A few years ago, some family friends were looking to buy a home. They were savvy enough to understand how important it was to buy in the right area > suburb > neighbourhood in order to achieve the greatest financial benefits from capital growth.
But boy were they picky.
They were initially unwilling to compromise on any of their parameters: 600 square metres, flat block, 3-bed, 2-bath, single story, brick veneer, within 500m of train stations and shops, within a specific school zone, etc, etc.
On top of that, they were really indecisive when suitable properties came on the market and often talked themselves out of purchasing… Is it the right month to buy, that property down the road sold for less last year, and if we buy now then what does that mean for our holiday plans in 2 months?
Lastly, they were constantly dipping in and out of the market – attending 17 opens one month, then zero the next two months, then 5 the next.
The result? After over 2 years of “looking”, they were forced to increase their budget by 35% due to median price growth. And they got priced out of the area they originally wanted to purchase in, then the next area, and then the next!
As the market moved onwards and upwards, their purchasing power went backwards, dramatically.
This is a prime example of what not to do when buying a house, whether as an investment property or a family home. So, what are some other mistakes to avoid, and what steps should you be taking as a buyer?
Here’s some advice from our property investment advisors in Melbourne.
Dos and Don’ts When Purchasing a Property
DO Consider at Least 2-3 Different Areas
As with most things in real estate, it’s about supply and demand.
If you restrict your search to one specific suburb or neighbourhood, you’re limiting your choices unnecessarily, and a few things will likely happen:
- you’ll suffer emotionally from continually missing out on properties;
- you’ll end up having to increase your budget substantially over time to keep up with other buyers;
- you’ll end up overspending due to frustration; or
- you’ll eventually get priced out of the area and will have to look elsewhere.
The lesson? Maximise your options from the get-go. Don’t just look where you live, where you grew up, or in other familiar areas. And don’t just choose one so-called hotspot. Widen your net to at least 2 or 3 key areas and consider them equally.
DON’T Get too Emotional (or at least try not to)
Buying property is a huge decision, whether it’s your family home or your big investment. There are always going to be emotions involved, but if you let them override you it could be an expensive mistake.
Be as analytical and objective as you can when considering properties and negotiating purchases. Remember that auctions are popular in Melbourne because they make potential buyers emotional, and don’t fall into the same trap.
Don’t be the sap that pays $100k more than your budget because you got lost in the moment or didn’t do your homework. Moves like that can quickly turn a solid investment into a very shaky one.
DO Crunch the Numbers
Whether you’re a homebuyer or a property investor, you need to determine your budget and stick to it. Get to know the upfront costs (20% deposit, stamp duty, legal & financial costs, etc.) as well as all the holding costs (maintenance costs, loan repayments, insurance, etc).
If you are pursuing a negative gearing strategy, ensure you have the funds to cover the losses, and don’t expect tax offsets to fully reimburse you (because they won’t).
DON’T Shy Away from Negotiations
There are plenty of moments in the residential property-buying process when you may get the chance to negotiate. When a property has been passed in after an auction, when a house is up for private sale, or during an open home if the vendor and the real estate agent are willing to play ball.
Sometimes you’ll be in a position of power (like when you’ve been handed a particularly concerning pest inspection or building inspection report) and sometimes the playing field will be neutral.
To get a great deal, you will need to become a master of making offers and negotiating. Quote numbers that are fair, justify your position with facts and be firm with your offers. Know when you have the leverage and act accordingly and you’ll be sure to get a great deal.
Remember that as well as discounted sale prices, you can negotiate for certain repairs to be carried out or for the vendor to pay extra closing costs.
DO Your Research and Understand Your Buying Goals
Most buyers (and, because we’re in property-mad Melbourne, a lot of non-buyers) regularly read property sections in newspapers and track sales results. Absolutely do this, but it’s equally important that you actively inspect properties, talk to local agents about trends and transactions, and walk the streets to get an intimate feel of different neighbourhoods. I’m a Data Analyst, so I appreciate the importance of statistics, etc, but there is no substitute for on-the-ground knowledge and contacts.
The research you do should be informed by your property-buying goals, so make sure you understand exactly what you want out of this process.
The first and most obvious distinction is home buying vs investing, but beyond that, you may need to consider:
- your financial and lifestyle goals
- positive gearing vs negative gearing
- capital growth or rental yield (there is a correct balance); and
- your appetite for future development or renovation, to name a few!
DON’T Be Overly Choosy
With all this talk about target areas, budgets, goal setting, and research, it’s easy to think that you’ll end up like my family friends, never finding the right property.
