These tips will ensure you make the right choice when buying your first place
A while ago, the finder.com.au team filmed an interview with property expert and CEO of Your Empire, Chris Gray. What we came back with was so much in-depth, helpful information, that it would be a shame to cut it into tiny fragments. So here is the long version for your learning pleasure.
Get the answer to your burning questions about buying your first home
- How should a first home buyer begin the home buying process?
- How should a first home buyer choose a home loan?
- How do you find the right property?
- Should buyers use real estate data?
- What professionals should a first home buyer use?
- How much deposit do I need?
- When is a good time for first home buyers get into property investing?
- What are your tips for grants and government assistance?
- What are your tips for off the plan and new buildings?
- How do you discover whether a vendor is genuine about selling at the suggested price?
- Do buyers really need to carry out all the expensive checks on a property?
- Should first home buyers get a private valuation?
- How do you use a property valuation to decide what is a fair sale price?
- How do you make an offer on a property?
- What tactics do you use get the purchase through?
- What are your tips for buying a property that's up for auction?
- Can buyers bag a bargain at auctions?
- Should first home buyers avoid auctions?
- What are the biggest mistakes first home buyers make?
- How do I choose a buyers agent?
- Should a first home buyer bother with a final inspection before settlement?
- What types of insurance should first home buyers look at using?
- The first thing to do when you're getting into property is to not to look at any physical property at all. Start with what you want to get out in terms of your investment and then start trying to work out the numbers.
Property is the last thing on the list. It's the last 5%.
- A lot of first time buyers will concentrate on little choices like getting a home loan from a non-bank, a bank, or using a mortgage broker. They try save an extra 0.1%. Twenty years on, it's all completely irrelevant.
The old way of making money was all about saving money. That's what our parents did. Whereas, for the new generation, if you concentrate on buying a better property, you'll make thousands of dollars, if not tens of thousands. Whereas saving money on a loan is peanuts.
As someone in the home loan business, I obviously believe that the amount saved on home loans isn’t ‘peanuts’. Yet Gray has a strong case. I myself know a couple reaching retirement age who held an investment unit in Western Sydney that made exactly $0 over the 10 years they held it for. Sure, choosing the right home loan would have saved them money over this time, but it wouldn’t have made the underlying property a good investment.
- Literally go and see a hundred properties. Get an Excel spreadsheet, write down exactly what property you've seen — what the square meterage is, the number of bedrooms & bathrooms, what the size is, how much the estimate was for the sale price and how much the rent is. Then actually track it all the way through to auction to see what it finally sold for.
This is so you can get an idea of what the agents are quoting and what they're actually getting at auction, what's selling at auction and what's not selling at auction.
The only way to do it is to go out for three to six months and see ten properties a week.
Again, it's not the kind of thing that people want to do, especially for first time buyers. They just want to go out and buy something, buy it emotionally, but most of the time they buy something wrong.
- Until you physically see something, on paper it could look like there's ten comparable two-bedroom units, but when you go and see the property, it could be vastly different.
While I'm a believer in using the stats, it's really about getting out and looking at the properties, talking to people and seeing what the feeling is on the street that makes the difference. It's very hard to be a textbook investor.
A lot of people say you can buy over the Internet, but I wouldn't recommend it.
- Even when you're starting with your first time, you need to try to get as many professionals as possible. There's no way you're going to know everything from the get go.
Approach it from the perspective that the more money you pay, the more you are investing, rather than thinking of it as a cost.
Ultimately, you need a mortgage broker, an accountant, a valuer, a building inspector, a strata inspector, solicitors for conveyancing and people who can help arrange Development Approvals.
- A lot of people will try to pay the largest deposit possible to avoid paying Lenders Mortgage Insurance. Whereas, quite often, I think that's a false economy.
Sure, if you can put 20% down and not pay mortgage insurance, it's a good thing. But if it leaves you with no money, it's actually a pretty risky situation.
Even if I had a 20% deposit, I'd rather put down 5%, keep the extra 15% and then maybe put it into an offset account. You can withdraw that 15% for emergencies in case you lose your job or you need strata fees or anything else.
Now, the mortgage insurance might cost you $5,000 to $15,000, but you can add it to the balance of the loan. If you buy a property for half a million and it doubles to a million in 10 to 15 years, who cares if you paid an extra $15,000 for mortgage insurance?
The philosophy with professional investors is doing the opposite to what everyone else does. Rather than saving the money, think about investing smarter. Having a cash buffer is much more important.
