In today’s show we get some first time buyers mistakes from Chris Gray and buyer negotiatiomn tips from Josh Masters.
Also Michael Yardney explains why he thinks buying a property sight unseen is a recipe for disaster and then Kevin talks to Mark Armstrong about strategy.
Bryce Holdaway the host of Location, Location, Location Australia believes professional investors need to focus on becoming borderless investors. He talks about what you need to do to prepare.
Many owners planning on renovating or building a new home are new to the entire building and contractual process. Today we talk to someone who entered into a building agreement naively assuming the contract was fair and that she would be protected. She was wrong. Hear Samantha’s story today.
Kevin: It’s a shame, but when it comes to mistakes, we find that there’s some uniformity especially when it comes to first-home buyers. I guess it’s a very, very nervous time. A man who is used to talking to them and helping them through this process is Chris Gray. Chris is a buyer’s agent. He works at Your Property Empire and is also the host of Sky TV’s show of the same name, Your Property Empire, Friday nights on Sky TV at 6:30.
Chris, thanks for your time.
Chris: My pleasure.
Kevin: How do you go about helping first-home buyers, and what do you find are the most common mistakes they make?
Chris: I think the biggest mistake for first-home buyers is they are gathering their information; it takes them so long to get their heads around it. I understand it, because it’s daunting having such a big mortgage and these days you’re spending $500,000 at least just to get into some of these suburbs.
They go around talking to their friends and family, taxi drivers and God knows who else, and all of these people aren’t necessarily qualified to give them any reasoned advice, but they get so many differing messages that they end up doing nothing.
Most of Australia is in the rising market at the moment, apart from certain pockets, and the big thing is you just have to get in. I’m definitely a fan of learning stuff, getting education, but you’re never going to know everything, so I really try to push people to get some knowledge but then just get in the market.
Kevin: It’s interesting when you talk about taking advice from family and friends. My experience is that normally family will err on the side of being super-conservative and think it’s their role to actually talk you out of it.
Chris: They’re not doing it for malice; they’re just trying to protect you. They don’t want you to get ripped off. They don’t want you to make a mistake. But mistakes in property over time – even if you overpay for a property or it falls down almost and has some rising damp or something – in time, it’s generally going to be okay.
I understand where they’re coming from, but people just need some encouragement and a kick up the backside at times.
Kevin: Indeed they do. Other mistakes, mate? Anything else you’ve come across?
Chris: Again, one of the big things that I find is that they spend so much time trying to research a mortgage. Obviously it’s a big part of the cost of the property, and it is essential to try and get a good rate and there are lots of differences between the banks, but most of the time, a mortgage broker can do this for you.
What they’re trying to do is save a few hundred dollars or a few thousand dollars, but then they go out and just buy a property because they get fed up with looking because it’s boring after a while, and it costs them tens and tens of thousands because they either buy at the wrong price or they buy the wrong type of property.
I’m an advocate of almost go to any mortgage broker – especially if you’re an employee, there’s not a lot of difference between most of the banks – and then spend 90% of your time trying to find the right property at the right price and doing the research on what it’s worth rather than concentrating on those hundreds and thousands of dollars.
Kevin: I love what you say there. Those mortgage brokers can also become quite good consultants in helping you as well, can’t they?
Chris: It’s good. While I am a fan of going to the banks at some point, a lot of the time I’m preferring to go to mortgage brokers, because at a classic bank, you’ll get a 20-year-old telling you what to do. They’ll say, “Right, buy a home and get a principal-and-interest mortgage and pay it off,” whereas mortgage brokers are more entrepreneurial – they deal with investors all the time.
Look, it’s fair enough to buy a home and pay principal and interest, but quite often, it’s not the ideal home so they’ll end up renting it as an investment later on and going interest-only. I worked out my figures years ago and the repayments are the same for $500,000 principal and interest versus $600,000 interest only.
I would much rather buy a $600,000 property now that gets me a better suburb and a better property – even though I’m not paying it off – than buying a $500,000 property and paying it off, and you’re not really paying much money off it anyway.
