If you’re thinking of buying a property, whether it’s your first or 15th, buying a property can be one of the most exciting times of your life. It can also be the most costly — for the wrong reasons.
From the plans you quickly envisage of starting a family, to the ‘his’ and ‘her’ wardrobes you will need, it can all be extremely rewarding and fulfilling. But before you even hop on the internet and start looking for your dream home on the esplanade (that you more than likely won’t be able to afford), I’ve put together a list of 10 things you must do before you buy a property.
Here are 10 things you ‘must’ do before buying a property.
1. Are you ready to enter the property market?
It’s a big commitment to enter the property market. You are responsible first and foremost for making sure the dreaded mortgage is going to be paid on time, every time.
If you are still unsure and just the thought of having such a large debt on your back is already worrying you to the core, it might be too early. If, on the other hand, you are ready to become a homeowner then it’s time to think about making sure everything’s in place to make that happen.
Here are two really points to consider:
- Do you have kids? Unfortunately, banks will not look so favorably on these ‘little angels’ (“costs”). In some cases, they may feel it necessary to offer you a smaller loan if you have “dependents”. Of course, you can’t lie about it. But be prepared they will look through all of your finances for at least three months to make sure you’re capable of saving and servicing a mortgage.
- Is your job secure? Like really secure? Make sure you emphasize how secure your job really is, especially when you talk to your bank or broker. Your ability to earn a stable and consistent income is the single-most-important factor for the banks. It’s even more important than your deposit! Hint: it might be worth waiting a month or two before talking to the bank/broker, to help you get your savings right and your income consistent.
- Have you done your tax return? You’ll need payslips, of course. But almost every loan application needs to have a tax return from the ATO — even if you’re not self-employed.
2. Are your personal finances where they need to be?
This is one of the most important steps in the buying process.
It is extremely important to have all your other financial affairs in order. It’s not just the initial deposit you have to come up with. It’s the other bits and pieces that go along with it. Stamp Duty, Conveyancing, the building and pest inspection… the list seems endless. These costs vary by state and the type of property you’re buying. The last thing you want to be doing is taking on the biggest debt of your life while you are still trying to repay a car loan or you’ve got a buy now, pay later loan for a TV.
Note: Stamp Duty exemptions exist in some states up to a $600,000 purchase price (see below), conveyancing costs can depend on your house price, and typically you can make an offer to buy “subject to building and pest inspection”.
Hint: I can’t stress how very important this step is. Banks will look far more favourably upon your application (and probably give you a better interest rate) if you have a good credit history. What’s more, they’ll more likely offer you a bigger loan should you want one!
3. Get an idea of what you think the property is worth in the location you want to live
This part can be exciting and deflating all in one. It’s easy to work out what your upper limit might be when it comes to the price you can afford to pay because your limit is often set at what the bank will lend you.
Use google to look up a couple of the bank mortgage repayment calculators. These are on the banks’ websites.
After putting in a few figures, a grand number will appear on the screen. This is the amount the bank will lend you and the interest rate you will likely be offered. Please note: these are only indicative lending rates, they are not a formal pre-approval. Your borrowing limit will likely be far lower. And just because you could get a loan for that amount, it doesn’t mean you should!
From here, you can hop on the real estate websites and look up the location and house type you want to buy. Hopefully this fits with the numbers you were just given in the calculator. Have a brief look at what you can get for your money in what locations and write this down. It’s important to have a gauge of what the home will cost.
4. Know your price limit – using a mortgage broker
I would highly recommend that once you have everything you need, it’s time to ask a friend or family member if they have any recommendations for a good mortgage broker.
A quality mortgage broker can save you thousands of dollars. The job of a mortgage broker is to find you the best deal on a mortgage that they can offer. A mortgage broker is generally paid by the bank that you take out the loan with, meaning at this point in the process you won’t need to get your purse out.
The broker will want much more detail than what you had to give to the online calculator. From bank statements to payslips, this can be a time-consuming process, but it’s certainly worth doing to get you the best deal on your biggest debt. Once this is complete you will hopefully finish with a pre-approval for a loan, so you are now ready to start looking properly.
Hint: start preparing now and keep a copy of all of your payslips, bank statements, assets and current loans. You can use more than one broker and approach a bank directly. You’ll need to send them all a copy of your documents.
Second hint: pay off and cancel any loans or credit cards before you apply for a loan because if you have a credit card (even if it’s got nothing owing on it) — it’ll count against you.
5. Have a deposit
Most lenders will require you to stump up a 20% deposit. It’s 20% of the property’s purchase price. For example, 20% of a $600,000 home is (20% x $600k) $120,000.
As you can see, this can be big dollars in our major cities, with many suburbs holding a median house price nearing $1,000,000. If this is your first home and you are anything like me, you won’t be looking in this bracket.
It’s at this time you need to get your savings in order. Unless you want to pay lenders mortgage insurance or ‘LMI‘ (which protects the bank, not you) you will need to build up a strong cash position to enable a 20% deposit for the property. Start a second job, drive for Uber, do what it takes.
In addition to a deposit, stamp duty has to be paid at the time purchase. Again, the amount of stamp duty is based on the house price.
There are stamp duty concessions and other government schemes that are in place to help people get into their first home. You’ll need to look into these as they can save you thousands.
For example, let’s say you are looking at a first home and you live in Victoria. If you can find a home to buy under $600k, the state government will waive the stamp duty. That’s a saving (in Victoria) of $31,070, “That’s huge.” As I said earlier, it’s important to see what you are entitled to because the savings are real.
