The U to Z of Property success – “Unconditional” offers, contracts & finance applications, obtaining a positive “Valuation” outcome, “Waivers”, when to be “eXtra” careful, how “Yield” changes over time and all about “Zoning” (Ep.146)

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In this week’s episode, Dave, Cate and Pete take you through:

  1. U – Unconditional: what does it mean for offers, contracts and mortgage applications? The trio discuss unconditional contracts, when is it appropriate to add conditions and share their hot tips on how to manage the vendor in the event of looming deadlines that are likely to be missed. Dave takes our listeners through the necessary steps before a lender will unconditionally approve a loan application.
  2. V – Valuations: how can you get the best outcome? The trio discuss the difference between valuations conducted by a licensed valuer, appraisals conducted by real estate agents and lender valuations arranged as part of the finance approval process. Listen in for the trio’s expert insights on how to prepare for a valuation in order to get the best results. For further education on valuations, listen to episode #17 “Valuations 101”.
  3. W – Waiver: cooling off period. When purchasing a property, the most common right waived by purchasers is the right to a cooling off period. Buyers who are purchasing interstate, beware! Legislation on cooling off differs from state to state and in many states, cooling off does not apply for auctions. For further insights on cooling off periods, listen to episode #132 “Purchasing laws in each state – Part 1”.
  4. X – eXtra Careful: when to slow down and take the time to avoid critical mistakes. Cate takes our listeners through what they should be extra careful about when reading a contract and the other paperwork associated with buying a property. The key is to have an understanding of what you’re on the hook for. For lending and pre-approvals, Dave shares the key points that purchasers need to be aware of and why it is imperative to speak with your strategic mortgage broker before bidding at auction or putting in an offer on a property, (even with a valid pre-approval in place). For our listener’s who are eyeing off a potential development, Pete outlines the importance of going through zoning restrictions with a fine tooth comb.
  5. Y – Yield: how it’s calculated and how it can change. Pete shares with our listeners how yield is calculated and the important differences when calculating yield on a residential vs commercial property. Dave explains how yield changes over time and why growth in yield is largely aligned with capital growth.
  6. Z – Zoning: why zoning should not be skipped over. The trio discuss the importance of zoning and how zoning restrictions can rapidly change and how lenders mortgage insurance could throw a spanner in the works. 

