FINS3633
Real Estate Finance
Lecture 7
Successful First Time Home Buyers
Have a budget and truly understand what can afford to pay
Clear idea of the property type they want—or what they do not want
Know the components of a serious offer
Can negotiate with agents
Stick to their plan
Buying Process
1. Getting preapproved/approved for your home loan (mortgage broker)
2. Identifying potential properties (realestate.com.au, domain, selling agent lists, buyers'
agent)
3. Inspections (solicitors to review contracts, potentially strata reports and inspections)
4. Determining the value of a home
5. The auction process (66 W form)
6. Offer strategy if passed in or prior to auction
7. Negotiating with selling agents
8. Offer acceptance (Signing contracts and paying deposits)
9. Settlement day (money in account, solicitor works will seller’s solicitor)
Buying Process
1. Getting preapproved/approved for your home loan (mortgage broker)
Buying Process
1. Getting preapproved/approved for your home loan (mortgage broker)
2. Identifying potential properties (realestate.com.au, domain, selling agent lists, buyers'
agent)
Buying Process
1. Getting preapproved/approved for your home loan (mortgage broker)
2. Identifying potential properties (realestate.com.au, domain, selling agent lists, buyers'
agent)
3. Inspections (solicitors to review contracts, potentially strata reports and inspections)
Buying Process
1. Getting preapproved/approved for your home loan (mortgage broker)
2. Identifying potential properties (realestate.com.au, domain, selling agent lists, buyers'
agent)
3. Inspections (solicitors to review contracts, potentially strata reports and inspections)
4. Determining the value of a home
Buying Process
1. Getting preapproved/approved for your home loan (mortgage broker)
2. Identifying potential properties (realestate.com.au, domain, selling agent lists, buyers'
agent)
3. Inspections (solicitors to review contracts, potentially strata reports and inspections)
4. Determining the value of a home
5. The auction process (66 W form)
Buying Process
1. Getting preapproved/approved for your home loan (mortgage broker)
2. Identifying potential properties (realestate.com.au, domain, selling agent lists, buyers'
agent)
3. Inspections (solicitors to review contracts, potentially strata reports and inspections)
4. Determining the value of a home
5. The auction process (66 W form)
6. Offer strategy if passed in or prior to auction
Buying Process
1. Getting preapproved/approved for your home loan (mortgage broker)
2. Identifying potential properties (realestate.com.au, domain, selling agent lists, buyers'
agent)
3. Inspections (solicitors to review contracts, potentially strata reports and inspections)
4. Determining the value of a home
5. The auction process (66 W form)
6. Offer strategy if passed in or prior to auction
7. Negotiating with selling agents
Buying Process
1. Getting preapproved/approved for your home loan (mortgage broker)
2. Identifying potential properties (realestate.com.au, domain, selling agent lists, buyers'
agent)
3. Inspections (solicitors to review contracts, potentially strata reports and inspections)
4. Determining the value of a home
5. The auction process (66 W form)
6. Offer strategy if passed in or prior to auction
7. Negotiating with selling agents
8. Offer acceptance (Signing contracts and paying deposits)
Buying Process
1. Getting preapproved/approved for your home loan (mortgage broker)
2. Identifying potential properties (realestate.com.au, domain, selling agent lists, buyers'
agent)
3. Inspections (solicitors to review contracts, potentially strata reports and inspections)
4. Determining the value of a home
5. The auction process (66 W form)
6. Offer strategy if passed in or prior to auction
7. Negotiating with selling agents
8. Offer acceptance (Signing contracts and paying deposits)
9. Settlement day (money in account, solicitor works will seller’s solicitor)
Home Loan Approval
Deposits and how much you need to qualify for a loan
• Historically could put down as little at 5% but you would pay LMI and receive a higher
interest rate
LMI (Lenders Mortgage Insurance - is a one-off insurance premium payable by the
borrower that protects the band against potential loss them may incur
A guarantor is a third party to a home loan, heling you to get a loan by offering the
additional support, generally limited to immediate family members.
Home Loan Approval
Pre/approval, approval in Principle, Conditional—want one that is fully assessed for how
much a bank would be willing to lend given that you are still employed, based on the
appraisal etc.
Final approval—actually receive the bank approval but subject to the bank’s actual
appraisal value of your home.
Generally working with a mortgage broker or individual bank’s brokers at this point.
Budget Planner
Know the Fees!
