Sally:
Welcome back to Pocket Money. Hey Marc.
Marc:
Hey Sally.
Sally:
So every week we talk about, you know, loads of different money topics, news, whatever's going on in Australia, so of course, it only makes sense that we're eventually going to land on property.
Marc:
Yes, it is Australia's favourite pastime, as the news rags say.
Sally:
But instead of telling you what to do when it comes to buying your first home, today we're going to be talking about what not to do.
Marc:
Yeah, that's right. So we're talking to Michael Yardney, and keen listeners will know that we have spoken to Michael in the past. And we had an awesome chat with him about the psychological habits that differentiate the money-savvy with the not-so-money-savvy.
Sally:
Can you not look at me!
Marc:
Oh, I didn't. I was just looking in that part of the room.
Sally:
Sure, sure.
Marc:
So yeah, this week, as you mentioned, we're gonna be talking about the mistakes that first home buyers make, but this is actually a two-parter. So next week, we'll be hitting you with the common mistakes that property investors make.
Sally:
And much to my surprise, those two things aren't mutually exclusive. There are mistakes you can make as a first home buyer that you may make or may not make as an investor. So interesting tips to pick up along the way.
Marc:
So you're definitely going to get a lot out of this episode and the next one, so stay tuned for next week's episode too. And if this is your first time here, before we play the interview, make sure you don't miss out on any further episodes. Head on over to Spotify, fang us a follow, go to Apple Podcasts, subscribe for free. You don't have to do much and you'll get all the future episodes delivered right into your grimy little mitts.
Sally:
I love it.
Sally:
Welcome, Michael. Thanks so much again for joining us on Pocket Money.
Michael Yardney:
My pleasure, Sally.
Marc:
So today we're talking about first home buyer mistakes, and we have a list of the top seven. So we're going to go through them quite quickly and we've also got some juicy questions to ask along the way. Let's start with number one. So buying emotionally.
Michael Yardney:
Of course people buy emotionally, because it's a very large financial commitment, but it's also your home, your castle. But it's important to realise that when you're buying your first home – and this is what we're talking about today – it's not going to be your forever home, it's not going to be perfect, so you should use it as a stepping stone to your next property. So rather than buying something that you love, you've also got to think about it as an investment because not all properties increase in value, and so if you buy in the wrong location or the wrong sort of property, it won't be the stepping stone to the next one, it won't get the capital growth that you're hoping for. And the other thing is, if you buy emotionally and overpay, it's going to cost you a lot more than you need, and that's going to be an extra cost in stamp duty and interest for a long, long period of time. The trouble is, is that property markets are starting to pick up again, Marc and Sally, and people are starting to get a little bit of FOMO – fear of missing out. They hear on the news that auction clearance rates are high, that property values are going up, and they're scared. So rather than thinking logically, they're worried that they're going to miss out again, and they pay too much.
Marc:
As a side note to this, what are your thoughts on – and I daresay, we'll cover this in our next segment on investment mistakes – but what are your thoughts on rentvesting as an alternative for potentially emotional homebuyers?
Michael Yardney:
I think it's a really, really great idea. The concept of rentvesting is renting where you want to live and investing where you can afford. Because for many first home buyers, they can't afford to own a house in most of the locations where they want to live in our big capital cities, and many can't even afford to own an apartment. So why not rent where you want to live and use your funds to buy an investment property that increases in value? Now, some people will say, well, rent money's dead money, but you actually forget that on the other side, a tenant is paying you rent on your investment property and helping defray the mortgage costs there.
Sally:
And for the second mistake, what about not factoring in all of the real costs? So, of course there is the price of the property, which I think is what everybody looks at first, but can you walk us through some of the other costs that should be factored in?
Michael Yardney:
That's a really good point, Sally, because people forget all the others. The big big one is stamp duty. Stamp duty actually comes from an old term, years ago. It's a government tax, basically, and it's about 5% of the purchase price of your property. So that's many, many tens of thousands of dollars in many cases. Now, currently, in some states, there are a number of first home owner stamp duty concessions, because, over time, various state governments are trying to encourage first home buyers into the market by giving them some concessions. So stamp duty is a big cost. There's also the legal cost of conveyancing, which involves getting all the contracts right and making sure they all settle, and that's somewhere between $1,500 and $2,000. There's moving costs to consider. And when you rent, you don't think about paying things like rates and taxes and insurance and maintenance, body corporate fees, those sort of things. But all of a sudden, if you own your own first home – and by talking about a home, I'm also talking about apartments – these can add up to thousands of dollars annually, so you need to budget for those as well. And of course, there's the mortgage costs that you've got to be able to afford on a regular monthly basis.
Marc:
Yeah, that's great. And then, so linking in with point number two is number three, which is overextending financially. So maybe you could talk to us a bit about how do you know if you're paying too much?
