Online: auctions for dummies

Welcome to the brave, new online world where legislation lags and instant gratification rules. Virtually everyone knows that you can run your whole life from your computer – you can clothe and feed yourself, pay bills and, yes, find and transact your next investment property.

A quick Google search reveals that both eBay, Ptyauctions.com.au and 2bid2.com.au offer property investors the convenience of online property auctions. Put that together with a growing number of real estate advertising sites like realestate.com.au and domain.com.au and it seems our ergonomic chairs and PCs now provide fuss-fee instantaneous access to property prosperity with few, if any, geographic or political borders.

This notion is certainly reinforced by the REA Group, which operates a global network of real estate websites including realestate.com.au, which is controlled by News Ltd.

Shaun Di Gregorio, REA’s general manager Asia Pacific, says the company is very keen to draw investors’ attention to the opportunity and convenience of being able to view and buy property anywhere in the world. “We want to make people aware that they are no longer bound by newspapers or glossy catalogues.” And, he says, buyers are responding: “People are voting with their fingers.”

Short-circuiting the first stage of pavement pounding is fine, as far as I’m concerned. There’s nothing wrong with whittling a long list of 20 properties down to five or 10 via the web. However, the perils facing investors wanting to buy local, interstate or overseas property sight-unseen in an online auction environment are worth taking seriously.

For a start, many property websites are nothing more than an advertising tool designed to show property off to best advantage. The photos and descriptions will not necessarily tell you the “fabulous investment” is opposite a railway line or adjacent to commercial activity, both of which are likely to have a detrimental impact on long-term capital growth and income potential. Even if you get a satellite image from Google Earth to get an idea of a property’s physical context, you still can’t be sure about its structural soundness or level of renovation.

There’s no substitute for physically inspecting your short listed properties and undertaking the requisite due diligence, including contract checks and building inspections. And woe betide those who think it’s unnecessary, or down right old-fashioned to do so.

Enzo Raimondo, chief executive of the Real Estate Institute of Victoria, says: “There are currently just over 1000 homes for sale on the US eBay and 100 for sale on the Australian eBay. He anticipates online auctions “will become more popular in the future.” The REIV, consumer affairs at both the state and federal levels and l share a growing concern for consumers who choose to buy and sell property online, simply because the state by state legislation covering the buying and selling of property urgently needs updating to include consumer protection for the online property, environment.

Although 2bid2.com.au and Ptyauctions.com.au have come up with a comprehensive set of terms and conditions and agents that appear to specialise in the online selling environment, with legislation lagging behind technology there are practical and legal loopholes that might make those terms and conditions difficult to enforce, even though bidders have to register and use confidential identities, access codes or passwords. The potential for dummy bidding and price-fixing is enormous, confidential password or not.

Unlike an onsite auction, you never come face-to-face with your competition. And, no, webcams won’t overcome this because they would offer a restricted viewing field. In addition to the issues of dummy bidding, price fixing, possible bidder identity fraud and being unable to see who else is bidding, l am concerned about pricing in a more general sense. If you’ve never seen the property, presumably because you sourced and selected it via an advertising website, you really can’t ascertain its correct value. How do you draw a direct comparison with other similar, recently sold properties to determine correct market value without seeing the asset first-hand? You can’t. And direct comparison is the most reliable method for establishing the correct market value for residential property.

Greville Pabst, chief executive and director of the WBP Property Group, believes the advent of online auctions will increase the competition in the industry and therefore drive down commission levels, but he also emphasises issues of disclosure and transparency. “How do you regulate cyberspace given that every state government needs to enact its own legislation and, odds-on, the rules will vary from state to state and country to country? In my opinion it’s very dangerous for investors not to have access to a full complement of disclosure statements; how would agents and sellers provide adequate disclosure in the online environment?”

