Lessons learnt from buying a house
Buying a house in Australia in 2016 is a challenging process filled with stress, anxiety and frustration. These are the lessons that I have learnt from the process.
It was 9pm on a Thursday night and my wife and I were sitting in the offices of a suburban real estate agent. We’d just signed the contract to buy the house and a swathe of emotions were running through our minds. The youthful real estate agent who wore too much foundation, was feeling chipper as she gathered final pieces of paperwork for us. Eventually she swung her head around the door of the office with a bottle of sparkling wine in hand. Placing the bottle on the table, she enthusiastically said “Congratulations!” with a Cheshire Cat grin and then asked us whether we’d be celebrating.
I told her that I rather fancied a good sleep. My wife agreed. And thus the bottle remained unopened. We were too exhausted.
Of course we were happy to have bought our first home but we were also thoroughly drained from the entire process. Purchasing a house is hard work, emotionally frustrating and if it were not for the discovery that Helicobacter pylori causes stomach ulcers, I’d say that buying a house contributes to that as well.
So why was buying a house so difficult? Here are my seven lessons from the experience. I’m not writing these to dissuade anyone from embarking on buying a house, rather I am a firm believer that being forewarned is being forearmed.
Lesson 1: The market is rigged
Sellers are like demigods and the rest of us barely exist in the eyes of most estate agents. Can you think of any other sector of the economy where the salesman boasts of having put the price you will pay for your purchase up?
For starters, price indication figures for properties in Victoria are nothing short of fiction. If a house is advertised for $550,000 plus, in all likelihood that means that the reserve (minimum price) will be set at $630,000 plus. Just add 15% at a minimum. The state government has recognised that “underquoting” is a problem and recently ordered 200 snap inspections of real estate agents, but until the law is changed to force real estate agents to publicly disclose reserve prices nothing much will change.
If you have added 15% to the price and are still happy to consider purchasing a property, you’ll want to go to an inspection and take a look. A real estate agent will greet you at the door and demand to see a driver’s licence and record a mobile phone number. Some will also ask for email but never oblige (just say that you don’t have one; who are they to argue?).
If you like the property enough to consider it further, ask for a Section 32 but be warned: From that point on you will be spammed to the hilt. There were days where I’d have up to a dozen missed calls. This horrendous abuse of telecommunications is really the agent’s way of testing if there’s any interest in a property. If there is, you can watch that undisclosed reserve price rise. Always play it down. Point out the faults in the house even if you love it. Make the agent think no-one’s excited by the property and that any interest that you have is begrudging.
Lesson 2: Buying from auction starts to look credible
There are several ways to buy a property. The four main ones are to:
- Bid at auction
- Purchase for a set price
- Make a bid before auction
- Make a bid before a set date
Of course, the option will depend on the vendor and what he/she wants to do.
We attempted to bid on a house that was offered for sale under the Sale by Set Date scheme. As it turned out, we were the only people to make a bid on the property at all. The real estate agent wanted an absurdly high price and we bid much lower. In the end, he rejected our offer (without consulting the vendor, we were able to conclude) and continued to attempt selling the house for another two weeks. So much for “Sale by Set Date” (Refer to Lesson 1 above).
We also attempted to bid at auction on another property.
Everyone has their own strategy for auctions; some come out strong early whilst others hide in the shadows until the poorer bidders have hit their bidding limits. We nearly won one auction until it ran away from under us at the last moment. The advantage of auction is that it’s transparent and one can see the competition. I didn’t appreciate this fact until we actually purchased a house.
In our case, the house that we purchased was to be sold at auction but the agent was soliciting bids in order to get an early sale (one of the owners had literally just given birth and the couple were paying two mortgages). We inspected the property several times and on the third occasion we decided to bid. It was 6pm.
In order for us to bid, the agent required a 10% deposit on-the-spot. That’s right, 10% just to bid. I protested. How could we possibly bid on other properties that we were considering if we didn’t win this house and we decided to attend another auction? They wanted their 10% immediately and yet we’d have to wait three business days to get our money back. I checked with the Office of Consumer Affairs and found out that this was fairly standard practice. Ouch!