Michael Yardney:
Well, at the moment, the banks are being very cautious, and so they are making sure that people don't overextend themselves. And this is a result of the Hayne Royal Commission and all the publicity that we're hearing, and APRA and ASIC making sure that banks are taking into account individuals' abilities to repay. In other words, responsible lending. In the old days, there was also the concern of interest rates going up, but that's not going to be a big issue for the next couple of years. So first of all, you've got to understand that you've got to do a budget and understand what your monthly mortgage costs are. And as I said, the banks are already factoring in that maybe the rates could go up a little bit, so you should be able to cover that. A lot of people don't leave themselves a buffer. They spend their last cents. And when you move into a place, there are always little things to do. Even if it's a new apartment or house that you buy, there are costs as well. So leave yourself some money in the kitty for unexpected costs, for expenses, for outgoings. And one way of making sure that you don't overextend yourself is, rather than going to a bank, go to a proficient mortgage broker who will actually help you through the maze of lending, get you your best loans and also help you do a bit of a budget as well.
Marc:
Yeah, that's a great point. So when I bought my first place – and we're gonna talk about this in the next point – but I got a building inspection done, and then it brought all these issues to the surface, which I would need to get fixed if I bought the property, so then that made me sort of put aside savings. But one thing that I did want to ask you, Michael, which is, when you're dealing with a broker, oftentimes, they will try and help you borrow as much as you can, and as a result of that, they might encourage you to use more of your savings than you wanted to. Are there any strategies or any things you can think about that could help you avoid that?
Michael Yardney:
Just like any other profession, there are good brokers and there are maybe ones who don't take your interests into account. I like to think of a broker as a bit of a finance strategist who's going to understand your needs, and a good finance strategist will make sure that you do have a buffer there. Sure they get paid by the amount of the loan you take, but it doesn't really make that much difference if you still leave $20,000, or the loan that you take is $20,000-$30,000. To be honest, most first home buyers can't have a big buffer. There isn't enough in the kitty to save for the deposit, pay for the stamp duty, pay for the outgoings and have a big buffer. But it's important to make yourself aware of these things. And I think that's the beauty of this podcast, so you can outsource some of the expertise, but don't outsource the understanding. Get knowledgeable, know what's going on, and that way you're not going to get yourself into these traps.
Marc:
And my final question about not overextending yourself financially is, how useful do you think it is to use a buyer's agent, specifically for an auction when you're buying your first home, to make you sort of not overbid or anything like that?
Michael Yardney:
Well, I've got a vested interest. My company Metropole is Australia's largest buyer's agent and we've got our own offices in Melbourne, Sydney, Brisbane. And we actually do help a lot of homebuyers, not just investors, and I believe we're levelling the playing field and it's not just at auction. But auction, as you pointed out, is definitely a place where emotions run high, and the auctioneers know how to tap into that. So a good auctioneer will make you bid more than you feel that you planned to, because they tap into the emotion and the excitement of the auction. It leads to people over-committing themselves a bit more than they should. So rather than getting mum or dad to bid for you – because, in many cases, they've only bought one or two properties in their life as well – having somebody who's a professional negotiator on your side, levels the playing field. Because, Marc, if you think about it, the seller has got a professional, a trained negotiator, on their side protecting them.
Marc:
Yeah, that's a great point.
Sally:
And I think that's so true. It's almost like an auction is FOMO happening in real time. Like, very stressful. You're like, yes! Okay! $10 billion! I'll take it!
Michael Yardney:
Well a good auctioneer knows how to pull out the emotion in you, and I remember going to an auction only a couple of weekends ago, and the auctioneer looked at the bidder who had stopped and he said to him, "Do you know what's going to happen if you don't make another bid?" And the guy stared at him and he said, "You're going to go home and you're going to be in trouble!" Because there was his wife staring at him, lovingly wanting to have that property. And he played on the emotion, and then guy made another bid.
Sally:
So I think that last point links pretty nicely into number four, which is not doing your proper due diligence. So what are some of the commonly missed steps that everyone should have on their to-do list before they do buy a home?
