About the Author
Stephen Pace is an experienced commercial and residential mortgage broker with BCP Finance in Melbourne’s leafy suburb of Parkville, on the city fringe. He specialises in home and commercial loans, and has agreed to share some general advice when it comes to entering the property market. Today’s article is part one of a two-part series, so be sure to follow posts over the coming months for part two! So, if you’re considering entering the property market and you’re looking for a lender, look no further than the very knowledgable Mr. Pace, and here’s why…
Entering the Property Market
Financing a property is always challenging and as for most in the general public, it is very likely that you will have to think long and hard whether or not you’re ready and capable of making such a financial commitment. Buying a property is usually the single most expensive transaction a person will make in their life, and if done right, entering the property market can be both a smart expense and good investment.
1. Purpose – Owner Occupied Vs. Investment
The first primary factor when considering entering the property market is to determine the purpose of the purchase. Are you looking to purchase this property to live in? Or are you looking for an investment purchase seeking to obtain rental income?
The two key factors above impacts not only the buyers appetite but also the bank’s from a loan point of view, in regards to the minimum contribution, and also servicing factors. Making a decision can be tricky but is should be determined by your current financial and lifestyle position. Looking forward 1-3 years of your goals is a point recommended to help to assist your decision making. If you are seeking an investment purchase, there are 3 underlying factors which would determine if the property will make a good investment, these 3 simple things are; rental yield, capital growth potential and the underlying demand.
2. Analyse and Evaluate the Financial Commitment
Once a buyer has determined the purpose of the purchase, each buyer should evaluate their finances. As mentioned above, entering the property market can be the single most expensive transaction a person can make, so don’t go in blindly! Do some research and educate yourself in regards to property areas, fluctuations in property prices and lender appetite and requirement. It’s also important to know what to look for when prospecting for a property, to ensure you’re not falling into a financial hole of additional costs outside of the purchase price.
a) Buy What You Can Afford
In this current market, with the rise of cost of living, you should buy the house you know you can afford, no point buying a house and then all your pay goes towards the mortgage repayments, you still need money for cost of living. Mapping out a plan of attack by creating a strict budget is a good idea. In the period of seeking a property, try and avoid overspending, as this could jeopardise your financial stability – from here you should only consider the ones that you budget can handle.
b) Understand The Various Expenses of Entering the Property Market
A point that also must be considered when evaluating your finances is working out and getting comfortable with the on-going expenses and commitments post-settlement. A lot of buyers drain their bank account and put their every last dollar into the purchase, but don’t take into account the maintenance costs of the house and insurances. The question then gets asked, is it worthwhile looking into a brand new house or buying an established house in an established area?
c) Inspecting For Potential Costs
If the house is established, when inspecting a house you should inspect it thoroughly, focus on the structural stuff, aging appliances, cracks/chips/mould in the walls any leaks or water damage – you may consider paying an external upfront building report. Enlisting a professional for the building report will cover off on factors mentioned above, as well as:-
- Ensuring the foundation is solid
- Is wiring up to code
- Is the house structurally sound
- Are you buying a property that has any wood eating pests? How will you know?
This is an important point as maintenance costs can end up eating heavily into your savings and budget, so it is worthwhile saving some money in your bank account for a rainy day.
3. Identifying the Area and Type of Property that suits You
Identifying a property, the underlying area and buying to suit your lifestyle is important. There are some factors that cannot be ignored, such as:
- Do you actually require a house? Maybe a townhouse or a unit would suit?
- Is the area close to work? Family? Friends?
- Is the property close to public transport and schools?
- How is the condition of real estate in the area?
- Is your area prone to bush fires? Flooding? Is it in a flight path?
The prices of property tend to vary in different locations and suburbs which is derived from several different factors. For example, a house that is situated in close proximity to infrastructure, walking distances to public transport, shops and schools, will generally cost more than a house located further from such amenities. Each location and suburb will have its own niche advantages; find out what suits your budget and meets all of your needs before making a final decision on which property to purchase or invest in.
4. Obtaining a Pre-Approval
Once you have worked out your potential purpose, created a budget and identified a preferable property type, where to from here? There is no written rule that you require one, but anyone in the financial game in this day and age would advise that obtaining a pre-approval is highly recommended.
Obtaining a pre-approval with a lender or approaching a mortgage broker for a professional opinion and guidance is worthwhile – we deal with this stuff every day and have the ability to guide and educate you throughout the whole process.
A pre-approval is a powerful tool to have up your sleeve; no doubt there will always be some mitigating factors or conditions to meet before going to a final approval, but it provides any buyer the confidence that they have the support from a lender. This will enable a buyer to attend an auction or even a private sale arrangement and confidently bid within their limitations.
Having a pre-approval provides confidence to any buyer entering the property market, as you have a lender in you corner to guide and assist you. So, why not continue to bolster up your team?
a) Real Estate Agents
Having a realtor that works for you and an experienced solicitor round off your trio. The seller pays the commission to the real estate agent, so it makes sense to capitalise on their free service as a buyer! The realtor can:
- Provide area and property data
- Identify current and potential properties coming up in the area
- Share knowledge regarding the area and suburbs you seek to buy
- Negotiate with the seller
- Assist in additional inspections
Secondly, having a solicitor is beneficial. Each property sale will come with a contract and there will be papers to sign. And more papers to sign… And more! The contract will contain a lot of legal jargon, so who better to review and provide advice than a solicitor? Their role is to ensure that the contract is sound and there aren’t any mitigating conditions popping out that will put their client (you) at risk. The contract is originally drawn up from the seller, so there is room for negotiations. Whether you need additional time to settle, or another inspection of the property, or to waive a condition, your solicitor will act on your behalf to do all of the heavy lifting. This helps to ensure that the contract will meet your requests and obligations.
A contract of sale is typically drawn up and available when a property is advertised; it becomes available from the acting seller’s real estate agent. Before attending an auction, try and obtain the draft version and provide this to your solicitor; they will advise accordingly if everything is in order. This way, you can attend an auction or bid on a private sale with confidence. If there are any clauses which jump out to them, they can be amended on the draft and reviewed by the seller before either party signs.
Whether you are an experienced property investor or entering the property market for the first time, buying a property is both an exciting and stressful experience. You may not always find a likeable home and buy it first up; there are people whom have been unsuccessful multiple times at auctions… Just remember to remain calm and positive that there are always many more opportunities. It is important to keep the above mentioned points in mind and all that is involved, including the moving factors and components within it. The more educated you are, fire power you have up your sleeve and stronger team you have to represent you, the better off you will be! The experience will become so much easier and more enjoyable.
Stay tuned for our next guest post in the coming months, detailing the important considerations of finding a home loan.