Adventures in Buying Property

ATTEMPT 1

Unlike most people, I had no intention of buying property. I was perfectly happy renting, having figured out it was more economical than owning. Also, I know many people who have overcommitted themselves and I had associated home ownership with financial hardship.

Then in 2001, I happened to attend an auction in Elizabeth Bay, having had nothing better to do at the time. My sister and I fell in love with the unit and decided to it was time to buy. Having nothing to compare it to except for the old fashioned unit we were renting, we were keen to buy. That said, my sister works in property so we quickly got hold of a good conveyancer while I handled the financial side and got pre-approval so we could start looking. I also did a budget but because I knew little about property, I didn’t include strata levies, water or council rates or home and contents and income protection insurance. We also did not look at recent sales in the area so we had no idea what properties were now selling for.

A few weeks later, an almost identical unit came on the market in the same complex. It was going to auction but I rang the agent and made a pre-auction offer based on the price the first unit had been sold for at auction. The owner accepted it and I told him we would purchase it subject to finance and a clean strata report. I then contacted my broker and applied for a home loan while my conveyancer did the strata report which came back problematic. There was a tree growing in the roof that needed to be removed as it was cracking the concrete. There was also a flood in the car park that would cost $30,000 to fix. My conveyancer said although the sinking and admin funds looked okay, it was still likely a special levy would be imposed for these repairs. She also pointed out – this shows how naïve we were at the time – that the strata levies were $1200 per quarter. Back then, that was a small fortune, even if this complex came with a pool, lift and caretaker.

My sister and I decided not to proceed. We later went to the auction in the hopes of low balling but the reserve price was set at $410,000 which was what I had offered. We didn’t bid and the agent was furious.

My sister and I continued renting. Eventually, the complex I was renting became more and more decrepit. Along with a change in property managers, the complex soon attracted feral tenants. My sister moved out. Then, in 2007, I also decided to move, after locating a sexy rental studio in Potts Point.

ATTEMPT 2

Two years later, in 2009, the owners decided to sell. They wanted $245,000. By then, I had saved up $190,000. I was planning to put $170,000 as a deposit and keep the rest for emergencies. My broker said because my equity was so high, I would have no problems getting financing. That said, only St George and CBA would lend me the money because of its limited size (29 sqm).

Again, because I did not look at recent sales, I didn’t know whether the asking price was too high. That said, I spoke to my broker and she thought it was within market given that the owner had renovated it to look modern and stylish.

My sister and a friend who works as a property lawyer thought buying a studio was a bad investment as I was restricting the size of my market, should I ever decide to sell. My broker thought otherwise. In hindsight, I should have listened to her because I found my sister and friend did not seem to understand the area as by that stage they had been living in the north shore for several years and appeared to be projecting what they believe is appropriate for the north shore to Potts Point, which is in the eastern suburbs and is renowned for its high density living due to its proximity to the CBD. The area is heavily populated with studios, apartments and terrace houses while you could probably count the number of stand alone houses on one hand.

On the other hand, this was during the GFC and when the first home owners grant was double which I suspected was artificially inflating property prices. Also, I was friendly with several members of the owners’ corporation who had at various times told me about the ongoing friction on the OC and how cosmetic repairs were constantly being made to keep one tenant happy at the expense of more serious repairs, namely the asbestos on the roof that needed removal which was going to cost $50,000. The strata levies were only $550 per quarter due to this being a simple complex with no fancy add-ons but the sinking fund only had $10,000 and the admin fund had a deficit of about $1,500. My neighbours even showed me their strata reports which painted a gloomy picture. Also, about a fifth of the units in the same complex came on the market within weeks of the one I was renting which made me suspect that maybe the owners were about to be hit with a large special levy which was why they were all selling.

Even though I would only have to borrow $61,000 (after subtracting the $14,000 first home owners’ grant), I decided not to proceed, sensing that this affordable studio could end up becoming a very expensive purchase. With the economic uncertainty during the GFC, I also thought this was the wrong time to buy.

That said, I had also prepared a more detailed budget that showed that because my mortgage was so small, it was cheaper to buy than to rent. In fact, because of this, I didn’t even need to take out income protection insurance. Unfortunately, I felt psychologically unprepared for property ownership and I didn’t want to give up my savings which were a large buffer against job loss. That was the biggest hurdle I needed to overcome before I could buy my own property.

