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Issue 24 > September 2015

Editorial


Welcome to the six-monthly edition of The Buyers' Advocate.

It has been a busy time over the past 12 months and I would like to take this opportunity to thank all our clients for placing their trust in our service.

We are committed to providing advice that is 100 per cent independent and, unlike many buyers’ advocates, we will never work in conjunction with a vendor’s agent to sell a property (a service known as vendor advocacy).

This eliminates the possibility of a conflict of interest. 

The media regularly comment on and scrutinise the real estate industry; now it’s their turn to come under the microscope. Unfortunately their report card is less than favourable right now, and in this edition I give our readers the real story. 

Assessing the condition of a property’s sub-floor is widely misunderstood by most buyers. On many occasions they have forgone excellent opportunities due to lack of understanding in this area. In this edition I clarify some common misconceptions.

The pre-settlement inspection is an important part of the buying process. Why should this inspection be carried out and when is the best time?
 
To complicate matters, lawyers and conveyancers acting for the vendor are inserting clauses in the contract to water down a buyer’s right to compensation, despite it being justified. I explain the intricacies of this important buyer’s right.

Have you ever felt the disappointment of missing out on a property because the selling agent didn’t contact you as requested? This is the seedy side of the Melbourne real estate scene. I spill the beans on why this may not be an innocent mistake.

As usual, this edition includes my regular Market Snapshot. This gives an up-to-date review of the Melbourne property market.

I explain how the market has performed in the first half of 2015 and give my opinion on how it will perform for the rest of the year.

Finally, if there is a topic any readers would like covered in the next edition, feel free to contact me at peter@yourbuyersadvocate.com.au

Regards,

Peter

 

In this issue:


 

Media puzzles
 

There is an old saying that advises “believe half of what you see and none of what you read” (except my articles, of course). Unfortunately, this saying applies to much of the media’s reporting of the property industry.

Over the past 20 years, the Australian real estate industry has become a national obsession.

Television shows dedicated to property dominate prime-time viewing on major networks. Daily newspapers and their associated websites devote entire sections to the real estate industry.
Property magazines assess the property market in each state and territory on a monthly basis.

This media attention not only provides information to buyers and sellers, it has also become a form of entertainment for many people.

One of the major reasons for this property obsession in Australia is the unprecedented appreciation in property prices over the past 20 years. More people than ever, both local and overseas, now want a piece of the pie; the public’s appetite for property information has become insatiable.

This increased demand for information has seen the advent of the “property reporter”, a role that now runs to a cast of thousands.

How creditable is this reporting and how can property buyers decipher fact from fiction among this deluge of information?

Firstly, television producers, newspaper reporters and magazine editors aren’t privy to property transactions; they don’t liaise directly with buyers and sellers on a regular basis. Accurate reporting relies on them being able to make judgements on what are creditable sources of information.

In order to make informed decisions they must have a basic understanding of the mechanics of the real estate industry. Some reporters, in my opinion, don’t have this fundamental knowledge.

 An example of hazy reporting was a recent article in The Age headlined “Melbourne’s best yielding suburbs”, which focused on residential property.
 
Residential real estate is an appreciating asset. An investor’s success or otherwise is based on capital growth performance, not the level of yield. The level of yield is a high priority for commercial property investors, not residential.

The article did not make this clear, which could be to the detriment of inexperienced investors who may have read the article and be contemplating entering the market.

The media industry is extremely competitive; and, just like any other reporter, property writers are under pressure to come up with attention-grabbing stories.

This competition may mean a newspaper or magazine prints articles that are sensationalist in an attempt to lure people to buy their publication.

 We saw this recently when The Age ran a story titled “Australian housing market facing ‘bloodbath’ collapse: economists”.

The article quoted two observers who claimed Australian real estate was substantially overpriced and there would be a massive market decline.To my mind, these claims have not been convincingly backed up with facts.

The Age claims to be the leading Victorian newspaper for real estate, and it is critical that all reporting is undertaken independently, without fear or favour to anyone. Many readers trust reporting to always be creditable and will make financial decisions based on what they read.

Of course you should keep up to date with property trends through the daily press – but balance this by filtering information from a range of real estate commentators, from advocates to agents to builders.

While newspapers pride themselves on being neutral, there are bound to be commercial considerations when it comes to the property pages.

A substantial amount of advertising revenue comes from the real estate industry, particularly large property developers – it is a multi-million dollar industry. 

