You’ve been saving, or at least you’ve been wanting to save, to buy your first home. Some people are content with renting and paying someone else’s mortgage but not you. You’ve been striving for this kind of independence for longer than you can remember and you’re now wanting to buy your very own home. However, for those who have never purchased a house (and even for those who have), buying a house can be a stressful ordeal and this could be the reason why you’ve put it off.
I want to take you on a journey into the house buying process here in Queensland. Some of the following principles may apply in other States but note that this article is specifically written for Queenslanders who are interested in buying existing standalone dwellings, not units or townhouses or off-the-plan builds. There’s plenty of assumptions made throughout this article and you will pick up on them as you read through it. Here is my list of five things to look out for when buying a house.
1. Your Financial Position
Your financial position determines almost everything when you’re buying a house such as the number of bedrooms, the size of the land and the quality of the building itself. Unless you’re purchasing with cash, you need to be aware of what lenders are doing with their lending guidelines. These lending guidelines vary from lender to lender so it pays to do the research and know which lenders and home loan products are out there.
Don’t be fooled into thinking that the bank with whom you have a savings account will give you special treatment because you’ve been with them for 10 years. In their eyes, there’s nothing different between you and Joe Bloggs who walks in off the street, but Joe is much more attractive as he isn’t yet a customer. Banks have different departments just like any diversified business model, but they aren’t as well integrated as they might have you believe. Just because ‘your’ bank knocks you back on a loan doesn’t mean you should give up. It just means their guidelines might be different to your needs or they are targeting a different audience.
It’s best to sort your finance out before you even start looking for houses or attending open homes. The price and affordability of houses are the two most key factors to consider since you can’t commit to anything without having the backing. Get started on the right foot so you know what you’re in for.
It can be difficult to navigate the finance process without spending copious amounts of time and energy in research. It pays to have an independent lending specialist who deals with a panel of different lenders. These brokers are in the industry dealing with the vast majority of the lenders in the market every day. By getting to know you, your position and your goals, independent lending specialists can help navigate this process for you without costing you a thing, making the entire process far less stressful than it can be. Finding a good broker can be priceless.
2. Your Family Life Stage
When planning to buy a house, you need to be ahead of the curve. You need to be thinking at least three years ahead. Where are you going to be? Who is going to be your community? What are you going to be doing? How much income will you be creating? What are your goals? What will your relationship status be? Will you have kids? These are all valid questions that need to be answered.
Things can change and they might not work out the way you planned but having a plan is far better than not having a plan. Having a plan keeps you grounded when adversity comes. It keeps you from making rash decisions that could potentially set you back even further.
It’s becoming increasingly difficult for individuals to get into the housing market without a substantial deposit, high income/serviceability or without a grant from the government like the First Home Owners’ Grant (read more here). It’s far easier for couples with stable jobs or those building their first home. That’s not to say singles shouldn’t be trying but you might have to shop around the different lenders to find someone that will give you the loan. The path of least resistance is usually the most desired.
3. Location, Location, Location
We all have dreams suburbs and ideal areas where we would like to live. Real estate agents are extremely important when scoping out a suburb or an area. Build a relationship with real estate agents in the area where you want to purchase a house. If you tell them that you are a motivated buyer and they are in turn a half decent agent, they will get to work for you. You’ve probably heard it said that agents only work for sellers but that’s not necessarily true. A good agent will create business relationships with anyone that’s keen to do business. Building relationships with local agents can save you a lot of time in research and spending your Saturdays going to open homes.
Other things to consider for location are the stereotypical things like public transport, infrastructure projects, schools and shops etc. But it’s also worth paying attention to where the house is positioned on the street and where it is in respect of the suburb. It’s a mistake to only consider the piece of dirt you are buying; you must also consider your surroundings. Don’t be afraid to pop your head over the fence and pay attention to the neighbours either side, over the back and over the road.