Resources

Show notes

  • Unconditional  
  • Contract – not subject to finance or subject to building and pest or selling your own home.  
  • That’s how you buy at auction 
  • If you’re worried about integrity of building, get this done before 
  • Get your pre-approval done before the auction – ducks need to be in a row.  
  • When someone is not in a position to put in an unconditional offer (eg: subject to finance or building inspection).  
  • Generally, a purchaser wants to wait until the loan is unconditionally approved, or they may not even have a pre-approval in place beforehand.  
  • In the mortgage process – unconditional means 
  • The lender selected has formally assessed your application, property and completed a valuation on the property and offered you a loan for the property you have bought. 
  • No further conditions left to satisfy with your lender. 
  • A common trap for home buyers is to assume that they have home loan approval in place when, in reality, no such approval has been granted. Each pre-approval is conditional on the bank accepting the property you’ve purchased as suitable security for the loan. 
  • Because rates are going up (fixed rates, APRA increasing assessment rate and also variable rates going to increase soon enough), your borrowing capacity could change between when you get the pre-approval and when you make the offer on the property. So always call your strategic mortgage broker before you go to put in an offer or bid at auction, to make sure your borrowing capacity hasn’t changed since getting the pre-approval.  
  • Unconditional offer vs unconditional contract 
  • Unconditional offer means that you do not add conditions to the contract – eg: subject to finance, building and pest, selling your current home. 
  • Extend conditions – difficult decision, do you go unconditional or forfeit the property if they don’t want to extend the timeframe for conditions.  
  • If you need an extension, give notice well in advance, not at the last minute that you won’t meet the deadline – get your strategic mortgage broker or the bank to call the vendor’s representative and give them real confidence that the loan will be approved, it’s just a matter of time – eg: servicing is not an issue, we’re just waiting on the valuation, there is a delay with the lender because of backlog. A great mortgage broker on the front foot can make a great difference between getting an extension or not.  
  • Valuations 
  • Valuation is done by a licensed valuer, for residential properties they’ll use the comparison method for other properties sold. If the valuer is called up to court, they must justify the valuation, need to be in 10% plus or minus of the actual sale price.  
  • Real estate agent does not need to sign off on their appraisal, in theory it’s the same process, but legally it’s not.  
  • How can you bolster the value of your property for a valuation? 
  • anything that you can do for a minimum amount of money, within a week or two, to potentially increase the valuation? 
  • Tidying up the bedroom is not improving the condition.  
  • Remodeling – yes. Painting and floor boards – yes. 
  • Focus on other sales in your area which are high, but you must wait for them to settle. Valuer can’t use it in their comparison until they have settled. Do the market research and time the valuation.  
  • LVR is tight – the best thing you can do is review all the comparable sales over the last 3 to 6 months, maybe longer if there’s not as many that are like your property.  
  • Keep the positive ones, remove the negative ones 
  • Have the key information – land size, bedrooms, garages, estimated land value per square metre.  
  • Give it to the valuer after they call you – the valuers like this sort of help as long as it’s reasonable. If it’s accurate and appropriate, that’s the best way to positively influence a valuer, rather than tidying up your bedroom. Put some Tim Tams out when the valuer comes through.  
  • What types of bank valuations are there 
  • In the case of the major banks, a full valuation is mostly used for transactions that pose a higher risk to the lender, such as: 
    • loans with a high LVR (especially if mortgage insurance is taken out on them),  
    • a high dollar value loan,  
    • more complex transactions, 
    • interstate investment purchases and 
    • certain types of properties or postcodes deemed high risk. 
  • Full valuation means that the valuer actually visits the property 
  • A kerbside valuation involves an external inspection in conjunction with comparable sales data to determine the property’s likely value, says Tim. It doesn’t take into account any special internal features like renovations etc. 
  • For a desktop valuation, it involves running comparable sales data from national sales databases in order to value the property – in other words a CMA. 
  • Waiver 
  • Most common right you can waive is your right to cooling off: 
    • NSW/QLD/ACT/NT – you can waive the cooling off as a negotiation tactic 
    • SA – you can waive but only if you get independent legal advice and have a certificate from legal practitioner to that effect 
    • VIC – cooling off period cannot be waived via contract 
    • WA/TAS – no cooling off period legislated, but you can negotiate a cooling off in the contract. 
  • eXtra Careful 
  • What should you be extra careful about when reading a contract and the other paperwork associated with buying a property? 
  • What are you committing to? In some states there is a cooling off and in auctions there isn’t. There is risk in everything, it’s ok as long as you understand it. Or if you’re losing sleep, have you got a plan B? 
  • Do you understand what you’re on the hook for? Strata plan, read through the minutes of the last body corp meeting? 
  • Overlays, covenants etc – your solicitor can advise you on this. If you are looking at development, second story or high fencing, find out if you’re allowed to do it. 
  • What should you be extra careful with when it comes to lending and preapprovals? 
  • Pre-approvals have an expiry date and will need to be extended or re-lodged – typically valid for 3 or 6 months 
  • Regardless of pre-approval validity term, new documents (payslips etc) will be required for verification after 90 days. 
  • Any financial position changes since the pre-approval was obtained will alter borrowing capacity / pre-approval level. 
  • Try to avoid (if possible) 
    • Changing jobs. 
    • Taking on more debt. 
  • If there are changes, always make contact with your SMB to discuss. 
  • Some lenders have auto pre-approval assessments 
  • Beware of these lenders / assessments, as they rely on the data entered being accurate. 
  • The data isn’t checked and a physical assessment not done prior to issuing the pre-approval. 
  • These applications also may or may not fit that lenders policy – which can only be determined upon physical assessment by a credit assessor after purchasing. 
  • Selecting your lender prior to pre-approval – factoring in variable and fixed rate loans, how you would like the make up of your loan.  
  • Selecting a fixed rate before you purchase – banks can change their fixed rates at any time and this can impact your borrowing capacity.  
  • Borrowing capacity could change 
    • Updates to lender policy. 
    • RBA or lender interest rates. 
    • APRA lending regulations or other serviceability related calculations during this period.  
  • The structure of your loan, whether fixed, variable or a mix will almost certainly change based on your purchase price and the prevailing market and lender policy conditions at the time of purchase. 
  • Property Planning – Property you are buying is not the right decision for today, but also in 5 or 10 years, ideally through to retirement and won’t adversely impact future property decisions that you will make. 
  • Pete’s top tip – if you’re going to develop, make sure that you can do what you want to do. Understand the zoning and the due diligence.  
  • Yield 
  • How is it calculated – income divided by the value.  
  • Gross yield vs net yield – remove the expenses from the total yield. This is more talked about in commercial yield.  
  • Effective yield – lease says $20,000 a year, but the first 6 months is rent free, you need to factor that in. That’s the effective yield.  
  • How does yield change over time? 
  • If value of the property is growing faster than the rent, the yield will be reducing. If you have high capital growth, you’ll have higher rental growth.  
  • What’s more important in the long-run is the rate of growth of the rent, and it tends to be more aligned with the capital growth of the property.  
  • Zoning 
  • We’ve got a property and across the road they’ve built 3 and we think we can do the same. If they built 3 many years ago, doesn’t mean you can do the same now. Zoning laws and council laws change. Engage a town planner to work out what you can and can’t do.  
  • The bank may be happy to take a mixed use zone, but that doesn’t mean the mortgage insurer will (if you have to take LMI) 

