Buying Property For Dummies Read online

  Sometimes lenders reduce the interest rate to the standard variable or fixed rate after a certain time period — often three years — provided you make all the repayments on time. Other lenders may give you a lower interest rate as soon as you’re able to provide the required number of tax returns.

  A low- or no-doc loan is not the same as a credit-impaired or non-conforming home loan. These have different qualifications and rules as you can see in the following section. Some loans do provide for the possibility that you are both credit-impaired and self-employed; these loans usually involve even stricter lending criteria and even higher interest rates and fees.

  Looking around when your credit is impaired

  One of the biggest obstacles against getting a home loan is having a history of bad debts — unpaid loans, regularly late repayments or bill payments, or a bankruptcy. In these cases, the former credit provider or biller may have lodged a payment default (or black mark) on your credit report. When you apply for a loan, the lender may refuse your application based on that default.

  Sometimes you can appeal this decision by explaining to the lender how the default came about. But given the fall-out from the GFC — which was largely caused by American lenders’ over-generous (and perhaps foolhardy) practice of lending money to people who did not fit the traditional criteria for home loans — Australian lenders have become more likely to stick to their refusal than give you the benefit of the doubt.

  However, specific credit-impaired or non-conforming loans are designed to cater for just this kind of situation. These loans are generally provided by specialist lenders rather than regular banks. As with low- or no-doc loans, these loans have stricter lending criteria than regular home loans and charge higher interest rates and fees. Even when going through the specialist lender, you may need to make a trade-off between the amount you borrow and the interest rate you pay. The difference between borrowing 90 per cent rather than 60 per cent could be a 2 per cent higher interest rate, for example.

  To apply for a non-conforming loan you generally have to provide full financial documentation. Loans are available for credit-impaired borrowers who also lack full financial documentation, but they have even stricter requirements and higher interest rates again. At the time of writing, one such lender is charging 12.99 per cent for the highest level of credit-impaired borrowers who want to borrow more than 70 per cent of the value of the property they want to purchase (compared to the standard home loan rate of about 7.5 per cent).

  Even though you may be unhappy having to pay higher interest rates than a mainstream loan, paying off such a loan is one of the best ways to establish or rebuild your creditworthiness in the eyes of mainstream lenders. Many borrowers use this source of finance as a way back to ordinary borrowing. Check to see if the lender offers discounts on the interest rate if you build up a record of on-time payments. Look for a loan that either reduces the interest rate each year that you stay in the loan or that automatically converts to a standard variable loan after two years.

  Non-conforming home loans by their nature represent a higher risk of defaulting to the lender. The lender usually requires a higher interest rate and may charge extra fees and have other requirements to compensate for that higher risk.

  If you’re not approved for a regular loan because the lender isn’t convinced of your ability to make the repayments, you’re unlikely to be able to cover the even higher repayments required by a non-conforming lender. You may be better off waiting until your income is higher and you’re better able to service a loan, rather than getting yourself into a difficult financial position.

  Understanding Your Credit File and What to Do about a Bad One

  Anyone who uses credit or has applied for credit in the last seven years has a credit file. The file is held by a personal credit reporting agency and is used by credit providers to assess your ability to repay a loan or credit.

  A credit file doesn’t have a score or a rating. It may include information about

  Accounts overdue by more than 60 days where a credit provider has tried to contact you by letter

  Applications for new accounts or loans

  Bankruptcy orders

  Defaults and court processes such as claims, summonses and judgments for a limited time

  Previously listed overdue accounts that have been settled or brought up to date

  Credit applications and defaults are deleted after five years and serious credit infringements and bankruptcies are removed after seven years from the date of listing.

  If you’ve had an overdue account reported, it remains on record even after you pay it in full. All overdue account listings remain on file for five years. The fact that an account has become overdue and then been paid, becomes part of your credit history.

  Each credit provider has its own lending criteria. Your loan application may be rejected on the basis of a history of unpaid bills, insufficient income or a combination of reasons. If your loan is rejected on the basis of your credit record, you must be notified in writing.

  You can correct your personal details held on file by writing to the credit reporting agency. To update your credit record — for example, to note that an overdue account has been paid — you need to contact the relevant credit provider and ask it to notify the reporting agency. If you believe a record isn’t yours or isn’t accurate, you need to write to the credit provider and request it to investigate the matter.

