30 Nov 2017

It’s easier than you think to lose money on property

AT A time when first home buyers compete desperately to “win” at auction and investors fork out huge sums for homes close to the CBD, it’s easy to forget there are some genuinely terrible buys on the market.

It’s assumed that if you manage to get your foot on the property ladder then you have crossed over to the winning team and are now on a capital growth trajectory headed toward the skies.

However, according to Kiril Ruvinsky, who is the corporate partnerships director of Strategic Investment Group, it is very easy to lose money on property.

“The most common thing we hear from clients is that they bought a property 10 years ago in Queensland or elsewhere, and they have either lost money or experienced no capital growth,” Mr Ruvinsky said.

“We hear this all the time.”

So how are people managing to lose money on property?

BUYING THE WRONG PROPERTY

The type of property has a lot to do with it. Apartments have not performed nearly as well as houses in recent years, and off-the-plan purchases are risky.

“You can end up buying an off-the-plan property and when it comes time to settle a few years later, the bank can value it at much less,” said investor and owner of Revolutionary Real Estate, David Kaity.

“You could lose your deposit or you may have to come up with the shortfall.”

The wrong property type isn’t confined to off-the-plan purchases either. Many buyers think older blocks with fewer units are fail-proof, but they too can be bad buys.

Mr Ruvinsky said buyers should order strata reports and hire a lawyer to look into any special levies in the owners’ corporation, or they could face a rude shock.

“We were looking into an apartment for a buyer, which looked fine, but when we looked at the strata documents there was a levy of $3 million to fix extensive water damage, which would have cost them hundreds of thousands of dollars,” Mr Ruvinsky said.

It’s also tempting for buyers to overlook building and pest inspections — $1000 for every home you bid on adds up quickly — but Mr Ruvinsky said that a house with serious damage, such as rot caused by termites, was hard to spot from the outside and could cost tens of thousands to fix.

IGNORING THE FINEPRINT

Be aware, too, of the type of title attached to the apartment. A strata title is the most common, but watch out for the thorny company title units, which are still present in Sydney’s Rushcutters Bay and Potts Point areas.

“They are cheaper because they are owned by a company you buy into, but they are harder to sell and they often have restrictions on how many apartments can be leased to tenants,” Mr Ruvinsky said.

It’s worth noting, too, in Victoria there is a third class of title, called stratum, in which the apartment block is subdivided into lots.

Each unit owner owns their lot, but also holds shares in a service company, which manages the common property. These units are also usually worth less than strata title units and some banks won’t lend on them.

TRYING TO FLIP A HOME

Often buyers will try and build equity by buying a cheap home, renovating it and flipping it for profit. Easy, right? Mr Kaity knows first-hand how fraught the process can be.

He nearly lost money on a renovation he did on a post-war, three-bedroom home in the Brisbane suburb of Camp Hill.

Mr Kaity and his wife spent six months researching home renovations and yet the couple still managed to commit the cardinal sin of DIY: over capitalising.

“We did a structural renovation instead of a cosmetic one and it was a lot of work,” he said.

“If we hadn’t decided to sell the property ourselves, we would have lost about $20,000.”

Mr Kaity made a few errors: he added a bedroom and bathroom, but he didn’t create a second living area, which was the trend among other large homes in the area.

“We have since gone on to renovate other homes successfully, but we learned a lot the first time,” he said.

PAYING TOO MUCH

Desperate first-timers often end up spending too much. If you happen to over pay at the top of the market and try and sell a few years later during a correction, you could be facing a loss.

Founder and CEO of Luxland Investments, Zah Azmi, said overpaying was the result of not enough research and letting emotion getting in the way.

“This can lead to over leveraging themselves and taking on too much debt, resulting in higher repayments that they can’t afford,” he said.

“If the deal falls over due to the seller wanting too much, then you should walk away.

“Being patient and moving on with the searching process will be beneficial in the long term.”

BUYING IN THE WRONG AREA

Finally, regional areas with little economic prospects or population growth and small towns in the midst of boom should sound alarm bells, according to Mr Kaity.

“We have seen the mining towns in WA experience significant growth and then crash,” Mr Kaity said.

“A small town may boom because of an infrastructure project, but if that project is short-lived, and it’s a one-industry town, you could lose a lot of money when you go to sell.

“You need to be buying at the top of the bell curve: the place where most people are buying and selling.”

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