- A good time for first time buyers to get into the investment scene is straight away.
If there are grants available, maybe buy the house, rent it out for 11 months then live in it for six months if that's what you need to do for your state and then rent it out again.
There's nothing wrong with renting out property rather than having it first time. You're actually better off treating it as an investment because then you get all those losses back in your tax. Sure, it might only be a third of the losses back, but cash flow wise, it's a lot better. All your expenses are suddenly tax deductible.
- Sure, get whatever grants you can, but at the same time, concentrate on the actual investment, not on the grant.
Again, I think it's a false economy.
Some people will go and buy something because they saved 10 to 15 thousand dollars with the help of government grants.
But if I can buy an investment somewhere else and I don't get the grant and I could make an extra 1% growth a year — I'm going to make $5,000 a year for the rest of my life. Compounded, that's worth hundreds of thousands of dollars.
Never buy anything for tax or government grant reasons.
- I'm not a massive fan necessarily of brand new properties and again, a lot of people will choose them because they get free stamp duty.
I find a lot of the good suburbs don't have any more land to build new properties. So you can't get into the best suburbs anymore and if you can, quite often they'll be $1 million plus.
Generally, what that means is if you want brand new, you have to go quite a few suburbs further back. They're not the best suburbs, as they're not going to grow as much.
Sure, you've saved $10,000 to $15,000 on stamp duty, but you've got a second-rate investment.
Concentrate on the investment as number one and then think about the tax benefits as number two.
I've also found with a lot of brand new stock, quite often it's overpriced. They're selling to emotional first time buyers and homeowners who'll generally pay a higher price than investors — many of who buy on bank valuations and more factual information.
- The biggest thing to do is to try and quiz the agent to really find out if the vendor is motivated, if they really want to sell and what their expectations are like. And see what happens if you came to them with their suggested price.
If the agent says, 'look, we're after $500,000' and you say, 'well, if I came to you with $500,000 today, would you sell the property?.' Quite often the story changes after that.
- Questioning is one of the most important things. You need to get a strata checked if it's a strata plan unit because there can be a $100,000 special levy just around the corner. You need to get a building inspection because you're not likely to know what concrete cancer looks like or what damp looks like and the potential cost.
Just because a building's got damp or concrete cancer, it doesn't mean the cost to you is going to be ridiculous, it could be $1,000, but at the same time it could be $1,000,000.
- I always get a valuation. Even though your bank is going to do one, quite often they're not going to do it until after the event.
I pay for those things and quite often it's about $1,300 to get those three reports [building report, strata report and property valuation]. A lot of people will say 'why pay thirteen hundred bucks for those reports when there's no guarantee you're buying the property?'
But I wouldn't risk $500,000 or even $300,000 without paying for those reports because I could be liable for $50,000 or $100,000.
- So when I get a bank valuation, quite often they'll give us a range. So they might say "This property is roughly worth $500,000 to $550,000.
In this kind of current market now we're roughly paying in the middle of the valuation, so roughly about $525,000. When the market comes back slightly stronger, quite often we're paying at the top end of the valuation, so $550,000. In a really booming market ,quite often it'll be 5% or 10% over the valuation, so maybe $575,000 or even $600,000.
You need to understand valuations as well as just getting that report.
I might advise a client to pay $575,000 because if they don't pay $575 now and they wait another month, the price then might be $600,000.
It's all about reading the market and understanding the market as to what I'd pay based on that valuation. At least by having the valuation I'm not going to pay $700,000, or if I am going to pay $600,000, I know I'm doing it based on a reasonable thought rather than just being emotional.
- If I'm prepared to pay $525,000 quite often I'll go in at $525,000 and say;
'Look, I'm not playing around. This is a pretty good offer and this is reasonably as much as I'm going to go up to. There's maybe some negotiation, but that's pretty much it.'
A lot of people try and steal the property at $500,000 or $475,000. But out of 200 properties on the market I'm probably only interested in 10. And out of those 10 there's probably only three that the vendors price expectations are right, so when I find those three I'm not going to risk losing those, as I'd have to search through 200 more properties.
When the right one comes along, I don't mind paying a fair price for it.
- When I give it the offer to the agent quite often I'll say;
'Look, you've got 12 (or 24) hours to take this to the vendor. I'm not going to allow you to shop it around and try and use my offer to get someone else's.'
But ultimately there's nothing you can do.
