. No settlement can take place without a conveyancer involved.

Finance and Mortgage Contract

 Following the purchase of the property, you will need to get formal approval from your lender. To achieve formal approval, the lender will need a valuation on the property. The valuation will be ordered by your Mortgage Broker and generally takes place within 3 business days. Once Formally Approved, your Mortgage Broker will help you navigate the loan contract to ensure you understand the loan you are obtaining and sign the required documentation correctly.

 Pre-Settlement

In the week leading up to your settlement, everything comes together. Your conveyancer will ensure that the settlement date, time and place is agreed to by the lender and the vendors conveyancer.  You will be required to make sure any additional monies needed at settlement are sitting in your nominated ‘settlement shortfall’ account ready for access on settlement day.

 Settlement

Settlement is essentially the transfer of a property from one owner to another. Typically known as at the end of the purchase process whereby you take legal possession of your new home. In a nutshell, settlement is when the buyer transfers the remaining balance of the purchase to the seller and the seller passes on the title or ownership to the buyer.

This is a very important event which needs to be carefully prepared for and once this process has been successful then it is time to pick up the keys and celebrate!

 

 

Buying a property with friends

If you’re looking for a creative way to overcome being locked out of the property market by rising prices, buying a house with a group of friends may be a solution to consider. It can also be a minefield though, so here’s how to avoid a blast.

While the excitement of banding together in such a life-changing moment can put everyone on a bit of a high, you need to plan for situations in which things might go wrong.

It’s essential you have all been completely upfront from the start about what you want to achieve by purchasing property together, as well as your personal expectations about timelines for purchasing the property, paying it off and selling it. And all of this must be documented in a co-ownership agreement.

Your mortgage broker can refer you to a solicitor or conveyancer with experience in working on co-ownership agreements, who can advise and create yours and make sure it’s suitable for your circumstances, whilst providing the necessary legal protection for everyone involved.

The big question will be what structure your ownership takes. There are two options: joint tenants and tenants in common. Joint tenancy is the most common ownership structure in Australia, as it is how most family homes would be owned.

However, because friends are less likely to share assets and long-term debts than a couple, and less likely to will their assets to each other, the ‘tenants in common’ model would usually be more suitable for this situation.

Under this model, each person owns a specified share of the property’s value. These shares may be equal, but don’t need to be. So, if you are willing to contribute $500,000 to the price of a property, but your two friends are not quite at that stage and only comfortable contributing $250,000 each, you could own a 50% stake while they each own a 25% stake. Keep in mind that each stake is in the property’s value, not control of the property. Legally, under this model, each owner has the right to full access to the entire property.

The co-ownership agreement created in collaboration with your conveyancer should set out how the costs of maintenance and insurances are divided, as well as how sale proceeds will be divided.

It should also cover plans for depreciation and capital gains tax, selling a share of the property to another co-owner, choosing tenants or determining rent, selling a share of the property to a third party (otherwise there are no restrictions on this under the tenants in common model), and selling the property altogether.

If all purchasers are planning to occupy the property, the agreement should make plans for if one wants to move out but continue their ownership. Under the tenants in common co-ownership structure, the other owners occupying the property would not be obligated to pay rent to the one who has moved out, as long as they are not restricting that co-owner’s access to the property.

As is the case with any property purchase with any structure, each co-owner should have an up-to-date will that specifies who inherits their stake in the property.

There are many more considerations when buying property jointly, so speak to an expert early on to make sure you’re doing it the right way.

What to consider before renovating

The decision to renovate is a common sticking point for homeowners, who can spend hours weighing up the cost benefits. Whether your motivation is to add value to your property or to add a touch of your personality to the home, renovations are expensive and debt often follows. It is important to find the right solution that benefits your long-term goal, rather than hindering any future plans.

A survey by Finder.com.au found only 27% of homeowners think refinancing their home loan to renovate is a feasible option to raise funds for the next big step. In this survey, 93% of homeowners who refinanced to renovate, said they had concerns over whether they would be able to afford the repayments, and whether the proposed renovation would actually add value to the property.

It’s important to reassess your current financial position, run through your plans and future payments, and decide if you can afford to take on more debt.

Laying the foundations

The next step is to investigate and calculate how much you need to borrow to renovate. Work out the specifics of your renovation, what the average cost to renovate is in your area and how much you are eligible to borrow. Aim to spend no more than five per cent of your property’s value on a renovation.

If renovations are likely to take over your living quarters for an extended period of time, you may need to also consider the additional cost of accommodation for the renovation period – another cost to factor in to your budget.

Getting bang for your buck

Once you decide to renovate, if you are trying to add value to a house to resell, it is important to look at the rooms and areas of the house that will add the most value. These are average renovation prices for key rooms, however prices will fluctuate based on the city and suburb.