One journalist told me he needs to “be careful” when commenting on issues that are related to these large property developers. He doesn’t want to jeopardize the substantial sources of advertising revenue that these corporations generate.
 
This self-interest can result in biased reporting to the detriment of property buyers.

Nationally distributed property magazines can also be guilty of sensational reporting. They regularly engage in what is essentially deceptive “bait advertising”. Their front covers proclaim headlines such as “Australia’s hottest emerging suburbs”.

There are many factors that determine the investment quality of a real estate asset; correct suburb selection is just one factor.

These headlines attempt to draw consumers into buying their magazine in the belief that investors can make quick and easy gains simply by buying in these so-called hot suburbs.

Property investing has become the cornerstone of many people’s retirement plans. Biased or inaccurate reporting can potentially ruin a young person’s financial future or an older person’s retirement; there is a lot at stake.

Property buyers should act only on independent advice from practitioners who are actively involved in facilitating transactions through liaising with buyers and sellers.

Taking advice from people who are motivated by self-interest will only result in future financial heartache.
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The pre-settlement inspection



A standard real estate contract of sale allows the buyer to inspect a property within seven days of settlement.

The general condition states that the vendor must deliver the property to the purchaser at settlement in the same condition as the day of sale, except for fair wear and tear.

It is important all property buyers carry out this important right. Although rare, there is a possibility a vendor may remove fixtures or chattels after the sale. Also, an appliance may no longer be working at settlement.

Ideally, a buyer should inspect the property as close to settlement as possible, reducing the possibility it is altered before the title is transferred.  
 
The general conditions of a standard contract of sale allow the purchaser to withhold up to $5000 of settlement money where there is a dispute. This is held by a stakeholder appointed by the purchaser and vendor.  

The nominated amount may be deducted from the amount due to the vendor at settlement but only if the buyer also pays an amount equal to the nominated amount to the stakeholder. It is the stakeholder’s duty to pay out in accordance with resolving the dispute.

There is a recent trend among lawyers and conveyancers acting for the vendor to override this buyer’s right to withhold money in the case of a dispute.

Some lawyers and conveyances are now inserting a special condition in the contract of sale deleting general conditions that give buyers the right to withhold monies at settlement if the property is not in the same state as it was on the day of sale.

Where a property is highly sought-after, the vendor holds the upper hand. If the contract does not allow a buyer to withhold money at settlement, vendors are reluctant to delete this clause from the contract.

After a buyer hands over the full amount to the vendor it becomes more difficult to seek redress. The withholding condition gives buyers more rights but if it does not apply due to a contrary special condition, buyers should reserve their right to take legal action after settlement.
 
All buyers should therefore carry out the final inspection as close as possible to settlement.
 
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Understanding under the floor

  

Defects related to the sub-floor structure of a home are widely misunderstood by property buyers.

Repairing or replacing the sub-floor of a timber home is known as restumping or reblocking.

The term underpinning refers to the process of stabilising a dwelling’s foundations to avoid further subsidence. Underpinning is carried out on brick homes built on a concrete slab or strip footing.

The need to reblock or underpin is generally caused by foundation failure or rotting of sub-floor timber.

Tell-tale signs that a dwelling has sub-floor problems are sloping or springy floors, doors not closing properly, door heads out of alignment, and substantial internal cracking of walls or external brickwork.

The advancement of building technology has seen most modern homes in Melbourne built on concrete slabs. Most period-style timber homes were built on timber stumps and brick homes on concrete strip footings.

Property investors tend to overstate the seriousness of sub-floor defects and therefore may disregard a property that is otherwise a great opportunity. Also, amateur property investors tend to wrongly elevate sub-floor defects as a high-priority negative when assessing capital growth potential.

Residential properties in the most sought-after locations in inner Melbourne were built more than 100 years ago and are generally period-style. If they haven’t been reblocked or underpinned then technically they need to be.

From a practical perspective, however, in many cases there is no urgency to reblock or underpin. A sloping floor or cracking walls may not be aesthetically pleasing but will usually not impede the liveability of the dwelling.

For example, as an interim measure springy floors can be rectified by “wedging” between the stump and bearer and unsightly cracking can be filled and painted.

The process of reblocking or underpinning results in substantial movement to a dwelling and will damage existing structures. Therefore reblocking or underpinning work should be carried out prior to any major improvements such as renovations to kitchens and bathrooms, or replastering.