Gold Nuggets

Peter Koulizos – The Property Professor’s Golden nugget: Unfortunately we’ve had some severe flooding, and for some of those people, they will find it very hard to get insurance. Have a look if the proeprty you are purchasing is in the flood zone. See if they are in the zone vs have they actually been flooded. The flood zone will affect your development – you may have to build above the ground level. An extra 400mm in concrete to pour, is a significant extra cost.  

David Johnston – The Property Planner’s Golden nugget: If you’re serious about trying to get a positive result on the valuation, take the time to research the sales over the last 6 months, if not longer. Get them into the spread sheet and keep the good genuine comparables, delete the bad ones. Land size, land value per square metre, number of bedrooms, bathrooms and parking spots. You’ll probably have hit most of the key properties that the valuer will be looking at.  

Market Updates

  • The 20 most unaffordable cities in the world. Pete shares with our listeners a report that states Adelaide and Brisbane are more unaffordable than New York. How can that be? The devil is in the detail when it comes to how affordability is calculated, which in this case, did not take into account interest rates and repayments. The trio discuss how reports can be skewed by the methodology used and the angle that the journalist is instructed to pursue. The trio point out that the debt-to-income ratio is a commonly used measure, however it is fundamentally flawed because interest rate (and cost of servicing the debt) is not always taken into account. They all concur that debt to repayment ratio is a more prudent measure to follow when assessing affordability.

Demographia – Most Unaffordable Cities in the World

  • Number of sales shows long-term trend of decline. Continuing on the data theme, Dave shares sales data which indicates that 2021 had the highest number of sales on record with 650,000 property sales recorded. However, upon further examination, this made up just 6% of all properties in Australia. In 2003, although there was a lower volume of sales recorded, the sales for the year accounted for 7.8% of all properties in Australia. The population has been growing since, but the number of people selling has been declining and reached as low as 3.7% in 2018 and 2019, before being bumped up in 2021. This is another reminder that if there are less properties being sold, relative to the total number of properties and population growth, supply is reduced and prices will go up.

  • Underquoting – but what are we going to do about it? Cate shares her weekend auction experience, where the agent price guide was set at $800,000-$880,000 and the property sold (as Cate expected), at $1.351M. This was a clear case where the agent underquoted the property despite recent sales supporting a likely selling figure closer to the actual result than the documented quote range suggested. Underquoting reforms are being considered by Victorian Consumer Affairs, and everybody has an opportunity to submit their thoughts. 

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