Kevin: As a buyer’s agent, how often have you seen young people come to you with a huge shopping list and then miss out on what would be their classic property because the list is just too long?
Chris: That’s what I was going to get into. I think the next biggest mistake is that they buy something beautiful – they love it; they can show it off to their mates – whereas typically, as a buyer’s agent, I buy ugly properties. But I might buy for the same price, something a kilometer closer to the beach that’s ugly, but I know I can change that. Whereas the beautiful property that is one or two kilometers away, there is nothing you can do to improve it and you can’t physically move it.
It’s trying to get away from the cosmetic, beautiful things and look to see “Has it got parking, has it got double bedrooms, is it small block, has it got low maintenance, and what is the physical location?” rather than those other things that really don’t make that much difference.
Kevin: Wow, there’s a wealth of experience coming through there, Chris. I appreciate you sharing that with us, too. Chris, of course, is from Your Property Empire, also on Sky TV Friday nights 6:30, Your Property Empire.
Chris, thanks so much for your time.
Chris: Thanks for having me on.
Samantha Powers Part 1
Kevin: Many others owners planning on renovating or building a new home are new to the entire building and contractual process. They have little or no knowledge of contractual matters and can be easily intimidated by the builder.
My next guest entered into a building agreement naïvely, no doubt the same way most newbies enter into these projects. Samantha Powers assumed the contract was fair and that she’d be protected – Reasonable, I would have thought. Like you and I, she had seen those horror stories on A Current Affair and never thought that her experience in fact would be one of them. She was wrong.
As a result of the experience, Samantha has written an e-book that’s designed to be a guide to make sure that others learn from her experiences, and I’ll tell you how you can get a copy of that e-book in just a moment. In the meantime, Samantha joins me.
Samantha: Hi, Kevin. Thank you for having me on your show.
Kevin: Thank you for sharing the experience with us. I’m looking forward to you being quite frank about it. Tell me how bad was it? What exactly happened?
Samantha: It was a pretty shocking, terrible experience for me. It lasted a number of years. My contract and everything started in 2010, and it’s only in January of this year that it actually finished up completely.
I hired a builder thinking that everything was going to be all right. It was a really simple build, supposed to be a single-story, nothing exceptional, not on a cliff face or anything, standard ground. It should have taken about seven months but at the one-year mark, he’d only just hit the brickwork stage.
He mismanaged all the money, because he had a whole bunch of projects on the side and during the economic downturn, it just didn’t pan out very well. In the end, he terminated the contract with me and he took a whole bunch of my money with him.
The subsequent attempts to rectify it was through the VCAT, the Victorian Civil Administrative Tribunal, and that lasted about a year and a half. Eventually, we had to go to the liquidation stage and then ASIC deregistered his business. Then we had to go through the builders warranty insurance. That all lasted about years.
Kevin: What a nightmare! In about a minute and a half, you’ve taken us through a process that no doubt involved you in a lot of angst over a long period of time. The e-book is a result of all of that. You’ve documented basically where you went wrong. Did you have a solicitor onboard helping you through this process?
Samantha: Towards the end, I did. I had a wonderful solicitor, but I must say that even the best solicitors – and particularly the good ones – do cost quite a bit. They’re on average about $450 an hour, and even then further on to go down the liquidation path, they are even more expensive than that. Prior to that, I’d gone through the Building Commission for advice, we’d sought conciliation and all that during the process before the lawyers. But very costly process to get to the end.
Kevin: What are the tips that you’d have that you’d give someone who’s looking at taking on a building or renovation project like this? Have you got some tips along the way?
Samantha: You can protect yourself before and during the contract. To protect yourself before the contract, find a good builder. A good builder is somebody who’s familiar with those projects, he knows what your upfront costs are going to be, what the potential pitfalls are, and he’s going to be pretty upfront with it. Sometimes that builder is possibly not going to be the cheapest builder.