Stamp Duty—roughly 5% in NSW now, could be more for nonresidents
Buyers Agent Fee—typically 2% of sale price, could be flat fee
Solicitors/Conveyancer Fee – roughly 2K
Inspections/Strata Report – Around 200-300 each
Bank Fees –600 roughly but can sometimes be waived
Mortgage Registration/Transfer fees
LMI (Lenders Mortgage Insurance) if applicable
Council and Utility Rates
House Types- Houses
Pros
• Space and privacy
• Backyard/Gardens
• Easy to increase value with improvements
• No land tax and no Strata fees
Cons
• Maintenance can be costly
• Renovations are expensive
• Cost more than Strata
House Types- Apartments
Pros
• Lower maintenance
• Easier to make internal upgrades
• Access to common areas
• Located closer to amenities
Cons
• Strata fees, special levies, increases to Strata
• Limited space and storage
• Shared areas and walls with neighbors etc.
• Governed by Strata
House Types- House and Land Packages
Pros
• Brand new to your specifications
• Energy efficient and comes with builders' warranty
• Government grants and exemptions available
Cons
• Costs are not always fixed
• Takes time to build
• Generally away from the CBD
• Rely on how the local area develops
House Types- Off the Plan
Pros
• Secure the property with 10% deposit
• Brand new and can chose fixtures etc.
• Government grants and exemptions available
Cons
• Sunset clause—maximum time the developer must complete the build (ensure your
solicitor reviews this)
• Market prices can change by time they are completed
• Personal circumstances might change too, as home loan approval could be affected
• Difficult to increase the value of the property
Buying an owner occupied home
What do you need? Absolute essentials—bedrooms, bathrooms etc.
What are non-essentials?
Shortlist potential suburbs and property types: be realistic to the areas for certain properties
of the home such as a lift, air con, swimming pool, pet friendly, has views etc.
Searching for a Home
RealEstate.com.au
Domain.com.au
Off Market Listings—Buyer's agent
Real estate agent mailings
Pricing A Property
Selling agents set the price point as guide
• Listed price listed eg For Sale $495,000, can negotiate
• Price Range, can give you some room to move within the range
• “Price guide” is the lower bound—if reject an offer above the price guide, legally need to
update price guide
• By negotiation or contact agent, generally high price properties
• Can ask for comparable to come up to a figure
• Expressions of interest, very high price properties
• Offers over/above/plus (illegal in NSW, VIC)
• Fixed date sale (popular in Victoria) –submit your best offer
• By Auction—popular in high demand areas
Working with Selling Agents
Remember the selling agent represents the SELLER
Use pressure tactics—scarcity, good deal, competition, they are professional negotiators,
any information can be used against you
• Don’t give away too much information
• Be polite and friendly
• Make it easy for them to want to work with you—have preapproval in place, easy to
contact etc.
• Be confident
• Do your own research
Questions to Ask the Selling Agent
How long has the property been on the market?
Why are the owners selling? Have they bought elsewhere?
What feedback have your received (but don’t believe everything)
What comparables using
Have there been building or pest inspections
Have you received any offers, and if so for how much (again, don’t believe everything)
Why do you think it wasn’t accepted?
Questions to Ask the Selling Agent
What do you think it will sell for?
Any contracts requested? (NSW, ACT, Section 32 VIC)
Is the vendor an investor or an owner occupier? Lease in place?
What are the council water rates/strata fees
Any special levies or schedules works?
What settlement period?
Why do you think it hasn’t sold yet (for properties on the market for more than 4 weeks)
Private viewing or second inspection
What TO say to a Selling Agent
You are interested and will be in contact
You have pre-approval (but not for how much!)
What NOT to say to a Selling Agent
That you are first time home buyer
How long your have been looking
That you love the property
That you’ve missed out on other properties—need to know basis
What you think the property is worth
How much you have to spend
If you have a deadline
Too much personal information
Property Valuation
Comparables: RealEsate.com.au, Domain.com.au, CoreLogic RPData, PriceFinder,, 3
current properties on the market (less than 4 months old)
Independent appraisals-- expensive
Elements for property value
• Bedrooms, bathrooms, garage, living spaces
• Land size, apt sq. meters
• Location
• Fixtures, fitting and inclusions (kitchen, bathroom)
• Uniqueness for some reason, special features (swimming pool)
• Development potential
• Views and direction if faces (north facing is popular)
The Auction Process
Viewing other properties as they go to auction
Be prepared, finances, contracts, expectations for prices
Auctions can vary but governed by strict regulations
• There are no cooling off periods (66W in NSW)
• A deposit is paid and contracts exchanged immediately
• Vendor bid must be announced to buyers (not necessary the reserve price)
• If the bidding does not reach the reserve price, the auction is “passed in” and the highest
bidder will get the first chance to negotiate an offer, still on that day. (Don’t go inside if you are
bidding on the street!)