Prospective buyers need to consider this aspect. This is 2016 and few people have cheque books. Transferring such a sum of money is not a simple matter of clicking some buttons on NetBank. In the end, I had to ring the bank’s telephone service and ask them to temporarily increase my transfer limit.
As it happened, the agent was prepared to take bids before requiring the money to be paid (thus contradicting her previous statements). We sat in her office whilst she went back and forth between ourselves and someone else. Whilst I accept that there was someone there, I have no proof. She could be a good actress. Who knows? This returns us to the notion of transparency at auction.
Some agents will simply take bids and award the prize to the highest without disclosing the amounts to any other party. This agent preferred to run back and forth telling us what the other had bid and asking if we’d like to match. It was horrible, but in the end we won. We were perilously close to walking away.
Lesson 3: Too much financial planning is barely enough
Do the maths first: This is essential.
Housing is expensive, but so too is all the other paraphernalia that surrounds it. What worked well for us was financial planning. This needn’t be a formal process with a licensed financial planner, but rather a budget and rules around expenditure.
The most important part of this lesson is that without savings, house buying is impossible. Save as much money as you can, every week. Try to avoid a deficit in your weekly spend. Sometimes it’s impossible (such as when the car registration and insurance are due in the same week or if calamity hits) but if those deficits are limited to a couple of weeks a year, that’s a good thing. My wife and I have been fastidiously saving since we started working as 15 year olds, despite our modest salaries. It took a long time but that habit finally paid off.
Before buying a house, invest money wisely. Look at term deposits for savings from banks that aren’t the big four. They often pay better interest on more favourable terms. But beware: there is a new trap thanks to the Commonwealth Government.
Banks are no longer able to ‘break’ term deposits without 30 days’ notice. This means that if you want to make a bid on a house and your savings are locked away in term deposits, you have a problem. As it turns out, a bank won’t even break a term deposit to enable the purchasing of a house. We had to sit tight for 30 days waiting for our money which was finally placed in an everyday account earning no interest whatsoever. That’s a cost.
Lesson 4: Research mortgages
When shopping for a mortgage, there are two choices: engage a broker or do-it-yourself.
The advantage of a broker is that they can do the shopping for you and save a lot of rigmarole. The disadvantage is that they are paid by the banks, so their tendency is to sell you a mortgage that gives them the biggest commission rather that what suits you best.
We decided to take the do-it-yourself option. There was a lot of hassle but we also bought a mortgage with an interest rate about 1.8% less than what the banks (and brokers) push.
Unfortunately banks will never agree to a mortgage until the house has been bought. There’s an obvious chicken-and-egg scenario here but unless you pay an absurdly huge amount for a house or buy a renovator’s delight, the bank would ordinarily approve the mortgage (see below). In the interim, all you will have is a pre-approval statement. The best advice for anyone working without a broker is to shop around and get a pre-approval with at least two banks. That way, they can face off against each other when you buy the house and lure you with low interest. It’s a competitive market, so use it. (The banks will try to discourage this).
These days, the banks are very keen to sell mortgage “packages” that include bells-and-whistles such as fancy credit cards, airline travel points and so on. Bells-and-whistles aren’t free and are mostly unnecessary.
For instance, I have a no-free credit card. Since I always pay it on time, I don’t pay any interest (so the interest rate is irrelevant). One bank wanted to sell us a mortgage with an annual fee of $400. That $400 would pay for a “premium” credit card that ordinarily costs $350. The idea that I would be paying $400 to receive a $350 product that currently costs me nothing is absurd. We declined.
The best way to compare mortgages is the “comparison rate”; this is the interest rate plus fees, charges and other costs. As you’d expect, the bells-and-whistles mortgage was actually very expensive. We found another mortgage, buried deep in the bank’s website, that was just a mortgage and nothing else. As you’d expect, the interest rate was considerably lower.
Lesson 5: Everything is more expensive than it appears
When you see a house advertised for $580,000 it doesn’t cost $580,000. It costs $580,000 plus:
- About $30,000 in stamp duty to the State Government (Victoria)
- About $800 in conveyancing costs (a legal requirement)
- About $400 for title insurance (optional)
- About $114 to register a mortgage (State Government tax)
- Up to $8000 if you require lender’s mortgage insurance (an avoidable cost if you save carefully)
- About $800 in house and contents insurance (a requirement of the bank providing the mortgage)
- Up to $800 to establish a mortgage (establishment fee, try and avoid this)
- The remaining balance on municipal rates
- The remaining balance on water charges including parks levies, sewerage costs etc.
