Buying property will be one of the biggest financial decisions you will make. Yet, even experienced investors can get caught out by problems that aren't obvious at an inspection or auction. Some buyers get caught out because a property can look perfect at an inspection when it is put on show and beautifully styled but can soon turn into an expensive headache after settlement. The issue might be structural damage, termites, a problematic strata scheme, an overvalued purchase price, unexpected repairs, a financing problem or simply discovering that the property doesn't perform financially as expected.
The good news is that many of the most common problems can be prevented, or at least identified before it is too late. The key to prevention is due diligence. Before committing to a property, buyers should understand what they are buying, what could go wrong, and which professionals can help identify problems before they arise.
Some of the common issues you could be facing include:
1. Paying too much
This can be the most expensive mistake, but it is also one of the simplest. Paying more than the property is worth is a common trap when emotions come into play.
In a competitive market, buyers can become emotionally attached to a property. Auctions can intensify that emotion, particularly when other bidders are competing aggressively. The best protection is to establish an evidence-based price range before making an offer.
Look at comparable properties that have actually sold, rather than relying solely on the agent's price guide. Compare properties with similar land size, accommodation, condition, location and features.
Online resources such as CoreLogic, PropTrack and realestate.com.au can provide useful market information, but buyers should remember that automated estimates are not a substitute for professional valuation or independent research. A qualified buyer's agent can also provide an independent assessment of value, while a licensed valuer can provide a formal valuation where appropriate.
If the numbers don't stack up, walking away can be the best investment decision.
2. Expensive building problems
One of the most unpleasant surprises for a buyer is discovering significant building defects after purchase. Problems can include rising damp, structural movement, roof problems, drainage issues, water penetration, defective bathrooms, electrical problems or extensive deterioration that wasn't obvious during a standard inspection.
A professional building inspection before purchase can identify many of these issues. A pest inspection is equally important, particularly in areas where termites are prevalent.
The NSW Government specifically recommends obtaining building and pest inspections when considering a property purchase. Importantly, a standard building inspection isn't necessarily an exhaustive investigation of every possible problem. Buyers should understand what the inspection covers and ask questions if they have concerns.
If the inspector identifies a significant issue, don't automatically assume the property is unbuyable. Obtain a specialist assessment and a realistic repair quote. A $20,000 problem might justify negotiating the purchase price, but a $200,000 problem might justify walking away.
3. Buying into a problematic strata scheme
Relevant for apartment, townhouse and villa buyers, the property itself is only part of the investment, you are also buying into a strata scheme. When you are part of a strata scheme, the financial health and management of the building can have a significant impact on your investment. A professional strata search can reveal important information about the scheme, including its finances, insurance, building defects, planned works, safety issues, legal matters and disputes. You should always obtain and understand the strata reports before buying a strata property.
What to look for:
- Large or anticipated special levies.
- Significant building defects
- Poor sinking or capital works funds
- Major upcoming repairs
- Insurance issues
- Legal disputes
- Repeated water penetration
- Cladding or fire-safety issues
- Disagreements between owners
- Poorly managed strata finances
Be cautious, a low strata levy isn't necessarily a positive. It can sometimes mean the owners corporation isn't adequately budgeting for future maintenance and if the building needs a new roof, lift, façade or waterproofing, then if the capital works fund doesn't have sufficient money, the unit owners will be asked to contribute.
4. Finding out about restrictions after buying
You may have grand plans for a property that aren't legally or practically possible.
For example, you might want to build a granny flat, subdivide the land, add another bedroom, renovate, knock down and rebuild, or construct a duplex but you should never assume that because something appears physically possible that it is legally permitted. Before purchasing with a particular strategy in mind, investigate zoning, planning controls, heritage restrictions, flood or bushfire constraints, easements, minimum lot sizes, building restrictions and relevant local council requirements.
If you have plans to change the property, it is smart to speak to the relevant council or planning professional and, where necessary, obtain written advice. This is particularly important for investors purchasing a property because of its perceived development potential.
5. Getting the finance wrong
You might have pre-approval and assume the finance is guaranteed, but this isn't always the case. When you purchase a property, the lender still needs to assess the property, valuation and approve the final loan application. A valuation can come in below the purchase price, creating a funding gap. For example, if you agree to pay $900,000 but the bank values the property at $850,000, you may need to contribute substantially more cash than originally anticipated. Before signing a contract, buyers should understand exactly how much cash they need for the deposit, stamp duty, legal fees and other acquisition costs.
It is a smart idea to also “stress-test” your finances to see how you will be impacted if interest rates rise, rental income is lower than expected, the property is vacant for a few weeks, if an unexpected repair arises? A good mortgage broker or financial adviser can help model different scenarios.
6. The property doesn't rent for what you expected
Investors sometimes make decisions based on an agent's rental estimate or advertised rental yield and buy a property that meets their target rental yield or returns. But an estimated rental figure isn't the guaranteed rental amount you will receive.
A property that was expected to rent for $800 per week might achieve only $720. That seemingly small difference represents more than $4,000 a year. Before purchasing an investment, research comparable rental properties and speak to several local property managers, if possible, you should look at actual leased properties rather than simply advertised rents.