The first step prior to any contract, definitely try and get a good builder in. On my website, you can download a checklist. It’s free; you don’t even have to sign up for a mailing list. Just a questionnaire on how to get a good builder.
Kevin: That website, by the way, is NewHomeContracts.com.au.
Stay with us, Samantha. We’ll get you back later in the show and we’ll continue this chat with you. Stay with us. Lots more to come, and Samantha will be back a little bit later in the show with more of those great tips.
Kevin: From time to time, I have heard some people say that you can actually buy property sight unseen. Of course, with things like the Internet, it’s made it very, very easy for us to get a lot of information right at our feet, so we can actually do as much due diligence as we need to do. But really, is it wise to buy sight unseen? You can have people on the ground for you, but I sometimes really like to see it myself.
Michael Yardney is from Metropole Property Strategists. Michael, I’d just like your opinion on this. Is it something you would do?
Michael: Kevin, I would never do that. Now, that doesn’t mean that I would not buy something if I had somebody I trust looking after it for me. But I guess what I’m saying is a bit different to what some people recommend.
I think buying a property sight unseen – which is touted as good advice because you take the emotions out – is really a recipe for disaster. Advocates of this strategy say, “It opens up your investment search to locations out of your backyard,” and I accept the fact that you should be doing that, and as they say, “It takes the emotions out.”
The trouble is that properties vary so much. It’s not like buying shares. Even from one side of the street to the other, prices can vary and properties can vary, so no, I wouldn’t be buying sight unseen.
Kevin: Michael, You alerted to something there about having a trusted advisor on the ground. Is that a solution if it’s just not practical for me to get there?
Michael: Yes, it is, Kevin. Let me give you an example. I remember looking, a couple of years ago, at a property. I did my virtual tours on the Internet and I downloaded all the statistics to the area. I did the Street View because that’s so easy now, and I looked at all the photos. But then when I actually got out to look at the property itself, right next door was an electrical substation – right physically next door. If you actually could look up in the air, which you couldn’t on the virtual tours, there were high-tension power cables there, so definitely this devalued the property I was looking at.
Similarly, I know properties in Sydney where if you’re on the north side of the street, you have magnificent views of the city water, the harbor, and the bridge. If you’re on the south side of the street, you have magnificent views of the houses on the north side of the street that have views of the harbor and the bridge. There’s a 25% difference in price from one side of the street to the other, and that’s why you need somebody with a level of perspective on the ground.
Kevin: What always troubles me, Michael, is that you and I talk all the time about the amount of education we put into selection of a property and educating ourselves, but I just don’t know that I’d be all that confident that the person I’m trusting is as educated as me. Maybe I’m a bit of a control freak. I don’t know.
Michael: So am I, Kevin. It is important to work out who you trust. That’s why at Metropole, for example, we have our own team of area experts, and even in Melbourne, we have four buyer’s agents – in Sydney, four, and in Brisbane, three – because they don’t even know the whole of Melbourne.
You need somebody who has a level of perspective, and, Kevin, that’s something that you can’t put in a spreadsheet and you can’t download from the Internet. Somebody who can walk down that street and know what the history has been, know what the school zonings are, understand what else is coming up in the market in the future years, and why one property is more attractive to owner occupiers and tenants from the other.
Kevin: Would that apply also if I’m working with a buyer’s agent, Michael, that I shouldn’t just blindly follow what the buyer’s agent says?
Michael: The buyer’s agent has to be an area expert and most of them are. Many of them are experienced estate agents who’ve now gone to help buyers, and that’s fine. What I’m finding uncomfortable at the moment is Melbourne buyer’s agents flying up to Brisbane, seeing 25 properties in a day, putting an offer on three and thinking they know the market.
Sure. I think there are a lot of very proficient, very experienced buyer’s agents, but get somebody who has on-the-ground knowledge, and in my mind, somebody who’s a property investor themselves, Kevin.
Kevin: Always good talking to you. Michael Yardney from Metropole Property Strategists.
Thanks for your time, mate.
Michael: My pleasure, Kevin.
