by Scott Pape - June 10th 2006
First home buyers need protection when it comes to dealing with developers and those promising easy money.
Dreaming isn’t enough when it comes to buying real estate. You also need to do your homework.
We’ve all seen the cute television commercials where talking dogs try to convince us to buy a certain flea treatment.
We understand animals can’t talk, but we can see the fit – who better to flog flea repellent than those that deal with them on a daily basis?
Pity there isn’t a repellent designed for us unsuspecting humans. The other night while watching television I saw the most amazing commercial that was full of fleas.
A stereotypical young first home-buying couple were pictured walking through a kitted up kitchen, lamenting the fact that they’ll “never be able to afford their dream home”.
At this point a talking sheep (actually a RAM) jumps up and explains to our hapless couple that buying their first home is easy.
According to the talking sheep, you don’t actually need savings to buy your own home. The woolly one went on to explain that all that’s required is to take out a loan for 100 per cent of the purchase price.
The reason these offers are getting more press is because of a decline in housing affordability.
According to figures recently released from the HIA/Commonwealth Bank Affordability Report, housing affordability deteriorated slightly in the March 2006 quarter and is still at historical lows.
Do your research
Before talking to a sheep or salesman every first home buyer should jump on the web and look at the total upfront and ongoing costs of owning a home.
Far too many people gloss over the considerable costs involved, which include building report and independent valuation costs, mortgage insurance, legal fees, stamp duty, transfer fees, mortgage application fees, removalist costs, insurance, and telephone and utilities connections.
Saving $60,000 for many first home buyers is a struggle in itself. Young people today, in addition to saving for a house deposit, are faced with paying rent, HECS debt, credit card repayments and soaring fuel costs. Although there is a significant demand coming from first home buyers wanting to get into a home, the supply (of cash) is not forthcoming. Herein lies the start of the trap.
Barefoot rule number 132 states there’s no such thing as a free lunch – regardless of what anybody tells you. The upfront costs of $60,000 are real, and before you get the keys to suburbia someone needs to pay them.
Property is a tough game and margins are thin. The last time I checked, property developers hadn’t taken up the challenge to forgo profits to help young people live the Aussie dream.
Someone is paying – and in most cases it’s the person that signs on the dotted line.
Don’t be fooled
Researching this article I found a lot of shady deals aimed directly at first home buyers.
From football coaches appearing on national television commercials telling us that ‘rent money is dead money’ and that a particular developer will ‘pay your rent for the first two years to help you save’, to house and land package builders promising that you can own your own home for less than $10 a week, so you can, according to the advertisement, ‘spend your money to buy that plasma television or car you really need’.
Many of these developments are downright dangerous. The scenario goes something like this: first home buyers go to a new estate that looks like something straight out of Jim Carey’s movie The Truman Show. There they read the glossy brochures that picture, promote and promise suburban bliss.
The next step is to pick out a block, then select a home, and then get shunted off to a “preferred lender” to get your financing (after the salesman has pre-screened you for affordability and fact finding).
My research showed that some first home owner financing deals carry interest rates of 8.4 per cent or higher (as opposed to the standard variable of about 7.25 per cent).
As an added sting many of these mortgages have high exit costs, so as to ensure that the mortgagee continues paying a hefty premium for (hopefully) the life of the loan.
In one quick afternoon you have hit a home run – a one-stop shop to the great Australian dream.
Yet the dream can quickly turn into a nightmare.
A real life nightmare
Hay Property Consultants managing director Peter Hay told me of one such situation.
A young woman bought a three-bedroom home in Point Cook, in Melbourne’s outer-western suburbs, for $325,000. After her exhilarating afternoon of shopping and signing contracts she experienced what’s commonly referred to as buyer’s remorse. Something didn’t feel right. It all seemed too easy.
A few weeks later she approached Hay Property Consulting to get its qualified opinion on how much the home was worth. Hay’s estimation came back at a price range of $285,000 to $290,000. Try as they might they just couldn’t seem to get the valuation of $325,000 – the price she paid.
Peter’s advice was simple.
Don’t move into the house.
Once you’ve lived in it, it becomes second-hand stock and will be priced down accordingly by the market. She would be better to on-sell it, take the loss and learn a very expensive lesson.
Today, that same property is still on the market. Even priced at $265,000 (a $60,000 loss) she still can’t find a buyer. The tragedy is that at the very same time, young home buyers are travelling to the edge of the city to these developments, taking in the slick sales spin and getting sucked into a deal they’ll pay dearly for over the next 20 to 30 years.
The lesson is to always get independent valuation advice, and never ever be pressured into signing anything without seeking your own independent legal and financial representation.
Yet the real lesson should be learnt before you enter your first display home. Buying a home is something we should all strive for. But not at the expense of our sanity.
Consider all variables
Committing to a huge mortgage is something you need to sit and think about before you are dazzled by property or finance salesmen.
You need to ask yourself some questions.
What happens if interest rates climb 2 per cent? Over a 25-year loan term it’s fairly likely – perhaps they could go even higher than that.
What happens if you want to have children? Suddenly two wages turn into one.
My critics may call me un-Australian for denouncing the Aussie dream, but the simple fact is that unless you have enough money to cover the upfront costs, and have taken the time to look at your budget now and into the future, you shouldn’t be buying a home, regardless of what real estate agents, financiers or our furry friend tells us.
Tread your own path!
Photo: http://www.flickr.com/photos/traveller2020/3584214808/
Follow @scottpape on Twitter
PDF No related posts.