ATTEMPT 3 

I found a unit to rent in a small complex across the road in arguably, the street’s best building. As soon as my lease was up, I was told I would have to vacate as the owner was selling. This time, I spent time looking at recent sales in the area, reading your book and obtained a sales report from RP Data for my complex. I asked the owner (via the property manager) if she would offer it to me. She did, wanting $420,000 to $430,000. Given that a similar unit in the same building had sold at auction for $389,000 twelve months prior, I thought this was over priced, even after factoring 5% capital growth, the fact I was saving the owner advertising fees, and that the unit needed electrical and plumbing repairs and the dishwasher needed to be replaced. Also, at the time one-bedders were being sold for the high threes, early fours. The ones that went for the mid fours had ornate finishes or were very modern. Although this unit was lovely, it was also very simple and had no special finishes. I decided not to proceed.

That said, one of my neighbours, who was on the executive committee, kindly showed me recent OC financial statements. The sinking fund had $80,000 while the admin fund was minimal. The strata levies – at $900 per quarter – were high given that this was in a small complex with no lifts, gym, concierge etc. On the other hand, my neighbour said the OC had decided to have high levies to avoid issuing out special levies for any unforseen major repairs.

I had also done my own valuation based on recent sales and valued it at $390,000. It was later passed in at auction and finally sold for $378,500 which was close to my figure. Not bad for a beginner! 

I also revised my budget and found that had I purchased it for the asking price, I would have had about only 15% of my take home pay left after setting money aside for food, mortgage payments, strata levies, council and water rates; health, home contents and income protection insurance. I thought that buffer was too small and again, decided not to proceed.

ATTEMPT 4

The day after I received my notice to vacate, a sexy one bedder became vacant in another part of the same complex. I signed the lease and continued renting, glad that I did not buy the one I had just moved from.

As with the other places I rented after I moved out from the decrepit building, I was very happy there.

Then, in April 2011, the same thing happened. Just weeks before my lease was to expire, I was told I would have to vacate.

By now, I was truly fed up with renting. I asked the agent how much the owner wanted, having valued it at $450,000 based on recent sales and due to the fact the owner had put some work into making this unit look modern and special. Because the owner spent so much money on maintaining it, only minor cosmetic repairs were needed. To my surprise, the agent said she wanted $420,000. I was so shocked I accepted on the spot.

My sister told me I shouldn’t have done that so I tried to negotiate backwards. The agent was not pleased. I then went back to my original offer which the owner accepted.

A few days later, an older unit in the same complex was being auctioned. I went to see how it would go for. It ended up selling for $448,500 so I was delighted with the price I paid. It also confirmed that my valuation was close.

Having had so many near misses in property, this time I felt more confident about the process. I re-read your book and got pre and final approval via my broker. During the negotiation stage, I had revised my budget again and had looked at various interest rate scenarios to see how high interest rates needed to before owning would become economically harsh. It turned out interest rates would have to be at least 10% for that to happen so I knew I wasn’t over committing myself. Over time I managed to save more money and with interest rates being so high, my term deposit was generating good returns. I ended up borrowing $250,000, putting down a $185,000 deposit and setting aside $20,000 in an offset account for emergencies. I also took out health, life, home contents and income protection insurance. This time, I would have about 25% of my take home pay left over after factoring day-to-day living expenses and all the other costs that come with home ownership so I felt more comfortable with proceeding. It also helped that CBA had a special offer at the time where I would get a discount of 0.8% off the standard variable rate throughout the life of my home loan. That made a big difference.

I’ve now been a homeowner for two months now and while I have to be more careful with my spending (no more Prada bags!), I’m not exactly starving either. I still go through periods where I miss having $205,000 in the bank but when I think about not ever having to be at the mercy of a landlord/lady again and how, in ten to fifteen years’ time my property could double in value, I think the benefits outweigh the costs.

So Paul, when you asked me how I managed to be able to afford a property in Sydney – and in one of Sydney’s most expensive suburbs – there is no secret formula apart from saving hard and investing as much money as you can, especially if you are still renting or living with your parents. Also, with the rapid rise in property prices, it is much better to buy sooner rather than later. That was where I went wrong: I was trying to increase my equity to minimise my debt but Sydney property prices were moving much faster than what I could save and the interest generated from my term deposit.

AR