Everyone has a piece of advice about what to do when you’re buying a home.
From how to engage with real estate agents to the types of properties to avoid – and those to zero in on – the process of realizing the ‘Great Australian Dream’ is steeped in a kind of modern-day mythology.
“Humans are irrational creatures,” said Ben Kingsley, a property investment adviser and managing director of Empower Wealth.
“We buy on emotion, and we rationalize with logic later. That is so true in the property space that you can get people who overpay.”
Real estate isn’t a perfect science, but rather a social science more than anything else, Mr. Kingsley said, and that’s perhaps how so many misconceptions and myths have circulated.
From buying on a busy street to steering clear of auctions, industry experts give their verdict on some of the common property adages.
Buy the worst house on the best street
The tried and tested real estate saying of “location, location, location” holds a lot of weight, property analyst and valuer Gavin Hegney said.
“However, sometimes it’s better to buy the average house in a location that doesn’t need lots of work,” Mr Hegney added as a caveat.
“If you were to buy the worst house in the best street today, it would probably cost you more to get it up to the average of the street than the extra price you would pay for an average house.”
Buying the worst house on the best street sounds smart… but is it always? Picture: Getty
The concept of ‘worst house, best street’ is the notion of a land-to-asset ratio, Mr Kingsley said.
“Now, the idea here is really simple and this is true, this is not a myth, the land-to-asset ratio, you want to have a greater portion of the value in the land than in the improvements on the land,” he said.
“Technically it’s the land that appreciates over time. It’s not the dwelling that appreciates over time.”
Angus Raine, the executive chairman of Raine & Horne Property Group, said in the midst of the current construction labor shortage and building materials supply chain challenges, it would be difficult and costly to complete a renovation over the next few years.
“For a long-term play, it’s definitely a good ploy because you are the last ugly duckling,” Mr Raine said.
Never buy on a busy road
Perception wise, there are some roads you would never buy on, Mr Kingsley said, but a blanket ban on any busy street isn’t wise.
“And we are talking about large major arterials, with large vehicle movements,” he said.
“Buying on less busier, but dual lane roads… the evidence is mixed when it comes to whether that’s going to impact future capital growth.
“The reality here is if one or two streets behind that busier road starts to get too expensive than the next buyers will ultimately justify living on a busy road, and will soundproof their homes.”
Buying on a busy road doesn’t need to be a deal-breaker. Picture: Getty
LJ Hooker Schofields director Sanjeev Kumar said it came down to being in the right location.
“The road being busy doesn’t matter as much if the home is in a really great spot,” Mr Kumar said.
“I think it’s more if a home doesn’t have traffic noise inside but can still be close to a busy road, that can be good for investment.”
If you buy on a busy road in a buyer’s market and sell on a busy road in a seller’s market, you could also do well, Mr Hegney said.
“Because busy roads get dragged up by the best properties in the area,” he said.
You make your money when you buy
Money is not made until you sell, Mr Hegney said.
According to Mr Hegney, many eager buyers aspire to make money on property within a short window of one to two years.
“The minimum timeframe that you should really be setting your sights on is 10 years,” he said.
“People often make decisions on their situations in the past and today, not decisions of the future. Buyer and seller decisions should be based on future intentions, not past experience.”
Buy below the market value
Mr Kingsley said often you hear people say, ‘I got a great deal, I bought it under market value.’
“Well, technically the market value is what a willing buyer is prepared to pay, and a willing seller is willing to accept,” he said.
“Now, in a lot of instances the seller could have a property that’s been on the market for a very, very long time, and they might be a forced seller, and so the buyer might be talking about buying under market value in that regard .”
In some cases, there is no such thing as ‘buying under market value’. Picture: Getty
But the truth of the matter is that buying where there are bargains to be found might not be the smartest strategy.
“The truth is, at that moment in time, the property was judged at that value, which is different to the concept of buying under replacement value,” Mr. Kingsley said.
“That’s when you really are getting good value. In other words, you could not replace the dwelling or improvements on the land for the price that you bought it for. You are better off buying where demand is stronger than supply because that is a higher predictor of short-term capital growth.”
Buying at an auction is not a good idea
This is simply not true, according to both Mr. Raine and Mr. Kingsley.
“With all our state-based legislations, it makes the buying process so transparent. Buying at auction, whether it’s online or you turn up physically, you can see the room, you can feel the room, see who’s the under bidder, see who’s the top bidder,” Mr Raine said.
“It is a bit stressful for some people, but you can actually hire people to bid for you – buyer’s agents – if your heart can’t handle it.”
Some would-be buyers steer clear of auctions. Picture: Getty
Auctions were the most transparent means by which you could gauge the interest on the value of a property, Mr Kingsley said.
“When it’s a private sale or an expression of interest, you really don’t know what’s going on. You really don’t know what the other party is offering in terms of their best offer and you could offer $20,000 or $30,000 more than the under bidder,” he said.
A one-bedroom home is a dud investment
Mr Hegney disagreed with this common myth because about 55% of households in Australia were made up of one person or a couple without kids, he said.
“By dismissing one-bedroom homes, you are ruling out half of your market,” Mr Hegney said.
Small studio apartments under 30sqm were hard to secure finance for, Mr Raine said, and that’s problematic.
“If the banks don’t lend on it, that’s a red flag,” he said.
“But one-bedroom properties can be a good investment. But under that, studios traditionally, they’re the first to come unstuck when the market is in a (downturn).”
Disregarding all one-bedroom units could see buyers miss out. Picture: Getty
Sell first before you buy your next home
The belief that you should sell first and be a cash buyer to be in a better negotiating position was also incorrect, Mr Hegney said.
“Because if you sell first, now you are in a panic position that you are homeless unless you buy something. And so whatever advantage you have got in negotiating, you have lost in the ‘homeless fear’ factor.”
You can make big money adding a second storey
Unless you were capturing a view, making money on a second storey was not guaranteed, Mr Hegney said.
“Building a second story will cost you one and a half times what it does on the ground,” he said.
Generally speaking, adding a granny flat was probably a better investment than going up, Mr Kumar said.
“Sometimes if it’s different, or uncommon it can be harder to sell for the end customer. But each area can be different,” he said.