So you’re looking to buy a property. You’ve seen other people do it, and how hard can it be? Find the right property, obtain a mortgage, do the paperwork and move in, right? Well, not quite. Property investment can certainly be very lucrative and with the right help and procedures is straightforward. But first-time buyers sometimes make avoidable mistake simply because they failed to prepare themselves and invest in the right advice.
The number one mistake made by first-time buyers is to rely on the seller’s real estate, financial or legal advice.
While real-estate agents may be ethically bound not to misrepresent the characteristics of a property, and in some cases are in theory meant to act in both the buyer’s and the seller’s best interest, the old saying that “he who pays the piper calls the tune” most certainly applies.
In some jurisdictions, it is normal for the buyers to deal directly with the seller’s agent, and if they are experienced and know what to expect, it might not be necessary to hire an agent themselves. But if you do not have knowledge of the local market or do not have experience in property, even in these cases it’s important to have someone who knows the ropes on your side.
The same applies to financial and legal advice. If, for instance, you are buying from a developer, don’t rely just on that developer’s financial forecasts and reassurances that the legal terms are market standard. Have a financial advisor analyse the forecasts independently, and have your own lawyer go over the contracts.
In general, if you are about to buy a property and there is someone involved in the process whom you didn’t hire yourself, they are working for the seller and that is where their interest lies. There’s nothing dishonest about that, but it is important to be aware of it.
Risks and mistakes that first-time buyers face
Failing to properly account for taxes and expenses
It would be a wonderful world if property investment were simply buying property and receiving the monthly rent. Unfortunately, there is also a constellation of extra taxes and expenses that you need to account for. First, there will be the upfront fees payable to agents, lawyers and the government (in the form of stamp duty). Many mortgages also involve one-time fees. In the case of stamp duties, these can vary depending on whether you are buying the home for yourself or to let.
Later you will have ongoing expenses such as insurance and property taxes, condo fees, maintenance, management fees if you outsource the management of the property and further agents’ fees when you need to find new tenants. You will also have to pay income taxes, which also can vary according to your specific situation. Bear in mind that some of these expenses tend to go up year after year.
These shouldn’t put you off from investing, but bear in mind that the actual return you will make is lower than the gross rent divided by the headline value of the property. If you don’t know what expenses to expect, talk to a specialist.
Failing to secure a mortgage and losing their deposit
Contracts will typically require you to put down a deposit and pay the remainder of the home-price in a certain time period, in which you are expected to secure a mortgage. If you fail to secure the mortgage, the seller may be entitled to keep part or all of the deposit.
So, even before you look at property, it makes sense to talk to banks to understand what size of mortgage they would be willing to provide you. Once you have a specific property in mind, pre-approve the mortgage, which means the bank is stating that it is willing to provide you with that mortgage, although it hasn’t committed to it yet. Only then should you sign the contract, and when you do, make sure you have sufficient time to secure the mortgage or find a backup option if anything goes wrong.
Biting off more than they can chew
When looking at property, be conservative – rather than stretching for the highest value property you can conceivably afford, go for something that you can pay for more comfortably. It is better to have good surprises and find you have some extra cash left over (which you may then be able to pay down your mortgage more quickly or to invest in yet another opportunity) than it is to find that the slightest upset in the property market or your income is going to cause you problems.
A scenario of foreclosure, mortgage renegotiation or a rushed sale is likely to put you at a disadvantage, so don’t worry about not maximising the size of your investment – by making a smaller commitment you are also reducing the risk associated to it.
In summary, if you are looking to buy a property, avoid common first-time buyer mistakes by hiring independent advice. Remember, this might well be one of the largest single investments you make in your lifetime, so you want to get it right.