Michael Yardney:
Sure, the less sexy sides of home buying. Marc pointed it out a while ago, building and pest inspections to identify minor and maybe some major issues. So, at the moment, there is a lot of publicity about the structural and the big issues happening in those high rise apartment towers, particularly in Sydney, but in the other capital cities as well. In Melbourne, there are a lot of issues with fire rating and cladding of buildings as well. So, maybe a little hint would be, avoid those big apartment towers that were built in the last decade or so and that are currently being built at the moment. There's a lot of stigma around those, and that's likely to remain for quite some time. You'd be a very brave investor or homebuyer buying into those even if they're cheap now, because developers are having real trouble selling off. So educate yourself about these issues. Now, clearly, the big things like Opal Towers and some of the others are outliers. Most are not as big a structural problem as that, but there's a stigma. They're all being tarred much with the same brush. There's a very poor secondary market, banks are not as prepared to lend against them, owner's corporations are having difficulty getting insurance for these big towers. So be careful about the sort of building you're buying into. Also, even if it is a new building and not one of these high rise ones, that's even where a building and pest inspection is important to identify issues. Now, Marc, you pointed out that you found some issues that had to be repaired. You can use those as a bargaining tool. Yes, I know you want $550,000 but, look, I've just identified that there's $5,000 worth of repairs that I've got to do, so let's be a bit more realistic with the price. You can use it to negotiate a lower price, or, if you can't afford it, walk away from a deal. It's also important to get a solicitor to check your contract. Sure, the agent should be honourable and the contracts, in general, are standard form, but there are other little clauses that they sometimes insert without you knowing that protects the other side. So, I would also always use a solicitor to check before you sign anything, and the agent will understand that. If they try to get you to use their same lawyer, walk away. You've got to have your own legal representative check it. And they check things like council zoning, building approvals, to make sure everything's protecting you as well. And don't forget to insure the property. One of the things that happens when you buy new property is, interestingly, it's your responsibility, even before you settle. It doesn't happen often, but I've heard of cases where somebody's bought a house and they settle 60 days later and in between, it actually burns down or it's badly damaged. And interestingly, even though you haven't taken possession, by law, it's your responsibility, not the vendor's. And so, therefore, you insure the property as soon as you sign a contract, it's agreed and exchanged, not on settlement.
Marc:
Yeah, there's so much gold in that. Someone I know – actually, this is more in terms of investing – but they had an investment property and they just let the landlord insurance lapse somehow, and then there was flooding and it went into the next-door neighbour's apartment, and it was just, it was just a really annoying kind of situation for both of them.
Michael Yardney:
So again, this is where you talked about a buyer's agent helping. If you have a good buyer's agent, they're more than just an order taker, they will take you through the whole process, hold your hand at the beginning to get an understanding of what your needs are, then they will help you select the right property that are on-market and off-market properties. Because interestingly, there are properties available to buyer's agents before you find out about them on the big property portals. Some are truly off-market, but most are actually what we call pre-market. What actually happens is, an agent lists the property and it takes a couple of weeks to get the photographs done, the floor plans, the styling of the property, and so they ring their A-list of clients first and then their B-list, and then they tell the other people in the office and they tell their clients as well, and eventually it gets listed on realestate.com or Domain or the other big portals. But those who are on the speed dial, the favourites of the estate agents, they get access to these earlier. So that's where a buyer's agent can sneakily get you in before others.
Marc:
Yeah. VIP treatment. One last point, which I think is pretty important to mention about not doing due diligence is that, if you haven't bought a property yet, one thing that really surprised me was how expensive things are to fix. It's not like when you have a car and like you can get out of most problems with, you know, not spending like a huge amount of money. Things that you wouldn't think are expensive, like, for example, I had to replace screws on my roof or something like that, and it was so much more money than I thought it should be. So I think that's when these building inspections can be really important.
Michael Yardney:
And that's the other reason you need to have some cash reserve or a financial buffer, as I said, because initially, mum and dad used to pay for that and then you move out and the landlord pays for that. Now all of a sudden it's your responsibility.
Marc:
Okay, so moving on to point five. Not understanding the contract you're signing. So yeah, maybe tell us a bit about what people should do to protect and educate themselves before signing a contract.
Michael Yardney:
A contract is a legally binding document. Once you've signed it, you can't say, oops, I didn't understand my obligations. And that's the reason why I was suggesting that you always get your legal representative, a solicitor or a proficient conveyancer, to check the contract and understand what's going on. Now, it varies from state to state. So in Victoria, all vendors or sellers have to give what's called a vendor's statement, where you actually have the outgoings and the owner's corporation certificates and rates and taxes. In other states, that's not part of the contract, and then there's a due diligence period. So sometimes you have to do the due diligence beforehand, like in New South Wales, you would want to get the owner's corporation certificates to see what's going on, and are there any disputes within the building, are there any unexplained big expenses coming up, or is there some money sitting in the kitty for repairs. And in Queensland, it's a little bit different. Usually, there's a period between when you actually sign a contract and when it goes unconditional when you can do the due diligence. And that's a bit hard for most people to do themselves, because they don't even know what due diligence they've got to do. And that's where your solicitor would help you or your buyer's agent would help you. So it's not just the contract that you're signing, but all the bits and pieces around the contract as well that you need to understand.
Marc:
Yeah, this is such a big one. So when I bought my property – I know I keep going back to this, but –
Sally:
Please do!
Marc:
The settlement happened over Christmas, so there was a period where everyone was away for holidays. And you really value a good solicitor at that point, because they'll confidently tell you, okay, this is where your deposit needs to go, this is how you can get it to me, these are the different payment forms, this is the date when you need to do this, this is the date when you need to do that. So yeah, I can't underscore that enough.