  • Kitchen: If you are a fan of any renovation show, you will know that kitchens sell houses. According to realestate.com.au, the average renovation cost you should be spending on a kitchen is between $12,000 and $16,000.
  • Bathroom: The average bathroom space in Australia is six square metres. So look to spend around $9,000 to $12,000 as the bathroom is a highly trafficked space and needs to appeal to a wide variety of investors.
  • Other areas: An extra bedroom or a deck outside adds appeal, more living space and improves the standard of living for the homeowners.

Finishing touches

The final hurdle to look at when deciding to renovate is the council fee. The council can charge you up to $2,000 for an application fee, although prices can vary depending on your suburb. After speaking to a broker and finalising the renovation, make sure you account for an extra 10 per cent in your funds, to cover any unexpected costs.

Deciding on the type of loan   

If after the initial assessment and investigation you do decide to renovate, there are three types of loans to consider in helping refinance and renovate your house: a line of credit loan, a construction loan or increasing your existing home loan.

These options suit different people for different reasons. It is important you seek the right advice to determine what is going to work for your particular circumstances.

The added costs of purchasing property

Buying property isn’t just the purchasing price, a number of hidden costs are associated. So don’t forget to account for these extra costs in your considerations. In addition to the cost of moving, a change in council rates, strata fees, the cost of any renovations and furniture, homebuyers face additional fees to complete the purchase of a property.

Stamp Duty

Stamp duty, a state tax imposed on the purchase value of the property or the market value, must be paid in order for the mortgage documents to be legal and to transfer the property. But since July first homebuyers no longer have to pay the stamp duty fee, if the property is purchased for below $600,000 – a considerable drop in those additional costs of buying property.

Legal Costs

To transfer the ownership of property, a solicitor, conveyancer or a settlement agent are required. They will perform property and title searches to ensure the seller is entitled to release the property, which may include checking the strata body corporate records.

Inspections

Building and pest inspections are an added cost, but one which may save you from further expenses in the future – particularly any major building work required. This amount will vary depending on the size of the property.

Agent Fees

First-home buyers don’t have to worry about paying any commission, since it is charged to the vendor of the property, most often as a percentage of the sale price. However, if you’re selling your current home to buy another property, you’ll probably have to take these fees into account.

Borrowing Costs

Lenders have application, valuation and settlement or loan approval fees that vary depending on the lender. Mortgage Brokers are familiar with these fees and can help you take them into account when choosing a lender that’s right for you.

Insurance

Depending on your loan-to-valuation ratio (LVR), you may be required to take out lenders mortgage insurance (LMI). Although the borrower pays for it, LMI is not insurance for the borrower; it protects the lender should you default on the loan. You will also need building insurance if you are not purchasing a strata property.

10 tips when buying an investment property

1. Have a clear goal

Understanding your objectives is key to finding the right investment property. The actual property itself is never the end goal when it comes to investment – it’s the financial element that you’re really concerned about.

2. Check your emotions at the door

This is not a home for you so there doesn’t need to be an emotional connection to it. It should always be about which property will give you the best return, not which one is most suited to your furniture. Be prepared to invest your money wherever the numbers make most sense… this could even be interstate.

3. What type of property should you purchase?

An investment needs to be a property that will be in hot demand from renters and possible owner-occupiers down the track. It’s best to do your research to see what types of properties are renting quickly and what properties are staying on the market for longer periods of time.

4. Old or new?

It’s the age-old debate: should you buy a renovator’s delight, or something you can rent straight away? It’s great if it can be rented out as is, but potential to renovate should also be considered. The ability to add value to the property is a good tick, as it will increase rental returns. Don’t immediately write off a property just because it needs a paint job or the kitchen cabinets need to be replaced. Alternatively, there are significant depreciation tax benefits to new properties.

5. Location, location, location

Consider

  • How far it is to the CBD or business area?
  • What is the proximity to schools?
  • Are local shops within walking distance, or will tenants have to get in their car to pick up the essentials?
  • Where are the public transport options?
  • What other amenities are close by?

6. What can you actually afford?

Get pre-approval and make sure you have all extra costs available, including conveyancing, inspections and any taxes – and always ensure you have a financial buffer. You may not get tenants within the first month.

7. How to set up the purchase

When it comes to investing, it’s important to understand how to set up the purchase so it benefits you most. The entity should protect any existing assets and be tax effective. You can purchase in your name, through your super or through a trust, but always understand how the purchase will affect you and your family.  Expert advice will assist in maximising the short and long term performance of your investment.

8. Features

You want to appeal to the highest number of tenants, so look for properties that offer that little something extra, like a second bathroom or a lock-up garage.

Also look at properties that appeal to many segments. For example, a lift may appeal to both retirees and a young family, as both will be looking to avoid stairs.  Just make sure the benefits outweigh any extra costs like higher body corporate fees.

9. Timing is key

You need to understand the market and the dynamics. While there are investment opportunities around most of the time, some market conditions are more favourable. If you don’t fully understand it all, ask for help.

10. Ask for expert advice

Your broker can put you in touch with the experts you need to talk to when it comes to real estate and investment. This means accountants, real estate agents, lawyers and valuers. These people are in the industry and they’ll be able to guide you in your decision making.