Whenever news of a new record price achieved for a property is published in the media, it is usually in a positive celebratory tone. While many high-profile purchases deserve a congratulatory blessing, there are some purchases that are regarded as more of a learning lesson than a smart move. However, very little media attention is paid to the overpaying mistakes property buyers make – and this causes such mistakes to be repeated again and again. However, many of these mistakes can be avoided.
Being in the property market business, I get first hand news on the market pulse before results are reported on the mainstream media. One area that is rarely featured in the property media is when buyers have overpaid. In fact, most people prefer to keep quiet about their overpaid purchases. To obtain some insight, let’s do some investigative work here. What happens when a buyer pays too much for their property?
Bank Says No
There are some property purchases which are fully paid by cash. For the majority of purchases, financing is usually obtained. If a buyer overpaid way above what the banks value the property at, the banks may reject the loan or only loan based on the bank’s valuation figure as oppose to the purchase price. The banks may not take the risk of financing a property which is over inflated in price, in which they could have problems liquidating the asset should the buyer default on payments. In 2010, a buyer paid over $1.3 million for a 4-bedroom house in Glen Waverley that was sitting on the market for a long time due to a greedy vendor. The bank valuation came back much lower at only $950,000. The buyer had to fork out the $350,000 in cash because the bank would only lend based on its valuation of $950,000.
Capital Loss: Off-the-plan and Overpriced
One of the risks of off-the-plan apartment purchases is that the valuation may come back less than the purchase price. This is a sentiment shared by many bank loan managers and property valuers in recent years in certain pockets of Melbourne with an oversupply situation. A prominent marketing feature of agents selling off-the-plan is the “saving” of stamp duty. Is the “saving” worth it when your property is not performing at all? Let’s see.
In recent years, the Forest Hill precinct in South Yarra has seen high-density apartments going upwards. Unfortunately, the prices are not heading that direction and in fact, bank valuations came back downward. An off-the-plan investment purchase was made in July 2010 for a 2-bedroom apartment in 50 Claremont Street, South Yarra for $679,000. At the 2012 settlement, the bank valuation came back at $630,000. Apart from having to scramble for extra money to pay off the property or cop a loss if it was to be resold, the buyer also had to endure low rents due to strong competition from the hundred other apartments nearby up for lease. Current comparable sales in 2014 are still showing the property has not achieved any capital growth. This happens more often than people think.
In Melbourne CBD, a buyer who bought a 2-bedroom apartment off-the-plan in the MY80 development at 80 A’Beckett Street paid $610,000 in 2013 and currently he is struggling to sell the unit due to an abundance of supply, forcing him to lower his resale price. The troubled Docklands precinct is another area not short of overpaid news. A Docklands apartment that was bought for $1.5 million off-the-plan was sold for $900,000 after 2 years. That is a massive $600,000 loss.
Buy Brand New, Sell at a Loss
Buying brand new properties can also run the risk of overpaying. One such example is the Hue Apartments in Richmond. The complex of 28 units of various configurations has an impressive list of design, architecture and development awards under its belt. But these accolades do not necessarily translate to profits for the buyers. Unit 5 with 2 bedrooms, 2 bathrooms and 2 car spaces was bought brand new in December 2009 for $810,000 but sold in March 2013 for $790,000. Unit 2 has 2 bedrooms plus study, 2 bathrooms and a car space. It was bought brand new for $925,000 in May 2009 but was sold for $817,000 in December 2012. Over a 3-year plus period, one recorded a loss of $20,000 and the other $108,000.
Buy High, Sell Low
Can you buy an established home cheaper than what the owner bought it for? It is possible, from an owner who has overpaid. A case study in 5 Rubens Place, Templestowe proves this point. In February 2008, the 4-bedroom property was sold for $940,000. The new owner lived in it for 3 years and decided to sell for a reserve of $1,120,000 but it was passed-in with a vendor bid at $1,050,000. A buyer then bought it for $1,075,000 in February 2011 while a slightly smaller 3-bedroom neighbour 6 Rubens Place was sold for $800,000 a month before. In October 2013, the property was for sale again and this time it was passed in to the highest bidder at $980,000 and subsequently sold for $1,040,000 after auction with the vendor losing $35,000 plus agent’s fees and marketing costs.
Overpaid Buyers Sued Estate Agent Successfully
In 2011, a high profile court case that was widely reported in major newspapers told the property buying story of the prominent Melbourne plastic surgeon Chris Moss and his wife Andrea John, who were deceived in overpaying for their Toorak apartments. The property was passed-in at $2.11 million to the couple. Post negotiation saw the couple offered $2.7 million which was accepted. However, the couple obtained evidence that the real estate agent had duped them into paying more because he had fabricated a fictitious post auction bid of $2.6 million. The couple eventually won the court case and the judge found that the property is only worth $2.5 million and awarded them the $200,000 difference.
The court case has highlighted that it is too easy for property buyers to be deceived into overpaying more than what the property is worth. Many similar cases are never reported in the media and if such incidents occur, relief is often out of the hands of everyday buyers who may not have the time and money to sue for damages. It is therefore crucial for property buyers to be very vigilant and careful in their property buying projects.