Kevin: There is a new website I want to tell you about, too. It’s not so new – it’s been around for a while – but boy is it getting some publicity. It’s called RateMyAgent.com.au, and one of the men behind that is Mark Armstrong, who joins me as my guest.
Good day, Mark.
Mark: Good day, Kevin.
Kevin: You must be delighted with the way Rate My Agent is working. How does it work for the consumer?
Mark: What Rate My Agent does is it allows consumers to search every suburb in the country and find out which agents are selling the most property, by total sales value or by the number of properties sold, and then they’re able to read consumer reviews, consumer feedback about the agent’s performance.
It’s a completely independent website. So far, we have around about 27,000 or 28,000 reviews that have been posted on the website, and we’re getting around about 1200 new reviews posted every week. It’s a great resource.
Kevin: Yes. Of course, it is. One of the key things, of course, in selling or buying property is your review of the agent. It’s a great tool. It’s called Rate My Agent. Check it out for yourself.
Mark, I’m keen, with your insight as to what’s going on in the industry, if maybe you could give us a few tips for new property investors, people who are wanting to get into this market and not missing out on it while it’s going so well.
Mark: Yes. I think the biggest mistake a lot of investors make is they hear about a whole lot of different investment strategies in the marketplace and they just try to pick a strategy. They also often get quite confused about which strategy, whether it’s positively geared or negatively geared, or whether they should develop, value add, or a whole range of strategies.
But the advice that we always give investors is to say, “Look. Let’s just take your eyes off the market for a couple of minutes and let’s focus on you. Let’s focus on the individual. Let’s focus on how old you are, let’s have a look at your family situation, let’s have a look at your cash flow and how your cash flow is going to look into the future, let’s look at what you’re trying to achieve, let’s look at your risk profile, and let’s develop the strategy around your individual requirements, not the other way around.”
I think a lot of people get sold strategies, but we’re more about helping people work out what strategy is right for them.
Kevin: I think some people get confused between strategies and outcomes, too – like negative gearing and positive gearing; they’re outcomes of an investment strategy. To have a strategy, you’ve got to have all of those pieces in place, which is what you’re talking about, Mark.
Mark: Absolutely, and I’ve spoken to many people over the years whose strategy has been “I want to buy ten properties.”
I say, “Why do you want to buy ten properties?” If one property makes you as much money as ten, do you want to make money or do you want to buy property?
Mark: Invariably, they come back and say, “Well, actually no. We want to make money,” and I say, “The number of properties has got nothing to do with it.” The idea is we want to attain financial security, or buy a home, or whatever the case may be.
Kevin: Yes. What are some of the other tips you might have for people wanting to start out, Mark?
Mark: I think the next one is once they’ve developed their strategy, they then need to really lay the foundation. They need to look at the structure they’re going to use, taking into consideration tax benefits, taking into consideration financing options, looking at trusts or company structures, or personal name or partnership.
A lot of people neglect those sorts of things, but the foundation of a portfolio is really, really important, so we naturally take people to that next step and say, “Well, now you’ve got your strategy, the structure that that strategy will be built on may vary from a different strategy.”
For example, if you’re looking at a positive cash flow strategy, a trust structure might be a better option because you can distribute the income through that structure. But if you’re looking for a capital growth focus strategy, you might be better off buying in a personal name because you can get the negative gearing tax benefits.
Laying that foundation and giving very serious thought to how that strategy works and the best foundation for it is a really good next step.
Kevin: Yes, that’s been some good advice. I guess it comes down to being professional about this, putting it together like a business and taking out the emotion, understanding that it is a business.
Mark: Yes, absolutely. It’s a plan. It’s a property plan or a business plan. Whatever you want to call it, it’s going through it in a very professional manner.
I think the next tip is making sure that the strategy that you’re trying to implement or you’re going to implement not only works today but also works into the future. I think the biggest mistake that we see people make is they buy properties and the mistake they often make is not that they’ve bought the wrong property, but they’ve worked out that they actually can’t afford to hold onto it – because their circumstances change, whether it’s because they need to upgrade their family home, or whether they’ve had another child, or whatever the case may be. Buying properties, in most cases, is a long-term strategy, so we need to look at how our lives are going to change down the track.