To avoid periods of long rental vacancy, understanding the location’s vacancy rates and amount of competing rental stock is paramount.
A high rental yield can be attractive, but investors should never assess a property on yield alone. Rental demand, vacancy, property quality, location and long-term capital-growth prospects all matter.
7. Not considering all costs involved.
A property's mortgage isn't its only expense. Owning property also has a number of other expenses to budget for:
- Council rates
- Water charges
- Insurance
- Property management
- Repairs and maintenance
- Strata levies
- Land tax, where applicable
- Vacancy periods
- Accounting costs
- Compliance requirements
- Major capital expenditure
Seeking the advice of an accountant familiar with property investment can help investors understand the likely tax treatment and costs associated with a property.
8. The contract contains a problem
A property contract is a legally binding document. Buyers should never assume that the standard contract is identical in every state or territory and they should never assume that all the clauses in a contract are “standard”. Sometimes vendors might want to include some special conditions attached to the sale of the property or have omitted some clauses that protect the buyer.
Before signing, always have the contract reviewed by an appropriately qualified property solicitor or conveyancer. They can identify issues relating to the title, special conditions, settlement terms, inclusions, encumbrances and other contractual matters.
The rules surrounding cooling-off periods, auctions, deposits and contract termination also vary between Australian jurisdictions. This is one area where trying to save a few hundred dollars by skipping professional advice can potentially cost tens or even hundreds of thousands.
If you are ever caught in the situation where you have found an error in the contract, even if after signing, contact your solicitor immediately and they can request a change to contract and they can communicate with the vendors solicitors to come to a mutual agreement.
9. Something goes wrong after settlement
Sometimes the problem isn't discovered until after the purchase. If you discover a defect, contractual issue or dispute, the first step should generally be to document the problem and speak to your solicitor or conveyancer. It is wise to keep photographs, inspection reports, emails, invoices and correspondence. Try to get everything in writing as verbal conversations are difficult to prove or support your case.
If the issue relates to a real estate agent or property professional, the relevant state or territory fair trading or consumer protection authority may be able to assist. In NSW, for example, NSW Fair Trading provides a complaint service for disputes involving property professionals, including real estate agents and conveyancers.
If the issue concerns building work, the relevant state building regulator may also be able to assist.
10. Serious strata defects emerge
If you buy into a strata scheme and subsequently discover serious common-property defects, don't assume you are on your own.The owner’s corporation generally has responsibility for maintaining common property. NSW Government guidance states that this includes repairing common-property defects.
Owners should raise the issue with the strata manager, strata committee or owner’s corporation and follow the appropriate dispute-resolution process.
In NSW, Fair Trading offers free mediation for certain strata disputes, with the NSW Civil and Administrative Tribunal available as a last resort. Other states and territories have their own regulators and tribunal systems.
11. You can no longer afford the mortgage
Sometimes the property itself isn't the problem. There are cost of living pressures, interest rate rises, you might lose your job, businesses can fail, relationships can break down, other major expenses could easily arise. If you start struggling to meet mortgage repayments, don't ignore the problem. The earlier you get on top of the issue and communicate with your lender, the better you will be in the long run. Your lender will have a hardship team that you can discuss your situation to.
The Australian Financial Complaints Authority (AFCA) specifically recommends contacting the lender as soon as financial difficulty arises. Depending on the circumstances, lenders may be able to offer arrangements such as repayment reductions, temporary assistance or other hardship options. A financial counsellor can also help assess the situation. The National Debt Helpline is another free service for Australians experiencing financial difficulty. Never wait until repayments are significantly overdue before asking for help.
Who should you call when something goes wrong?
The right person depends on the problem.
Contract or legal problem: property solicitor or conveyancer.
Building defect: qualified building inspector, relevant specialist tradesperson, solicitor, and state building regulator where appropriate.
Pest problem: licensed pest inspector.
Strata problem: strata manager, owners corporation, strata committee, state fair trading authority or relevant tribunal.
Real estate agent dispute: state or territory consumer protection/fair trading authority.
Finance or mortgage problem: lender's hardship team, mortgage broker, financial counsellor or AFCA.
Tax issue: registered tax agent or accountant.
Planning or development issue: local council, town planner or planning consultant.
Insurance problem: insurer first, then the relevant internal dispute process and AFCA where the insurer is an AFCA member and the complaint falls within its jurisdiction. AFCA can consider complaints about insurance as well as banking and credit products.
Prevention is cheaper than fixing a mistake.
The biggest lesson for property investors is that due diligence isn't an inconvenience standing between you and a purchase, it is a necessary step when buying property.
Spending money on a building inspection, pest inspection, strata report, legal review, valuation, planning advice or professional financial advice may feel unnecessary when everything appears to be going smoothly, but these costs are tiny compared with the potential consequences of buying the wrong property.
Don't hide from the problem and don't wait until the situation becomes urgent. Document what has happened, contact the appropriate professional and understand your options. But if something does go wrong, act quickly.