  You can get a copy of the complete details of information kept on your file from the websites of personal credit reporting agencies such as Veda Advantage (www.mycreditfile.com.au) or Dun & Bradstreet (www.dnb.com.au). Both of these agencies will provide you with a copy of your credit file free within ten business days. You need to provide proof of identity, including the name of the organisation to which you last applied for credit. If you need your credit report more quickly, a payment of $30 to $40 ensures you receive it within one business day.

  For more information on correcting your credit file and improving your credit rating, see Debt Repair Kit For Dummies by Anthony Moore and Steve Bucci, Wiley Publishing Australia Pty Ltd.

  Bypassing the Banks Altogether

  If you want to avoid borrowing through lenders altogether, another option is available. Vendor finance is, as the name suggests, a loan arrangement provided by the person or company that owns the home you want to buy. You pay the owner, or vendor, back in the form of instalments, with the idea being that you get to own the house down the track when you have either paid it all off, or are able to get a regular home loan to pay off the balance of what you owe to the vendor. The instalments you pay include an ‘interest’ payment that is typically 1 or 2 per cent higher than commercial interest rates. You may also need to pay an upfront deposit.

  For people who aren’t eligible for a home loan any other way, this arrangement can seem like a godsend. But a few major pitfalls exist that you need to know about before you take up this option.

  One problem is that the purchaser doesn’t legally own the property until all the money owing to the vendor has been paid. If the vendor still has a mortgage against the property, and defaults on the loan, theoretically you could lose the home you thought you had been paying off. To ensure this can’t happen you are wise to get an Instalment Contract drawn up that includes a caveat on the property to safeguard your interest.

  Many vendors of such properties also charge a premium not just on the interest but also on the market value of the home. That premium could be as high as 20 per cent. That means that the property has to significantly rise in value before you have enough equity in the house to refinance the loan through a regular lender, thus locking you in to a high interest loan perhaps for some years.

  Make sure you get good legal advice before you enter into any kind of vendor finance arrangement.

  Chapter 11

  Going, Going, Gone: Buying at Auction

  In This Chapter

  Understanding the pros and cons of auctions

/>   Recognising the limitations of relying on advertised price ranges

  Knowing all about the auction-day process

  Making an offer after the auction

  Making an offer before the auction

  Reviewing and signing the contract

  In Melbourne, Sydney and, to a lesser extent, Brisbane, auctions are the accepted way of conducting a property sale, especially in the inner suburbs. As a buyer in those cities, you can spend much of your weekends as a participant in the very intense human drama of putting your hand up for a property that your heart is set on. More often than not, you walk away after witnessing another bidder beat what you can afford to pay — until the day you yourself are the successful bidder.

  Auctioneers thrive on and promote this emotional intensity. Their role as selling agents is to encourage competition among potential buyers to push up the price as high as possible; the auction provides the perfect stage setting for that process. Very skilled auctioneers are in huge demand for their expertise at entertaining and, at the same time, manipulating a crowd to create a sense of desire and urgency for a particular property. Their art is to make bidders fear they’re likely to miss out on the opportunity of a lifetime if they don’t put in one more bid.

  For potential buyers like you, the urgency of the auction process can create some pitfalls. Bidding in such a pressure-cooker situation isn’t always conducive to making good decisions about such a large purchase. In the heat of the moment, bidding an amount that is more than you can really afford, or putting your hand up for a home that isn’t suitable for your needs can be all too easy. A cooling-off period doesn’t feature with an auction (see Chapter 13 for more on cooling-off periods) so, if yours is the winning bid, you may well regret that exuberance for years to come.

  In this chapter, I look at the tricks and traps associated with auctions and look at ways you can maximise your chances of successfully and sensibly making the winning bid.

  Assessing the Pros and Cons of Auctions

  The frenzy associated with auctions, as well as some rather dodgy practices, such as dummy bidding (bids by people who have no real intention to buy the property, and which are now banned in most states and territories), has put many people off the idea of even attending an auction.

  But you can prepare for some positive aspects of auctions that are often overlooked. One is the fact that bidding on a property takes place in an open and transparent market. (In a private treaty sale — see Chapter 12 — you may never know the amount of the offer the selling agent is asking you to beat.) Yes, at auction, the auctioneer may do all he can to inflate the selling price, and individual bidders may go above the price they’d originally been prepared to pay but, in the end, the price goes no higher than the market allows.

  You can see this factor in practice when the market comes off the boil. In that situation, having auctions with only one person bidding and just the neighbours looking on isn’t unusual. In this situation, it’s common for the property to be passed in because the vendor isn’t satisfied with the amount being offered.