Kevin: Very good. Great talking to you Mark. Mark Armstrong. Check that website out, too. It’s called RateMyAgent.com.au. It’s a great tool if you’re looking around to get the best agent.
Mark, once again, thanks for your time, mate.
Mark: Pleasure, Kevin.
Kevin: An old saying that I love to reflect on from time to time is that you’ll make money out of real estate when you buy, not when you sell. That all comes down to being a good negotiator. Even if you are using an agent, you have to understand the negotiation tactics that are used and how you can use them to your own best advantage. A man who does this all the time, Josh Masters, is from BuySide.com.au. They are buyer’s agents, so obviously, they do negotiation; that’s part of the business.
Josh, I wonder if you’d give us some insider secrets here. What are some of the best ways to be a good negotiator?
Josh: That’s an excellent question, Kevin. I probably do have to stress that the most power you’ll have as a negotiator – especially as you’re buying – is when you’re in a buyer’s market or a softer market. It is very difficult to do it in a seller’s market.
But when you’re a buyer, and it is a softer market and there is some leniency on negotiations, there are a range of things that you can get into that a lot of people overlook but can be really valuable to the seller and also to you in terms of interest rate payments and the like.
One of the things that can be available to you is decreasing the deposit. That is quite common these days. So, taking it from 10% down to 5%. Why that’s an advantage is that it means that less of your money is locked up in someone else’s bank account, essentially, so you can still have access to it, you can spend it on whatever you need to, and when settlement time does come, then you can obviously put in the remaining fee from the bank loan itself.
Kevin: That’s a good point too. As long as you’re covering off on the agent’s commission, because mainly what the agents are concerned about is having their commissions in that trust account.
Josh: Very true. Another things I would definitely look at is settlement terms. These are key. The settlement term for us is really important as an investment, especially coming up to periods like December or June/July where we might be coming into a very soft tenant market. That means that there’s not a lot of tenants around, especially around Christmas time – a terrible time to rent out.
Usually we’ll want to push that settlement time past that period into a period where tenants are really back in the market, like late January – a key time. Rather than going for your standard six weeks, you might push it out to 12 weeks. That can be quite a good little strategy to get hold of, as well.
Kevin: I like that one in particular. That’s a good one. What else have you got?
Josh: One of the key ones that we like to use – it’s often just one that we like to throw in there but it’s really valuable to us – is early access to the apartment. What that means is that before settlement comes – let’s say you have a six-week settlement – we might ask for two weeks early access. We get our property manager in there. We allow that property manager to show people through so that when we do come to settlement, we can have a tenant in there from day one.
Kevin: That’s fantastic. I love that. Do you have to do anything special in the contract to allow you to have that early access?
Josh: It’s always good to talk to the agent and get something in writing when you’re dealing with the solicitor and trying to close the deal up. You don’t want to have to rely on he said/she said when you go back into the negotiation room. I always like to have a little bit of a clause in there, or even an e-mail, confirming from the solicitor that you can have early access prior to show clients through. Generally, if you’re amenable with the sales agent, they will let you do it.
Kevin: Of course, you’re always better off having it done properly – especially if you’re a seller – because effectively, you’re really giving possession prior to settlement.
Josh: I wouldn’t go as far as saying possession. God, I hope not.
Kevin: Well, the moment you hand the keys over and allow access is effectively what you’re really doing. Isn’t it?
Josh: That’s true. We always like to have the sales agent there, though. They will arrange it with the property manager, and again, that’s why I say it’s really good to be amenable with the sales agent, because they’re taking their time out of their day and if they don’t want to do it, they’ll just say no.
It is good, I guess from a personal perspective in the negotiation, to get on side with the agent. Don’t make an enemy out of them. There’s no point in burning bridges. You never know when you’ll need to call on a favor from them in the future.