Further, the potential for unscrupulous marketers to re-enter the property investment fray is wide open. Online sales and auctions mean there is no need to entice unsuspecting and vulnerable buyers with bus tours or free flights. “It can all be done online,” Pabst says, “and at a very low cost to the marketer.”

The risks of buying and bidding online in Australia are mild compared to doing so overseas, especially in an emerging or largely unregulated environment such as parts of Eastern Europe and the United Arab Emirates. Andrew Lord, a partner of law firm Lovegrove & Lord, says: “In Australia we have excellent consumer protection and high disclosure standards. But if you’re buying overseas, you’d need to check whether there is adequate protection. You’d need to understand your rights in case of misrepresentation, misleading information or misdescription of the assets you are buying. You’d need to be very clear on how deposits are held and regulated in that foreign jurisdiction.”

What, at face value seems a wonderfully exciting and unlimited opportunity is in my view, fraught with pitfalls. Until cyberspace becomes appropriately regulated, my advice is simple: Don’t ever bid blind. Don’t buy sight-unseen.

Property Q& A

This week's questions cover:

• Urgent purchases.
• Borrowing for property through super funds.
• Reviewing stamp duty.

Snap purchase

l live in the country and want to buy a two-bedroom investment apartment in riverside Brisbane this week, for $400,000–500,000. I would like an opinion.

First, it sounds to me as though the urgency of your purchase time frame might be motivated by wanting to settle before June 30 and that, at least in part, your purchase is tax-driven! If this is the case I would suggest you take long, deep breath and reassess the situation. Tax breaks are great, but they should never be the driving force behind investing. You are far better advised to get your asset selection right and wait for the right opportunity. Getting the choice of asset wrong will cost you far more in lost capital growth than you will ever save in tax.

Borrowing within super

We are aware super funds could soon be able to borrow to buy investment properties. We have bought an off-the-plan property – one bedroom plus study with a car park in Sydney's North Shore – that will be completed and due for settlement about the end of the year. We were originally going to buy the property outright with cash from our super fund but our ears pricked up when we heard about impending opportunity to borrow within the super fund structure. Could you elaborate on this?

Depending on when you settle the purchase, if you would like to borrow part of the purchase price you’ll need to wait for a few loan products and regulatory guidelines to come on stream. It’s highly likely that loan to value ratios for super fund borrowings will be lower than those for assets held by individuals, but that’s actually a very important protection mechanism and in keeping with the purpose of superannuation. Given the scant amount of information on these products available at this time, I suggest you speak with your accountant about forward planning. If you’re scheduled to settle before these loan products become available it would be worth asking how and if the equity you have in this asset could be used to help finance a further purchase.

A pox on stamp duty

I have been a property investor in the past, renting out to tenants. However, at present I am reluctant to re-enter this market because of the Government “theft” or, as they call it, stamp duty. At one time I believe the amount was reasonable, but now, having to hand over $20,000–30,000 for an average property is too prohibitive and that’s why I am sticking to shares, because the costs involved are fair enough. If more people could pay a fair rate of stamp duty, I think maybe more housing would be available for rent. What do you think?

There’s no question that stamp duty rates across the nation are ridiculously high and governments rely far too heavily on property-generated tax revenue, which is part of the reason governments are so reluctant to make major adjustments! I completely understand your bias towards shares on account of the impost, but there is one effective way to overcome the expense and it all comes down to asset selection. To mitigate the cost of stamp duty, a property must have a strong capital growth bias. Provided your asset achieves an average of 7–10% compounding growth per annum over a minimum hold of five to seven years you’ll well and truly make up for the tax. Also, don’t forget that property is a less volatile asset class as well as a basic commodity that supports perpetual underlying demand.

Note: We make every attempt to provide answers to readers’ questions, however answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Monique Wakelin is co-founder of Wakelin Property Advisory, a Melbourne-based independent property acquisition and advisory company, and co-author of Streets Ahead: How to Make Money from Residential Property.

Do you have a property question for Monique Wakelin? Send an email to monique@eurekareport.com.au