Don't be so quick to buy property

By Catherine Cashmore

Tuesday, 31 January 2012

Like many other industry professionals, I’m often accused of “talking up” the market for my own greedy ends – however, the majority of my working life is spent encouraging purchasers to avoid various real estate transactions, rather than enter into them. Having worked in this industry for many years, I’m still amazed at the risks people take when purchasing a property. It’s no surprise sales agents get a bad name with consumers – buyers seem completely oblivious to the fact that they’re working for the vendor not purchaser, and as such can offer little help or advice outside essential information that can only benefit their clients – namely the vendors.

For these reasons – and many more – buyers’ agents have become commonplace over recent years and the industry has grown considerably. In America buyer advocacy is considered the norm for property shoppers. However unlike in Australia, the listing authority between the selling agent and vendor specifies that the fee will be payment for “bringing a buyer”. Therefore, when the property is sold and commission paid, the fee the buyers’ agent receives usually comes directly from the vendor-paid commission and the buyer simply pays the purchase price.

With more mouths to feed, this is why American real estate sales commissions are so high to begin with (I’m told around 6%). It’s a complicated process fraught with conflicts of interest. Obviously if the buyers’ agent is being paid from the vendor’s commission, his or her fee will be greater based on property price. In other words, the more you pay for the property, the more the buyers’ agent receives, so there is little encouragement to negotiate a low price – although I’m sure there are ethical agents in the US who do a good job regardless.

In Australia our system is a lot less complex. Buyers’ agents work exclusively for the buyer, have an authority with the buyer, are paid by the buyer, and as such are contractually obligated to work in the buyer’s best interests. Therefore when it comes to sourcing a home, avoiding risks and seeking independent advice outside that of the selling agency, working with a “good” buyers’ agent is a wise idea. However those doing so should always choose a “fee for service” model, rather than a commission-based process.

Getting reliable advice is especially relevant to those buyers who intend to invest in property in another state or territory. When I worked as a selling agent, I often sold property to buyers over the net – sight unseen. It wasn’t unusual to get emails and phone calls from purchasers who were prepared to sign a contract on the advice I relayed alone – advice benefitting the vendor. The Australian market is fragmented and as such, different states are at differing stages of the property cycle. While Perth was tracking sideways a couple of years ago, Melbourne was enjoying a 20% rise over a single quarter. Therefore investors don’t want to be tied to local purchases if it’s wiser to search further afield and if this is the case, obviously a fair amount of research has to be done remotely. But should you travel to view a property before the final decision is made?

Well, that’s the advice from some who suggest investment should be totally void of emotion. It’s not so bad if you employ a local professional to do the necessary due diligence on your behalf – but in my opinion, internet shopping into the world of real estate with no more than a few advertisements and Google maps to sway your judgement is no better than plunging your hand into a lucky dip and hope it comes out holding gold. Checking out the feel, suburb and general surrounds of a location is something you can only experience physically – and yet it wouldn’t surprise me to see “Buy Now” buttons sitting next to real estate advertisements at some point in the not-so-distant future.

For instance, who can say how many buyers this year have been tempted by the numerous spruikers of American property investments and purchased into the country’s falling market, which seemingly has no bottom to its pit of despair? However, at the Home Buyer’s Show I attended in Melbourne last year, the room was full of “property professionals” advising the wisdom of such investments.

In Australia a buyer can travel nationwide and purchase a property on a weekend away if he or she so desires. If she’s really brave, she can do it remotely – signing and returning the paperwork via fax or email. However, any transaction is subject to the laws and regulations of the state purchased – and like every other state law in Australia, they differ(in some cases quite considerably) from state to state. For example, in Victoria, buyers commonly have three business days to “cool off” on real estate sales transactions (auctions excluded). New South Wales on the other hand allows five business days. Perth has no cooling-off period, and Darwin has a four-business-day cooling-off period. In all cases there are exceptions to the rule and if you don’t know what they are, you could find yourself coming unstuck.

For example, in Victoria, buyers commonly think the cooling-off period starts when the vendor signs the contract – however not so!  It starts from when the written offer is made – regardless of it being accepted. If the vendor waits for three days before signing the contract and the buyer has not employed a solicitor to conduct the due diligence needed for the paperwork, the time to use the “get out of jail” card without losing your deposit has long passed. No doubt other states and territories have variations on this and it’s confusing enough when you work in the industry – let alone when you’re conducting a real estate transaction only two or three times in a lifetime.

There’s currently a proposal on the table to bring in national licensing for all real estate professionals. When/if implemented it would allow realtors from different states and territories to conduct their business anywhere in Australia. However, without some streamlining of the different systems in place, it’s hard to imagine how agents will have the necessary knowledge to work in the best interests of their clients without local expertise. I am hopeful the delays keeping the proposal at bay are being used to address these issues.

Other points of confusion concern the different negotiation practices employed in each state or territory. For example – the market in the inner suburbs of Melbourne can move at the speed of light. As such, placing a contract with any special conditions is a challenge in itself, and the process has to be navigated carefully if the offer is likely to be accepted. However in Perth, where – until recently – prices have languished and auctions are rare, it’s common practice to place several special conditions on sales contracts and without understanding the process, it’s not wise to venture into an unconditional agreement.

Purchasing real estate is fraught with danger. Even for those with experience, without the best research and advice, there are enough hidden dangers lurking to ruin the potential of any pricey acquisition.  For example, if you wandered into Western Australia, buoyed up on the recent market activity and population projections without due awareness of the state’s new planning schemes, you’d risk missing out on some excellent potential for short term capital growth. In Perth, large swathes of land are being re-zoned to allow for greater density in major activity centres. This could mean a house sitting on a block of land with the potential for a two-storey, seven-metre-high development could become next month’s six-storey unit site. Obviously it will affect the potential and value of various blocks of land depending on which way the wheel turns.  All in all, the internet’s not going to be very good at sourcing out these types of intricacies.

Despite all of the above, when property shoppers take to the streets once again, there’ll still be a swathe of investors who’ll delight sales agents as they stumble across the street theatre of an auction and decide on first look to raise their hand and place a bid.  Some may get lucky, but others will be the fodder for this year’s newspaper headlines and in essence, it’s no different to a game of Russian roulette. Property investment isn’t easy; it’s hard work and takes time. Analysing the price requires on-the-ground legwork and access to data bases that in some states are only accessible to licensed real estate agents. Working out if a property is a suitable investment requires a physical inspection from someone who is an experienced local and should not be done via internet alone. It’s true no investment is free of risk, however make sure those you take are calculated and not reckless.