  A lacklustre auction may be disappointing for the vendor, but it can put you, the potential buyer, in a very strong position. You know exactly how much the market is prepared to pay for the particular property, and can proceed with your negotiations on that basis.

  Estimated Selling Prices and Other Half Truths

  One thing you learn very quickly about a property going to auction is that the price quoted in the advertisement bears very little relationship to what price a property eventually sells for — or, indeed, the price the vendor is really prepared to sell for.

  Some auction advertisements give a price range described variously as an ‘estimated selling range’, ‘buyer enquiry range’, ‘price guide’ or ‘quoting range’. Some quote a starting price or one ‘in excess of’ — although quoting this way is now prohibited in some states.

  When you’re looking at prospective properties, these price guides are useful to give you some sense of whether a property is likely to be in your price range. But they’re not much help if the price range given is very wide. For example, a price range given as $400,000 to $550,000 is not much help if you’re a buyer with a budget of $450,000. To ensure that price guides are useful, some states, such as Victoria and South Australia, have instituted codes of conduct that require the top of an estimated selling price range to not be more than 10 per cent higher than the bottom figure: For example, a house can have a quoted range of $400,000 to $440,000. Victoria has also recently banned the practice of properties being advertised as ‘price plus’. Fair Trading New South Wales has also promised a review of pricing practices to deal with concerns about misleading advertising practices.

  Be sure a property is likely to be within your price range before spending money on a building inspection report (refer to Chapter 5).

  Even with the tighter price advertising codes, it is important to remember that the actual price on the day may still be higher than the top end of the range. The actual price may be 20 per cent more than the top quoted price in the range, and on occasions can be 50 per cent more. At the top end of the market, prices on occasion have been nearly double those quoted.

  In some cases, the difference between the quoted price and the eventual sale price has been so wide that it has led to accusations of ‘underquoting’, which suggests that agents are deliberately quoting a low price to draw in prospective bidders, even though they suspect the property is likely to sell for a lot more.

  Agents argue that they can’t possibly second guess what the market demand is going to be for any one property, but too often you find out that the vendor’s reserve price (the price below which a vendor isn’t prepared to sell) far exceeds the prices quoted in the advertisement for the property. Even though vendors decide on a reserve price for their property independently of the agent, they base that price on information the agent gives them during the selling process. The real estate industry has acknowledged the problem of misquoting and has accepted new laws that can fine agents found to be deliberately misquoting.

  To get around new legislation, many agents are now advertising properties without any price at all, sometimes listing them as ‘price on application’ (POA) instead. This gets around the problem of underquoting but means buyers now need to contact the agent in order to get a sense of whether the property is likely to fit their budget. Remember that the verbal price an auctioneer gives you is likely to be no more accurate than an advertised price.

  Seasoned home hunters know instinctively to add a margin to any quoted prices. If your top limit is $450,000, you may be better off looking at properties that are being advertised at between $400,000 and $420,000. A property advertised with a price of $450,000 may well go for $500,000 or more.

  Understanding Auction Day

  An auction is a piece of theatre that has its own rules and conventions. The auctioneer must follow certain procedures:

  The conditions of sale have to be read.

  The market must be opened to bidding.

  The vendor must be consulted at some point to see whether the reserve price has been reached.

  Depending on the skill of the auctioneer, all these elements of the show may be conducted in a way that adds to the sense of excitement surrounding the auction.

  Sometimes, the auction takes place in an auction room as part of a number of auctions of individual properties. Sometimes, the auction takes place onsite at an individual property. In that case, the auction usually starts with a half-hour or so open-for-inspection time to give prospective buyers a last opportunity to fall in love with the home and to inspect the paperwork. Then the auctioneer herds everyone out onto the street in front of the home, or under a verandah or inside a room if the weather is inclement.

  Introducing the property

  Whether onsite or in an auction room, the auctioneer reads the conditions of sale, trying to extract as much marketing opportunity as possible from the otherwise dry document.
Then he gets his chance for a final spruiking of the property, launching into a sales spiel about the property, its potential and the features of the local area.

  The bidding war

  Now the real action begins. Sometimes the auctioneer offers a starting bid for someone to accept, sometimes someone in the crowd is ready to put up a hand with a first bid. Bidding can then go higher, either as a result of individuals offering a higher price or by the auctioneer throwing a price to the crowd in the hope someone accepts it. If the bidding starts to slow, the auctioneer may reduce the increments — lifting the price by $5,000, for instance, instead of $10,000. Bidders can also reduce the increments if they wish, although the auctioneer has discretion to accept a reduced bid or not.