$pend Money to Make Money
It’s hard enough these days to save for a deposit and break into the property market. So with fees around $10,000 it’s no wonder first time investors are reluctant to engage the services of a buyer’s agent. But is this money well spent? Jennifer Duke reports
First time investors are right to be wary when it comes to their first property purchase. But with a First Home Owner’s Grant windfall, you might want to consider living in your investment property for six months to use this money on a Buyer’s Agent; a strategy that experts argue can save thousands in the long-term and save you from buying a lemon.
Many first time investors are choosing an investment property over a home as their first purchase, according to Right Property Group director Steve Waters.
“We get quite a few Gen Y first time buyers who tend to want to buy investment properties before they buy a home to live in. A portion of our clientele is that, and usually we find they are white collar workers rather than blue collar workers,” Mr Waters explains.
Buying a property can be a daunting prospect for all purchasers and this is especially the case for when it is a first time buying experience for an investment. However, most choose to go this alone. While 98 per cent of vendors use a real estate agent, only two per cent of property buyers use a buyer’s agent (Real Estate Buyer’s Agents Association of Australia) to assist them with the process.
First time home buyers are currently eligible for a minimum $7,000 First Home Owner’s Grant (FHOG) from the government, and potentially more depending on the state or territory (see sidebox), and with a once-in-an-investment-lifetime opportunity like this, it is imperative that the money is put to good use.
Firstly, in order to be eligible for the purchase, the investor must have Australian residency, intend to use the property as their primary place of residence for six months and neither they, nor their spouse, can have ever owned a property before.
The initial finances
Investors must firstly ensure that they have their finances organized for the purchase without considering government bonuses or grants. “You need to be able to afford the property without the FHOG as a necessary component,” Mr Waters says.
With buyer’s agents’ flat fees ranging from between $6,000 to $15,000 it is clear that the FHOG can cover a sizable chunk of the outlay required for a buyer’s agent.
Todd Hunter, director of specialist buyer’s agency wHeregroup, explains that first time investors are often characterized by high levels of emotion in their purchases, which can lead to unwise choices. For those trying to crunch their numbers, choosing a buyer’s agent may help to reduce the risk of overcapitalizing due to purchasing in the heat of the moment, especially at auction.
“It takes the emotion out of the process, as well as the risk of paying too much money for the property, which is actually a very common thing. Often a buyer will walk in and fall in love with it because the kitchen is nice, or the bathroom is nice, and the real estate agent can quite easily see that the buyers are keen. They’ll then tell an eager buyer that: ‘Yes, there are other buyers out there, you need to put an offer in quickly, and it has to be your best offer.’ These people are virtually talked into putting all their cards on the table in the first go.”
Propertybuyer managing director Rich Harvey agrees that this is often the case, “In a rush of blood people will think that they’re going to miss out and will do stupid things and make silly offers,” he explains.
“It’s common for first time investors to become emotionally attached to a particular property they’ve seen, but it will often turn out to be a dud investment. We help investors make the right selection criteria to buy a capital growth property or a cash flow positive property that’s going to return them a really solid profit.”
If the purchase is for investment purposes, then the buyer’s agent will disregard that the investor intends to live in the property in the short-term.
“If the first time buyer is looking to move into it for six months and take advantage of later turning it into an investment property, then the buyer’s agent will look at the transaction purely as an investment strategy. They have the tools to negotiate the price down far more effectively than a first time buyer could,” Mr Hunter says.
During this negotiation process a good buyer’s agent will normally ensure that the property value is dropped by an amount greater than their fee.
“That’s just the face of it,” Mr Harvey says. “We charge a fixed fee. We typically save a lot more. Normally we charge $9,000 as a fee, which is just under two per cent for a $500,000 property. But if we save that client $20,000 or $30,000 that’s two to three times the fee.”
Getting a leg-up
Making back the initial price, however, is the minimum that using a buyer’s agent can offer. Typically buyer’s agencies also aim to advise on strategy, and ensure that the investor is buying the best property available for good prospects in the long-term.
“It’s far more than just about the fee or the savings – it’s about buying the right property.
“Some people think: ‘I don’t want to pay the fee of $10,000 and I’ll just source it myself,’ but you get advice from buyer’s agents that you can’t get elsewhere,” he explains.
This advice will ensure that the investor buys in a growth corridor and chooses a property that is set to increase in value.
“That’s the other thing you have to consider. It’s not just the immediate savings but it’s the advice you’re getting on that particular property and having all the right things in place.”
First time investors should be aiming for both high growth and positive cash flow, according to Mr Harvey, and while these properties are available, they can be harder to find.
“They aren’t impossible to find, they are out there. They’re just much harder to find, particularly if you’re doing it alone. I would be saying to the investor, let’s do an analysis.”
This analysis is one area which first time investors taking the purchasing path alone often get wrong.
“We are thorough and look at the investor’s income, expenses, goals, job security, and so on. These factors help us decide what is best for an investor and what they should be aiming for.”
First time investors may also find that dawdling in the property market can lose them money. Commonly, most buyers take up to a year to make their first purchase alone, however with a buyer’s agent this tends to be closer to a month in total, according to Mr Harvey. If the market is moving, this can be an important part of the overall profitability of the purchase.
Investors are also more likely to choose the right property through a buyer’s agent as even seasoned investors tend not to have access to the variety of stock that a buyer’s agent is privy to, Mr Hunter suggests, saying that many miss out on the best opportunities inevitably from the get-go.
“A good buyer’s agent will have access to real estate agents, as well as the knowledge through them to what deals are out there and, most importantly, the properties that aren’t on the market yet. When I buy in certain regions there is no way an average investor had access to the listings I did. I had the right network of people that ensured I had the properties before they even hit realestate.com,” he says.
Even those with good access to real estate agents themselves could miss out on potential options due to limited knowledge outside specific suburbs.
“The buyer’s agent is also there to help guide the selection criteria, and, especially first time investors and buyers tend to have fairly limited knowledge about what opportunities are available in the Australian property market,” Mr Harvey says.
The potential limitations
Investors must, however, realize that this is a strategy for properties that are ideally to be held for the long-term.
As their cash flow will be tied up during the six months in which they are required to live in the dwelling to gain the FHOG, the implications must be considered – particularly if the best investment is not nearby.
The investment property needs to be near the investor’s workplace when considering the buyer’s eligibility for a loan, Mr Hunter explains. Someone looking at buying in another state without a secure job near that property may find that this is no longer an eligible plan.
“From a financer’s point of view, if you’re proposing to move into this property and it’s in Brisbane and you’re in Sydney, how are you going to fund that? They need to know that you’re going to have a job up there that is secured, and not on probation, so you can afford to take that mortgage,” he says.
Skipping six months of potential cash flow may alter the viability of an investment, Mr Hunter explains. However, those buying on the lower end of the price scale, in the $300,000 and under bracket, with smaller monthly outlays will likely benefit most.
Similarly, those looking to live in their investment for six months need to understand the implications of a potential lifestyle shift for that time period.
“One thing you should definitely consider first is the specific location in which you are considering to invest – do you want to live there for six months? So, for instance, if someone is living in Sydney’s East, in a suburb like Maroubra, and they want to buy an investment property in Campbelltown – well can they actually deal with the change of living there?”
Investors willing to deal with this six-month change of scenery may find that the benefits of a buyer’s agent far outweigh going it alone.