Property investors should always assess a dwelling’s capital growth potential based on high-priority real estate fundamentals.

Of course, building defects should also be taken into account, but a realistic assessment needs to be made of the cost and timing of repairs.

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The preferred buyer                    

After pounding the pavement for six months you finally lock eyes on “the one”. It was love at first sight; beautiful with ornate detail, well-maintained with a nicely formed facade, an art deco gem.

You expressed your interest to the selling agent and asked to be kept informed of all offers. He looked you in the eye and assured that no offers would be accepted before auction. “This little gem is going to auction,” he said.

You are fired-up about this lifestyle opportunity; it was the only one for you. Building and pest reports are undertaken, a lawyer is engaged to check the contract, more meetings are held with your financier to extract every last cent of your borrowing capacity and many more inspections are made by family and friends.

The big day arrives and, after a sleepless night, you nervously make your way to the auction. You are playing out in your head your auction strategy and can visualise walking into your new home after making the winning bid.

You enter the street and it is strangely devoid of activity; it is not what you expected. You drive up to the property and there is a “Sold” sticker across the advertising board.

It’s like finding out your new love is having an affair with your best friend; your heart sinks and you feel a little nauseous. The words of the selling agent ring through your mind: “This little gem is going to auction.”

This type of occurrence was part of the Melbourne real estate scene before the advent of email – which now makes it easier to hold vendor’s agents to account – and, though rare these days, this behaviour can still happen.

A common reason for the sham was the selling agent sold the property to an associate, excluding other interested buyers, to benefit him.

That associate was a property developer who, in return, would give the selling agent the property to sell after improvements. In other words, the selling agent ripped off his vendor and other interested buyers so extra commission could be made on the resale.

Typically this sham was orchestrated when the vendor did not know the property’s true value or was convinced by the selling agent the property was worth less than the reality.

Recently I was involved in a transaction on behalf of a client where the selling agent clearly had a preferred buyer. In this situation the vendor lived interstate.

It was only through expressing my interest in the property through multiple emails that an unsavoury situation was avoided.

Never assume a selling agent will contact you about a property, despite verbal agreements.

Property buyers should always tell the selling agent in writing they want to be “advised of all offers” on any property they are interested in to avoid disappointment.
 

Market Snapshot
 

The Melbourne property market has continued on its merry way in 2015, but there have been signs over the past few months that the upward price acceleration is starting to slow.

This is a welcome trend as any further upward movement would be unsustainable.

The housing market experienced a strong June 2015 quarter, with the median price setting another record at $706,000 – up 5.2 per cent on the March 2015 quarter.

The average clearance rate for Victoria was 77 per cent in July, compared with 72 per cent for the same time last year.

The demand for vacant rental space in Melbourne was stable at 2.9 per cent in July, while rent for houses remained flat at $400 a week. The vacancy rate in regional Victoria also stabilised at 2.4 per cent over the month.

The cash rate was unchanged at its record low of 2 per cent following the Reserve Bank of Australia meeting in August.

According to the RBA, economic growth is expected to improve steadily to more than 3 per cent by 2017.
 
The unemployment rate in Victoria for July rose to 6.2 per cent from 6.1 per cent the previous month.
 
The national inflation rate was at 1.5 per cent over the June 2015 quarter.
 
There has been nothing overly scientific about residential property price cycles in Melbourne. I say this having observed the market for more than 30 years.
 
House prices rise slowly most of the time then spike sharply for one to two years. However, a point lost on many commentators is the substantial variance in price movement between different types of property.
 
Generally speaking, residential properties close to sought-after amenities with scarce and unique features will increase in price at a substantially faster rate than other properties. Conversely, in a downturn these properties hold their value while others decrease in price.
 
The current upward price cycle has lasted longer than average. Moving forward, we will see more moderate upward price movements.
 
Source of statistics: Real Estate Institute of Victoria
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Note: Readers should not act solely on the basis of the material contained in this newsletter. Peter Rogozik Property Consulting expressly disclaims all liability for any loss or damage arising from the reliance on this document.

Copyright © 2013 Peter Rogozik Property Consulting
Licensed Estate Agents ~ Registered Building Practitioners

Level 27, 525 Collins Street 
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Melbourne, Victoria 3000
Australia

T + 61 3 9689 9080
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E peter@yourbuyersadvocate.com.au
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