Michael Yardney:
Another thing you mentioned about Christmas: There are times to settle and times you shouldn't. So don't do it just before Christmas when it's really, really hard. And the other thing is, don't do it on Friday afternoon. A lot of people want to settle on Friday afternoon because then they can move into their new property over the weekend. Interestingly, settlements don't always occur when you plan it. Because if you think about it, Marc, you bought your property from somebody, who actually had to move out that day because they bought a property from somebody else, who interestingly, had to move out that day because they bought a property from somebody else. And, all of a sudden, somewhere along that chain, something doesn't work out, somebody doesn't have their money, the other place isn't ready on time or whatever, and you can often get this domino effect. And if you suddenly have to move out and on Friday afternoon you've got nowhere to sleep, you can get yourself into trouble. You can't get onto the contractors or the banks until the next day. So in fact, avoid settling on a Friday if you can. Most of the time, it'll all work fine. But if you're one of those who are caught by doing it on a Friday afternoon, and you can't get on to the banks till the next day and they can't roll it over till Monday, it leaves you in a bit of embarrassing position.
Marc:
You'll be taking out a long-term Ibis Hotel residence.
Sally:
Exactly, rock up to mum and dad's with your boxes full of stuff, like, hey! So the next one is not getting finance pre-approval. So what does that mean?
Michael Yardney:
A lot of people actually look on great sites like finder.com.au. And they get an indication of how much they can borrow, they can see what the loans are, and then they go off and buy a property and then they go to try and get their loan organised. Wrong. It doesn't work that way. You've actually got to get the money upfront. Let me explain that, today, in this current lending environment, it's much, much harder to get a loan, there's a lot more hoops you've got to go through, it takes longer than it used to. So, if you get a pre-approval, which, is always conditional, it's not an unconditional guarantee, it's subject to the valuation of the property and it being in the right postcode and things like that, but you will know how much you can spend and not overcommit yourself. So get your finance organised first, preferably through a mortgage broker, possibly through a bank, and then you know how much you can spend.
Marc:
Yeah, and I think it's worth mentioning here that like, not every pre-approval is the same. Some are more, I suppose, like, serious, or they're deeper than others. So yeah, that's another reason why you should speak to your broker or your lender and actually ask what exactly does this pre-approval mean for me?
Michael Yardney:
Well, that's an interesting point, because banks are cautious about certain types of buildings and certain postcodes. So, therefore, as we mentioned a moment ago with regard to all the new high rise towers and the problems, they're not going to lend as much or at all for those. And for certain postcodes, particularly in the CBDs of our capital cities and surrounding where there are very large oversupplies of apartments, they're only going to lend a lower loan-to-value ratio. In other words, they won't necessarily lend you 80-85% of the value of your property, they may only lend you less. And the other thing is, in a lot of the big towers, they don't want what they call a concentration risk. And they're only prepared to allow a certain number of their clients to buy into those buildings. So it's important to understand what your pre-approval will allow. So as you say, it's not a blanket thing that you can go anywhere and buy any property up to that value, Marc.
Marc:
Okay, so the final point: Trying to do it on your own. So what things can you do by yourself and what things should you get expert help for?
Michael Yardney:
Well, as I said a moment ago, you should outsource the expertise and you should use a buyer's agent, you should use a mortgage broker, you need to have a solicitor, but you shouldn't outsource the understanding. You should get an understanding of the basics of this, and there's lots of great articles on finder.com.au about how to buy homes. The MyProperty website, there's lots of information. There are books out there as well. So go in educated because the other side, the other party is probably more educated than you, and knowledge is power. But I believe it is worth investing in having a buyer's agent, as we said before, to represent you, because you're going to pay a learning fee. You're going to pay the market a fee by overpaying or making mistakes. I'd rather get somebody else's experience, because they'll have the perspective that money can't buy – but you can hire it.
Marc:
Okay, so those are the tips for first home buying mistakes. Thank you, Michael, for that.
Michael Yardney:
My pleasure.
Sally:
Okay, wow. So now we know all of the mistakes not to make as first home buyers. Marc's like, it's too late for me.
Marc:
Yeah, exactly. I'm done.
Sally:
So next week, as we mentioned earlier, we're going to be covering all of the property investor mistakes to avoid with Michael, so don't miss out on that.
Marc:
Yeah, so stay tuned.
Sally:
Thanks for listening to Pocket Money from Finder. Head over to finder.com.au/podcast for the show notes for this episode. The Finder podcast is intended to provide you with tips, tools and strategies that will help you make better decisions. Although we're licenced and authorised, we don't provide financial advice. So please consider your own situation or get advice before making any decisions based on anything in our show. Thanks for listening.