Note: the Federal government is also offering a select number of first home buyers (10,000) a scheme whereby they will guarantee a loan, up to a certain amount, so you may only need to get 5% as a deposit. All of these offers can be great when you’re trying to crack into the property market.
6. Who’s doing all the legwork?
What I mean by this is, are you going to take the reins, and find the home you want to buy or are you going to employ a professional to give you some help with the biggest purchase of your life?
It’s always astounded me in Australia that more people who are purchasing homes don’t use a ‘Buyers Agent’ to help find and facilitate the purchase of their home. Buyers Agents (BA) work for the buyer and are paid for their work by the buyer. This is a relatively new profession in Australia but one that is quickly gaining popularity.
A good buyers agent will have offers brought to them by many real estate agents, and are always the first to know when new listings are brought to market. This is a big advantage. These pre-listing offers are generally brought to the BAs because the property’s owner doesn’t want to spend money on marketing but they still want a quick sale. This can mean big savings for the buyer, as a good BA who knows this can negotiate their way to a much smaller agreed sale price.
BAs get paid in 2 ways: a fixed price, or as a percentage of the sale price. I always encourage people to weigh up their options before going one way or the other.
Of course, you can opt to buy a property on your own. If you ‘go it alone’, the next step will give you a rundown of what you will need to do.
7. Go to as many open inspections and auctions as you can
It is vitally important that you inspect as many homes in the immediate area you are looking in as possible to get a good understanding of what is out there, what it’s worth, and how many other people you are going to be competing against.
Becoming mates with real estate agents helps. They can get you on mailing lists which entitle you to view properties before they hit the open market, and more importantly, the property portals. Speak to every agent, attend every open inspection and explain what it is you are looking for in a home.
Hint: remember, the agent gets paid by the seller and on the number of homes they sell, so if they find the one that fits with what you want, chances are they will help you out.
Auctions are a great spectacle.
If you have never experienced it I would highly encourage you to get along and see for yourself the theatre that the auctioneer can create. This will also give you much-needed experience as more than likely you will be eaten alive if you attempt to show up to the first auction and buy. If you have ever been to an auction in a hot market you will know that you shouldn’t expect to walk away paying well under your preferred price.
The other bonus of doing countless inspections in your area is that you get to find out about all the good and bad of the area. The last thing you want is to buy a house next to someone who is partying and blasting music every day and night. Unless that’s your kind of thing…
8. Find the house
Once you have finally found the house you like, on a block that is suitable, close enough to the cafe you can see yourself sipping a latte at, it’s time to act.
Make sure the home has all the things you need:
- Do you need 3 or 4 bedrooms as you want a big family?
- Do you need lots of parking spaces for your cars and the boat?
- These things all need to be looked at once again, before the next step…
Once you have found the house it’s time to make sure that everything is what you are after, and if not, how much it will cost to fix. You don’t need to be a qualified builder to do this, just roughly. Ask a friend or family member who has experience in carpentry or similar to walk through the home one last time before you make an offer.
After you have ticked the boxes, you need to know the price you think this property is worth in its current state and what you’d be prepared to pay for the home.
9. Offer and negotiate (subject to inspection)
Making an offer is an exciting time for any home buyer. But please make sure you do the following things when making an offer on the house, they can protect you from overpaying or buying a dud.
Put the offer in writing. The sales agent is legally obligated to show all written offers to the vendor/seller. If you don’t do this, there is a chance you may be told the offer was rejected without the agent actually ever presenting the offer to the seller. They would do this if they felt the offer was on the low side.
Make the offer ‘subject to finance’. It sounds simple, but the bank will re-evaluate the loan pre-approval and if yours or their circumstances have changed they may be inclined to revoke the offer for a loan, including this clause in your offer covers you so you don’t get caught in a situation where you legally have to purchase the property without correct finance.
Make your offer ‘subject to building and pest inspection’. Once again, I know it sounds simple but so many people don’t do it. The last thing you want to do is commit to buying the property only to find out the house needs restumping, or it’s overrun with termites. This clause covers you for these types of things. If your offer is accepted you are in a good position as you can have a professional building and pest inspector come through and give you a complete report on the property and house you are about to buy.
10. Get a final inspection done by a professional.
If your offer has been accepted by the vendor it’s time to bring in the professionals to inspect the property. A building and pest inspection can reveal underlying issues with the property. Don’t stress though, an inspection will always reveal something, and it can help save you money.
You may need to call upon another expert to get a quote for repairs or more information on the problem. If it is found that the property does in fact need restumping, it might seem like the end of the world, but it’s a great opportunity to negotiate on the price!
For example, let’s say I was happy to offer $600,000 for a home, but the inspection explained that this home needed restumping. I have obtained three quotes which all come out to roughly $20,000. With that in mind I am happy to offer $580,000. This works sometimes but not on others. If you have other competing buyers they may be happy to proceed and therefore you may miss out on the property. But at the same time, you may have just saved yourself the headache of a house with much-needed repair work to be done.
On the other side of the coin though, the seller/vendor will probably already know what is required and may be inclined to accept your offer and let you take ownership at the lower price.
That’s it!
If you want to take one of our free online investing, finance or budgeting courses, click here to see what you can learn today. It could save you thousands…
As for your property jounrey just try to have fun, ask the hard questions, try to keep emotions out of it and good luck with your purchase!
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