Kevin: That’s very good advice, as we always expect from you, Josh. Josh Masters from BuySide.com.au.
Great talking to you again, mate, and we’ll catch you again real soon.
Josh: My pleasure, Kevin. Thanks for having me.
Samantha Powers Part 2
Kevin: Getting back to our conversation with Samantha Powers and the e-book that we’re talking about – and you can get more information on the website, NewHomeContracts.com.au – we are helping you to make sure you choose the right builder if you’re going to go into a building contract. Learn from the experiences of Samantha.
Samantha, earlier in the show, you were giving us some tips on selecting a good builder. You’ve given us one. What’s the second one?
Samantha: Thanks, Kevin. Like I said, there are many tips that you can do, but I’ll touch on another one at this point. The second is to make sure that the liquidated damages are sufficient for your contract.
At this point in time, the standard default rate is about $250 a week, and liquidated damages is just the cost if the builder goes over the contracted time and everything. Now, $250 a week is not much if you are building, say, three townhouses or something like that. If you’ve already drawn 80% of your construction loan, $250 a week is definitely not going to be anywhere near your actual costs.
Making sure that your liquidated damages are not zero and quite potentially quite possibly above $250 is another thing, because that deters them from dragging their heels and going over the contracted timeframe.
Kevin: Do contracts and standards vary much between the states?
Samantha: The contracts themselves don’t. In each state, they rely on different kind of legislation, but the contracts themselves are just an agreement between two parties, so they can be changed depending on what the parties want.
When it comes to the differences between states, there’s different terminology. Victoria has a building survey that issues and occupancy permit whereas New South Wales, they call it something else and they get an occupancy certificate. It’s more terminology differences, but in general contracts, it all comes down to the cost of the project. Over $500,000, you might require a different contract. Under $500,000, the same story.
Each state has small differences, but ultimately you can protect yourself through implementing fairer terms in your contract.
Kevin: Is it as simple as making sure that there’s some kind of performance within that contract, that it has to be done within a certain timeframe, and also, whether or not it should be done at a fixed price?
Samantha: A fixed price contract is never actually fixed because there’s always the possibility that inclement weather could occur or that your bricks might not be available. Fixed contracts are desired but they’re never really fixed. Yes, you can try that, but otherwise, you have to get a good builder who’s going to give you a big overview of what could go wrong, and then it’s not just about having that locked-in price; there are so many more things that you can also do.
Kevin: I know you cover that in some great detail inside the e-book, and it’s called “The Essential Guide to Australian Domestic Building Contracts: Save Yourself Thousands.” It’s available through Samantha’s website, which I mentioned earlier, and I’ll do it again now: NewHomeContracts.com.au.
Just in closing, Samantha, what’s the best thing to do if a project does actually come off the rails?
Samantha: If a project comes off the rails, you need to seek advice from various sources. Each individual state has a place to go or people that you can consult with. For those in Victoria, it’s the Building Commission – they’ve renamed it now. You can go there. But they all have disclaimers that their advice is advice only and they’re not bound by it legally.
Don’t go to your friends and family and ask them. If they have no clue about building and contracts, then you’re going to get some great opinions, but…
If you decide that maybe the building work has not actually reached the stage and you refuse to give a payment, if you are actually in the wrong, then you are liable for costs in the end. You need to do your research, you need to really understand the terms and what your obligations are.
Kevin: It’s all covered, as I said, in that book that’s called “The Essential Guide to Australian Domestic Building Contracts.” It’s been written by Samantha Powers. It’s available on the website NewHomeContracts.com.au. Samantha, we are out of time but thank you so much for sharing this experience with us. I know that it will have helped a lot of people.
Finally, can I ask you, was there a happy outcome?
Samantha: Yes. I finished the house myself, I learned a great deal throughout, and I will do it again.
Kevin: Okay. That’s great to hear. Samantha Powers. That website, again, is NewHomeContracts.com.au.
Samantha, thanks for sharing your experience with us.
Samantha: Thank you for having me, Kevin.