Write a checklist and include questions like: Is this too steep of a slope? Are there opportunities for flooding? Dangerous trees? Main road? Noise pollution, light pollution, traffic pollution? Untidy neighbours? Vehicle access? Use your eyes and your common sense. Pay attention and do your research. There’s a couple of free websites that give you some insight such as www.onthehouse.com.au, which allows you to see when the seller originally purchased the house. It’s public record so it’s completely fine to use this information since that’s what it’s for. I will talk more about this in the next section.
Purchasing a property is a huge investment. Do your research on the suburb too. What potential does it have? Do the prices indicate the market has clued onto its potential? Depending on your strategy, you might not be in your first house all that long; it might just be a stepping stone to bigger and better things. Therefore, view the purchase as an investment. Think long-term growth.
I recommend speaking to a property investment advisor if you’re unsure about where you should be buying. This will hopefully take some of the emotion out of the decision-making process. Some amount of emotion and gut instinct is still required when making a purchase, but an unbiased second opinion can save you a world of trouble.
4. Deposits and Finance
There are usually two (and sometimes three) ‘deposits’ required when purchasing a house. This can be confusing for those who are new to the process. First, there’s the deposit that the bank requires as a security for the loan itself. The lending guidelines vary from bank to bank so the percentages vary from time to time. Some banks only require 5% of the total house price whereas others can require up to 20%.
If you have a deposit greater than 20%, you won’t be charged a lender’s mortgage insurance (LMI) fee on the loan. Most lenders will add this to the loan so you don’t need to fork it out upfront, but it can still be really expensive (e.g.$20,000). This fee doesn’t add value to the home and you need to pay it back with interest so keep that in mind when making your offer. Although this won’t affect the seller, it’s more for your pocket’s sake.
The other type of deposit is one that will be needed to put the house under contract. The amount required will depend on the demand for the house. If there’s a lot of interest and other offers already submitted, you might need to show the seller you are serious, so a larger deposit might be required. But remember, the deposit you put on the contract will be taken out of your cash flow and may affect your lending position. The less you put down the better.
For our first house, there wasn’t any demand for the house and there was no competition so I put $20 down, which is almost unheard of. A normal amount without demand is around $1,000. But like I said, if there’s demand, you might need to be a bit more competitive with $10,000. With an auction, you’ll probably need around 10% on the day it goes under the hammer so don’t bite off more than you can chew. Work closely with your mortgage broker to find the most effective route with least resistance. The more you put in, the more options you will have at your disposal.
5. Signing the contract
So you’ve found the house you want and you want to go after it. You’re confident on the finance to the point of a pre-approval and you’re ready to put an offer on the house. Before signing anything or even talking about offers, you should obtain a copy of the contract and send it straight through to your lawyer (sometimes called a solicitor or conveyancer). Their job is to bring to your attention the demands of the contract and any unusual clauses. There can be serious consequences if this process is done incorrectly. Having a good lawyer and being informed can alleviate a lot of the negative legal implications that can arise.
Generally, depending on the circumstances leading up to putting an offer on the house, you can approach it several ways. You need to be astute as to who’s involved in the process, what their circumstances are, why they are selling, how long they have been trying to sell and how long they have owned it. Using the website “onthehouse” or “realestate.com” can be a really useful tool. Investing in the assistance of one agent to do the majority of the research and legwork will benefit you when the time comes to putting an offer on paper. Build a relationship with your selected agent even if he or she is not the agent listing your dream home. On the other hand, if the seller or the agent is not in regular contact with you or show little commitment to you and your search, they might not be worth dealing with. In these circumstances, you may need to move on.
After your lawyer has given you the all clear to go ahead with an offer, you will need to come up with an amount you think the seller might be interested in but that you can also obviously afford. With all the information you’ve collected (if not written down hopefully at least in mental notes), formulate a figure. Again, the price will be determined by the demand or perceived demand. If there’s no other offers or interest, you could have a lot of swing. If there’s a lot of interest and three other offers, you might have to be a bit more competitive if you really want the house. That doesn’t mean you have to offer over and above what the seller is asking but use your instincts to determine what those you’re competing with might offer.