Then there are costs associated with moving house, such as:
- Furniture removalist fees
- Electricity and gas disconnection fees (and unpaid accounts)
Everything is more expensive than it appears. Be prepared.
Lesson 6: Bankers and conveyancers can be slow
After we purchased our house, we agreed to a 30-day settlement. This was a mistake and if I had my time over again, I’d choose 60 days.
Whilst it is possible to settle a house in 30 days, our period intersected with Christmas and New Year so it was a stomach-churning push the whole time. After the house had been purchased, the bank had to:
- Have a valuer inspect our property to see that it exists (and is worth what we paid for it)
- Decide if they actually want to give us a mortgage (“approval”)
- Verify all our financial details by collecting payslips, bank statements etc
- Draw up the mortgage contract
- Have us sign the mortgage contract
- Process the mortgage contract and set-up accounts
- Make arrangements with the conveyancer to process the settlement
If you have pre-approval with two banks, you need to get them to offer you their best interest rate and decide which one you will do business with. This is a lot of work to complete in 30 days. During this process, we found mistakes in our bank contract and made the bank re-draft it. One needs to be most vigilant during this time. We also had to check very carefully that the amounts of money we were to be charged were in fact correct. Again, we found an error (in the bank’s favour) that had to be corrected. All of this takes time and energy.
Be sensible: give the bank and yourself 60 days to sort all of this out.
The other delay was a joint effort between the bank and the conveyancer. It may sound like nothing at all, but it was nearly impossible for us to obtain a simple statement of the final costs to pay on settlement day (rather than approximations). My wife, who is an accountant, was able to calculate it all but it was very time consuming and is really the job of the conveyancer. We received our statement two hours before settlement and even then, it contained an error.
Lesson 7: Settlement day is a good day
Eventually settlement day arrived and that meant an end to the financial nonsense with the banks and the dealings with real estate agents.
In our case, the previous owners had left some rubbish in the backyard but a call to the conveyancer and the real estate agent ensured that they came around quickly to collect their things.
After that, we were standing in our own home. Whoa – what an ordeal!
For any new home buyer, the next step is then to decide what to do with the house:
- Should the garden be re-landscaped?
- Should the house be painted or refurbished?
- Does the house require any urgent maintenance? (there is always something)
- What furniture will be required where?
The journey never ends, but the difficult part is over.
In one way, we were lucky because we found a house after a couple of months searching, but that isn’t typical. Sometimes it can take up to 18 months. Remember to be strong, hang in there and never lose faith.
Good things come to those who wait.
Comments
4 responses to “Lessons learnt from buying a house”
1/ “Make the agent think no-one’s excited by the property and that any interest that you have is begrudging.” The agents already know about these indifferent buyers. They will be reporting to the vendor of all the problems and indifference by prospective buyers. But if the agent is worth his or her salt, they will know about the disinterest by certain parties, who are actually quite keen.
2/ I am clearly out of touch as I have never heard of this deposit to bid. I trust you have correctly expressed it and if so, it is outrageous and needs to be immediately banned.
3/ All wise. I have broken term deposits in the past without penalty. Go higher within your bank if something seems unreasonable.
4/ Bells and whistle mortgages are new to me and sound like the are best avoided. Banks will approve a loan amount for a mortgage, even if informally. It seems you had a substantial deposit and the ball was really in your court so far as lending institutions go. Your bank would really like you super money when you retire.
5/ And then double the figure you came up with.
6/ Yes, sixty days for comfort.
7/ Congratulations, but who has spare funds to do anything after their first house purchase. Having bought five times and I guess sold four times, it is for the most stressful thing in life to do, but worth it.
My settlement day was today! So glad that’s done with.
I move tomorrow.
Aargh!
Your blog is spot on, so many costs and hidden bits and pieces.
Thankfully the property I purchased had already been passed in at auction, so I didn’t need to deal with all that BS. Just haggle the price. What a journey eh!
Congratulations, Fen!
Thanks Adam – this is so helpful!