At times like this, an old saying comes to mind. “Don’t let the perfect get in the way of the good!”
It’s rare to find a property that ticks absolutely all of your boxes, and if one is found, chances are you’ll have to pay a considerable premium due to strong demand from other purchasers. Be realistic with your expectations, rank your priorities, and be willing to compromise. The beautiful thing about real estate is that you can make the improvements needed over time.
DO Consider Value-Add Opportunities
The most successful property people I know are enthusiastic about renovating, extending and developing. They recognise that rundown properties can be bought at a discount, whereas you pay a premium for turnkey dream homes. Importantly, it’s about recognising and investigating options to change floor plans, renovate, extend or develop prior to purchase.
Updating an outdated kitchen or maximising a big but underutilised backyard is a gift for owner-occupiers looking to stay in their home or investors hoping to maximise value.
If you’re interested in going a step further and completely redeveloping a block, our property development consultants in Melbourne can find a site with development potential and help you close the deal and put all the plans and permits in place.
Don’t be the buyer that outgrows your house and has to move in a few years due to lack of space. And don’t be the investor who relies solely on the property market for capital growth, with no thoughts for active value-adding.
Look at a property’s full potential and purchase with an eye to the future.
DON’T Overlook Bad Bones
In real estate, you make or lose your money when you buy, not when you sell.
What this means is that you should look for quality properties in carefully selected areas. What this doesn’t mean is getting obsessed with finding a “bargain” to the point where you overlook serious structural issues that become a time and money sink.
A kitchen or bathroom reno is one thing, but bad foundations or an incredibly poor structure and layout can be incredibly costly whether you’re hoping to live in a property or make serious money from it.
Always have properties professionally inspected and tick every other box on your due diligence list along the way. And remember that a carefully considered $900k purchase will almost always be more of a deal than the $500k “bargain” you’ve rushed into.
DO Talk to a Professional
We provide a lot of free professional advice and insights, partly because we love real estate and we’re passionate about sharing our work.
But let’s be serious, we hope that by sharing our stories and research, people will recognise that we know how to succeed in real estate.
If you don’t know where the best suburbs in Melbourne are, what type of property to look for, how to achieve great profits and/or long-term wealth, or what strategies to deploy in negotiation or auction bidding, then reach out to us.
At Property Analytics, we are your buyers agents/buyers advocates across Kew, Doncaster, Thornbury, and Melbourne. But our team doesn’t just find, negotiate, and secure investment properties. We offer a proven process for pursuing high-value investments, including off-market investment and development opportunities, all based on your goals.
Some other professionals you might need on your journey that we can connect you with include mortgage brokers, solicitors, property managers, and accountants, as well as town planners, engineers, architects, and quantity surveyors for development projects.
DON’T Listen to So-Called Experts
Your mate or your cousin might have bought a successful investment property 5 years ago, but that doesn’t mean they can guide you to the same success, let alone point you in the right direction.
Property marketers will spruik the dream until you sign on the bottom line, but they are all about selling properties and earning commission, not giving you good advice.
And real estate agents… Well, you can’t avoid them. And the idea that they’re also on the buyer’s side remains an all too common misconception. Just because you need to network with them, it doesn’t mean you need to take anything they say at face value.
DO Get into the Market
Every week, month and year that goes by without purchasing a property, your options become narrower. As much as we recommend being smart, objective, strategic and professional, the reality is that you need to eventually take the plunge to succeed in real estate. Indecision is a lot like procrastination – it keeps you occupied, but it doesn’t get you anywhere.
So, don’t dip in and out of the market or spend all your time looking at properties or price brackets that are purely aspirational. With our advice and proprietary research to back you up, you can enter the property investment market sooner.
DON’T Get Drawn in By Apartments
This is something we will never stop banging on about. Oversupply and lack of demand result in less property price growth, restricted finance options, and risky business for investors.
Successful property investors stay away from apartments, and you should too.
I’ve Seen a Lot of Property Buyers Make the Same Mistakes
One of the sad realities of property ownership in Australia is that Wage Growth is nowhere near keeping up with House Price growth.
For this simple reason, problems like procrastination and pickiness can be just as costly as emotional or uninformed purchases. You either lose money and opportunities by purchasing a pit or you do nothing and get priced out of good investment opportunities.
But there is another way.
When you have a clear strategy, independent data, and a proven shortlisting, feasibility, and negotiation process, you can enter the market smartly, and sooner than expected. And when this is the way you enter the market, meeting your investment and development goals is easier.