Question Mark: Buyer's market blossoms

With winter drawing to a close vendors are about to come out of hibernation, creating opportunities for the canny investor in the last part of 2006 before the market begins to move in 2007. Currently demand from buyers is patchy and any dramatic increase is supply will create the perfect environment for investors.

The most common question I get is: when is the right time to buy? Trying to pick the top and the bottom of the property market is nearly impossible, but understanding how supply and demand affect the market can be vital to picking the right weekend to buy.

Property, like any market, works on competition. If an asset is in limited supply and strong demand, the value will increase; if supply is plentiful and demand is limited its value will decrease.

The spring market will see a dramatic increase in supply. James Redfern from Marshall White Real Estate in the inner-eastern suburbs of Melbourne, says listings jump as much as 50% from the winter to spring markets. Paul McGrath from McGrath’s Real Estate in Adelaide agrees, indicating the number of listings increase by about 60% as winter gives way to spring.

The interesting point is that although the number of listings increases sharply, the number of buyer inquiries does not. Redfern says buyer inquiry numbers increasing by 10–20%; McGrath says numbers in Adelaide lift by about 20%.

Spring is a great time to buy property because the supply and demand curves begin to work in the investor’s favour, especially so this season. It is a buyer’s market, not a seller’s. It is the time when we see more opportunity in the marketplace and we are less likely to see heated competition.

Council valuations

Following your advice on crystallising CGT on moving into an investment property, do you believe a council rates valuation notice would be sufficient to identify the value of a property at that time?

The tax office does not allow the use of council rates valuations for CGT purposes.

Council valuations are not always 100% accurate as they seldom take into account differences in architectural styles between properties and demand for local facilities such as schools, shops and parklands, which can all affect the true value of your property.

You will need to contact a registered valuer to assess the property and provide a certified valuation. If you feel the council valuation is accurate, you can always pass it on to the valuer as background information to use in determining the certified valuation.

Keeping the mortgage open

I purchased my home 25 years ago and am finally about to pay it off. I only have $7000 left to pay, and no time limit on when I pay it.

I’m really keen on the idea of holding that title in my hot little hands, but my bank manager has suggested I don’t pay the remaining $7000. She says I could keep the loan account open in case I want to access some of the equity down the track. What’s your opinion?

On one hand, I understand why you’d want to pay your mortgage off completely, after so many years of repayments. If you pay off the remaining amount, the bank would not have to hold the home as security and the title would be yours.

On the other hand, leaving a small part of your loan unpaid would give you the flexibility to access some of the equity you’ve built up over the years. If you have plans to invest in another asset, or you have a large looming expense, I suggest you keep a small amount owing on the loan which you can access via redraw or a line of credit.

In saying this, I suggest you make repayments for a while longer and reduce the loan down to a very small amount '” less than $500. This will minimise the amount of interest on the outstanding loan amount, whilst keeping your loan account open in the event that you need to access your equity.

Buying property with friends

Two years ago I started investing in residential property with three friends. We have already bought two properties and set ourselves the goal of buying two more per year for the next three years.

So far we have bought our properties in a company name, but we’ve been considering setting up a DIY super fund for future purchases to give us more purchasing power. What do you think of this idea?

First, it’s important that you and your friends are all on the same page in regards to your investment goals. You must all be clear on how long you intend to hold the properties, and what kind of exit strategy you will implement in the event that one or more of you ever want to sell.

Second, you and your accountant should take a close look at your current ownership structure. When buying in a company name, you will not receive the 50% CGT discount if you sell.

Buying property via a DIY super fund certainly provides considerable tax benefits, with only 15% tax on earnings.

You should, however, be aware that you can’t leverage against assets held in a super fund. Whereas you can borrow against the value of properties held outside super to purchase other wealth building assets, a super fund can only buy property with money already in the fund. This means it may take a long time to build the fund to a level that will make property acquisition viable.

Further, investing in super means you cannot access the money until you retire, so if you’re still some way from retirement your funds will be tied up for a long time.

It’s vital to get your ownership structure right before you buy any more property. You should consider ownership alternatives other than buying in a company name or DIY fund, such as buying in a trust or a personal name. Each one has their pros and cons, so please seek advice from your accountant about the best ownership structure for your particular situation.

The missing dishwasher

We recently bought a new home in Melbourne’s inner suburbs. It is not our first home; we paid $1.2 million and now have a hefty mortgage!

Maybe we were naïve but because we bought at the upper end of the market, we didn’t think there would be many problems. However, when we settled on the property, we found that the dishwasher had been removed. We presumed it came with the property but when we called the agent he gave us the brush-off. What can we do?

This really is a question relating to the broader issue of chattels. Chattels are personal property and there are two types. Real chattels, which include the building and fixtures, and personal chattels, which include clothes and furniture.

First, you need to determine whether the dishwasher is considered a fixture or a personal chattel. A fixture is something that is fixed permanently in place, such as a clothesline or a built-in spa. Where as a personal chattel is usually not fixed in place such pot plants or a fridge.

Unfortunately dishwashers are a grey area of the law. Most people presume that when they are built into the kitchen, dishwashers are a fixture. But now that it has been removed it will be very hard to get it back.

I suggest you look closely at the advertising material the agent put together when the property was sold. If a dishwasher is mentioned in the advertising, you can take the agent to task for misleading advertising. Strictly speaking, the removal of the dishwasher may not be the agent’s fault; he or she should be able to help you come up with a resolution.

If you don’t get any joy from the agent, I suggest you contact the Real Estate Institute of Victoria and ask for their advice on how to make things right.

Failing this, the reality is that although you may have a case to get the dishwasher returned through the courts: Unfortunately, the legal costs may well exceed the cost of the dishwasher. In this case, you may just have to chalk it up to experience, and purchase a new appliance yourself.

This is a good, albeit painful, lesson learnt. When buying property you should always specify in the contract of sale any items you believe will become yours on settlement.

Mark Armstrong is Director of Property Planning Australia www.propertyplanning.com.au, an integrated property advisory and mortgage sourcing service. He also writes for Australian Property Investor magazine www.apimagazine.com.au.

You can email any questions regarding property to Mark Armstrong right here, by clicking questionmark@eurekareport.com.au