Some real estate agents don’t accept verbal offers at all but some will try to fish it out of you before you sign a contract because getting a contract together creates work for them so you need to bear this in mind. Some agents won’t even look at the price of the offer before they submit it to the seller. It really depends on how they do business. And every one of them is different. Your lawyer should give you options if complications arise but ultimately you make the decision.
The conveyancing lawyer that I use, Max Williams from HPL Lawyers, identifies the following traps for buyers to watch out for when buying a house:
(a) Purchasing entity
It is critical that buyers ensure that the correct entity is identified in the contract as the buyer before the contract is signed. Whoever (or whatever) is shown in the contract as the buyer will end up being the owner of the house. The consequences of writing the wrong entity can be a costly error.
Once the contract is signed, if the buyer needs to be changed, then the contract will usually need to be rescinded and a new contract entered into in order to avoid negative stamp duty implications. You will usually need to pay the legal costs of the seller for attending to this rescission, which could be in excess of $500. You will also need to pay your own legal costs associated with the rescission.
The following are some common scenarios where this issue may arise:
- A couple who sign a contract decide only one of them will be the owner of the property for asset protection reasons
- A person signs a contract and later is told by his accountant that a trust should own the house for tax benefits
- A trustee of a self-managed super fund (SMSF) signs a contract and later discovers that because the SMSF is obtaining finance to purchase the house, a custodian needs to be the owner
(b) Handwritten amendments
It is not uncommon for parties to a contract to negotiate amongst themselves after an offer is submitted or even after a contract is signed by one party. However, if any handwritten amendments are made to the contract, they must be initialled by both parties in order to be binding. If the seller makes any amendments to the contract after the buyer signs it which are not then initialled by the buyer, this may also mean that the contract will not bind the parties.
(c) Unwritten agreements
Following on from the previous point, any agreements between the parties regarding the house should be documented in the contract. If it’s not in the contract, it’s unlikely to bind the parties. You may think the seller or their agent are the most trustworthy people, but you never know what may happen if a dispute arises.
For example, if the seller agrees to you moving into the house prior to the settlement date, ensure a special condition is inserted to reflect this. Or, if you want the contract subject to conditions other than the standard finance and inspection clauses, again a special condition will need to be inserted.
In order to avoid such errors occurring, you should consult with your legal and financial advisors prior to signing the contract.
After signing the contract, you are no longer required to speak to the sales agent or the seller if you don’t want to; your lawyer can communicate directly on your behalf. That’s what they are for so utilise them. Conveyancing and searches fees are a necessary evil but altogether you shouldn’t have to pay more than around $1,500 to $2,000 for the fees and searches for a normal residential purchase. However, if the contract falls over, you might still need to partially or wholly compensate them depending on your arrangement with them.
6. The Building & Pest
Conducted by: Matthew Houlders from Little Critters Pest Control
What’s involved in a building and pest inspection, how much does it cost, and is it really that important to get one done when you buy a property? Buying a home or investment property is likely to be one of the biggest investments most of us will ever make. And yet, some people are willing to let it all come crumbling down because of an invader that’s only a few millimeters tall.
Termites are nasty little pests that can carry on undetected for months or even years, wreaking havoc on the foundations of your building sometimes before you figure out they’re even there. The average repair cost for termite damage to a house is $7,000, although we’ve all heard horror stories when homeowners have been forced to part out with tens of thousands of dollars to rectify a termite problem.
Similarly, structural and drainage issues can cause huge financial headaches and building issues can be present in both new and old homes. So, when you’re in the market to buy, it makes total sense to have a building and pest inspection done by experts as an essential part of your due diligence process.
If the sellers have gone to the effort of obtaining a building and pest report then this is a great indicator that they are committed to the sale of their home and have made positive changes to correct any underline concerns well before the sale. This is a “win-win” for both the sellers and buyers.