Auction Day Best Practices
Arrive early, register your interest to bid, conduct one last inspection
Don’t bid against yourself
Stick to your budget, or appoint a friend to bid for you with your budget
Be prepared to sign same day if you win
Keep calm, no need to start bidding, call out the bid in FULL
Making an Offer
Your offer
• Price
• Settlement Date
• Deposit amount
• Conditions if any (can the vendor use your deposit etc., cooling off.)
• Best in writing (email): address, your details, preapproval
• Always follow up to confirm receipt (phone/text) but be patient for a response
• You can add an EXPIRY: Please note, my offer expired at 5pm on March 28th. If we
do not receive an answer by this date I will proceed with an alternative property.
Negotiating Strategies
Stay calm and don’t give away too much information
The Agent wants to sell the home (else they don’t get paid)
You can negotiate settlement terms
• Waive cooling off period
• Short/long settlement period
• Temporary rent back options for the owner
• Releasing your deposit
• Be flexible
Be prepared to walk away-–give the agent your best and final offer in an email and say the
vendor can reconsider but will not be going higher
Accepted Offers
Pay deposit to Real Estate Agent Trust Account
Exchange contracts—working with a conveyancer or solicitor
Cooling off period 3-5 business days (unless signed a 66W NSW or at an Auction)
Building and pest inspections, strata reports (if have cooling off period)
Final loan approval—delays are still common so make sure all finances are in order well
before Settlement Date
Settlement Date
Complete final inspection
Property settlement is a legal process between the legal representation of the vendor and
buyer
The buyer’s conveyancer/solicitor will know what bank is providing financing.
Collect keys!
Investment Properties
Minimum two bedroom
Best to be close to amenities
Pros if new, keep close tabs on maintenance, can claim huge depreciation costs on taxes
(older builds probably have fully depreciated)
Should have representation (property manager)
• Should have landlord insurance which insures against damage caused by the tenant or
covers losses is a tenant under contract fails to pay.
Do not need to sell, can refinance and take out equity to buy another property—as long as
you can service the two loans and the leverage would not be a problem
Never Sell Strategy
You buy a $500 property with 100K deposit and 400K mortgage
It rises to 1M and you sell it
Capital gains tax would be $1m-$20K fees-$500K cost = $480*25%=120K
Leave you with $1M- $20K-$400-$120=$460 as a deposit
Buy a new property worth $1.84M with the deposit (20%+costs)
Mortgage = $1.47M
Never Sell Strategy
You buy a $500 property with 100K deposit and 400K mortgage
It rises to 1M and you refinance it=> bank lends you $800K
You already owed $400K so that gives you $400K for deposits and costs
Buy another property worth $1.6M
You now have two properties, one worth $1M and another worth $1.6M è 2.6M
Mortgage= $800K + $1.28M è 2.08M
Conclusions
There are many factors that affect home prices
For owner occupied purchases you may be more flexible on the price but try to stay calm,
there will in fact be another property
For investment properties, buy at or below market value and be prepared to manage the
debt that comes with property investment
Housing prices can in fact fall! But high-income earners in Australia will generally own 2-3
investment properties as part of their portfolio.
Agenda
First time Home Buyer – Customized material not from our textbook
No recommended end of chapter questions this week
Next week will be the in-class take home project presentation.
Turn it In Links are available under Week 8 section
Auction Failure Rate
Data source: Domain Auction Listings
Auction Failure
Gives impression something
is wrong with the house
but…
Not necessarily true! It is a
bad news event but if
something were truly
wrong, the auction should
succeed but at a lower
price >>
Reserve Price Mismatch
Auction Sales Method
• Homes sell for more at Auctions, this finding confirms previous literature
• But ours is the first to study long run price implications of auction failure:
ln Pi = β1Auctioni + β2Failed Auctioni + Fixed Effects + ϵi
1.2% x 0.83 – 2.6% x 0.17 = 0.57%
• In aggregate if auction failure rate doubled, it would wipe out all potential gains.
• Potentially endogenous as better homes are sold via the auction method