Even if you were going to do that it really just comes down to negotiation technique and your relationship with the agent.
- Even if a property's up for auction, it doesn't mean that it has to go to auction.
I find that the best properties always sell well. Generally I don't want to go to auction because that property will go up 5 or 10% as more people see it. My strategy is always to get it off the market as soon as I can.
As soon as I see the property, I get the report and a contract done. I sign the 66W certificate which means there's no cooling off, so that's the same as auction.
It's a really strong offer, I put my 10% on the contract and go to the agent and say; 'Look, it's maybe not the best offer in the world but it's a guaranteed result.' So say it's $500,000, 'if you go to auction you might get $525,000, but you might get $475,000.' So here's a guaranteed 'bird in the hand'.
- In my experience of thousands of property sales, I just see the good properties sell well and the bad ones always sell cheap.
If you're in a market that's generally pretty down, potentially you might go to auction because you might think; 'Well, if no one's really interested maybe you can get a rock bottom price.' But that's usually not the case.
So, do I want a cheap property? No, because it's always going to be cheap.
In a down market it's always going to be harder to rent, it's always going to be harder to sell, whereas if I pay even a premium for a good property, say even 5% or 10% quite often you'll always get a premium in the rent and you'll get a premium when you resell.
So while buying price is important, to me, the number one priority is to get the right investment.
- So there's quite a few different methods of sale for first time owners, for most people it's either going up for sale or it's going up for auction.
There's no right or wrong as to which ones to go for.
At auctions, a lot of people are quite nervous about going to auction and so they might be swayed more to properties that are for sale. But that's going to cut you out of a lot of properties, especially some of the inner-city areas.
Pressure is put on by the agents and the auctioneers to push the price up. As a professional buyer, I see people bidding against themselves, paying hundreds of thousands of dollars more purely because they haven't got the knowledge.
You can hire a buyer's agent for 0.25% to 0.5% of the sale price to go and bid for you. Sometimes it's worth spending that money because if you're 21, you've got no experience, it's going to be very, very hard and you will get pushed up.
- Again, as a first-time buyer, it's very hard to understand, because most of the time people don't use my services, they would buy those other 190 properties that I wouldn't buy no matter what the price is.
We tell clients; 'don't buy on the main road. Don't buy with no parking. Don't buy in a massive block.'
They then come to us six months later saying, 'Yeah, I've just bought something on the main road that's got no parking.'
People will do step one and they'll do step 20. They won't do all the steps in between because they're in such a rush and such an emotion that they'll just go and buy a property.
You've either just got to go off and buy the first thing that you see and cross your fingers and start praying. Or do it properly and maybe spend three or six months really understanding everything and following it to make sure you know what you're doing.
- It's very hard for you to understand if you've got a good buyer's agent or a bad buyer's agent. Just as a vendor, it's very hard for them to tell if they've got a great real estate agent.
Of the questions to ask them, the classic one is 'how much property do you own yourself?'
If a buyer's agent's got lots of property, they've made lots of money from it, they're generally just imparting their experience and their knowledge onto someone else. If they're making a lot of money from it then they can help you do the same kind of thing.
Ask them what difficulties they've had, what successes they've had, really just interview them as if it's a job interview and see how they perform.
- As a first time buyer it's a good routine to get into because you're probably not spending $50,000 to $100,000 on it. You're maybe doing a paint and re-carpet. You need to make sure that someone hasn't trashed it and nicked all the cupboards and fixtures and fittings.
- I insure myself for pretty much anything that can happen, both to me personally, my properties, my business and to everything else.
Again, quite often it's a false economy. A lot of people are trying to make money from saving money. Insurance is the last thing that they want to spend because they think it's never going to happen — but it does.
I've had lots of friends in their 30s that have had strokes, heart attacks, some have died — some still living thank God — and a lot of them were in between insurance policies. Whereas I'm insured for anywhere between $3 to $10 million.
If something like cancer or a stroke happens, which is unfortunately very likely — then that's almost your retirement plan done.
If you've got an insurance policy and you've got millions of dollars coming in, life's pretty relaxed. So it's definitely worth the investment.
With buying investment properties or your own home you've definitely got to get a landlord's policy if you're going to rent it out because otherwise most household policies aren't going to cover you.
If the tenants trash things which they can do, let the whole building alight, which can happen, suddenly if you're not covered and your financial life is pretty much over straightaway.
When it comes to personal insurances, both income protection and life insurance, all of those I maximise out as much as I can.