Surviving a property switch

PORTFOLIO POINT: Selling out of one property and buying another is always a stressful time. Here are some tips.

Switching property, whether an investment or the family home, can require the timing of a choreographer – especially when investors or home buyers try to arrange it so that one property is sold and another bought at the same time, so that settlement of both transactions is done on the same day.

By imposing this sort of order on what is already one of life’s most stressful experiences, it’s no wonder that many people have difficulty making it all come together.

Adopting this now conventional method of switching – the closely coordinated buying and selling of property – means the need to accommodate a tight timeframe can also reduce a party’s flexibility in negotiations, which can have a significant cost.

For instance, where an individual has first bought a new property, the settlement period agreed for this new property can effectively dictate the timetable for the sale of their first property. So if they buy with, say, a 60-day settlement but then find there are delays finding a buyer for the first property, they may have to insist on a 45 or 30-day settlement deadline when they market the property to meet the purchased property’s settlement timetable.

Vendor inflexibility around negotiating a settlement date can put many potential suitors off, reducing the pool of buyers. It can also alert buyers to the reality that a vendor needs a sale which, naturally, they will use to their advantage. In a worst-case scenario, the looming deadline may precipitate a sale at a significant discount to the market value.

Stuart Wemyss, director of ProSolutions Private Clients, says one way to reduce this risk is to first sell long and then buy short. “You sell your existing property with a long settlement period – say 90 days,” he says. “You then purchase your new property on a shorter settlement period – say 30 days.”

This approach usually allows owners access to their new property before they have to give up the old one, which is especially convenient for home buyers. But there is a cost: bridging finance is required for the short period when both properties are held. The interest charged is generally more expensive than standard rates, but with the holding timeframe a matter of weeks, the cost is unlikely to be too onerous.

However, as bridging finance is usually only applicable if the applicant has signed a sales contract on their current asset, this method still involves a substantial degree of synchronisation around the buying and selling of property. Further, for home owners, there remains the pressure to buy their replacement home reasonably quickly or risk being homeless when the clock times out on the sold property’s settlement.

The ideal scenario is where the link between the buying and selling of assets is broken. For investors, this can often be straightforward: they sell an existing investment property and, once the purchase has settled, they re-enter the market to look for something new. That option generally isn’t attractive to home owners, unless they are willing to rent for a while or can cope with staying with relatives or friends.

A more practical route is to buy first and then sell later, and to establish a new loan that covers the cost of the new property and the balance owed on the first. These loans are available from banks at rates comparable to standard rates and, if there is sufficient equity built up in the first property, mortgage insurance can be avoided.

Generally, this allows a borrower to hold two properties for up to six months. On the sale of the first property, the portion owed relating to that property is paid down to the new lender, effectively leaving the borrower with a conventional loan secured against just their new property.

To obtain the optimal outcome when buying and selling property, one wants to negotiate from a position of strength. So there is merit for individuals looking to switch property to research these financing options at the start of the campaign. The costs of asynchronous buying and selling over the conventional method can often be a few thousand dollars in interest charges, whereas as the potential upside can be tens of thousands of dollars due to the stronger negotiating hand it deals the party that chooses this approach.

It won’t be for everyone, but gaining a measured understanding of the finance options at the start of the switching process is more likely to give you peace of mind than a scramble to understand bridging finance and secure a lender at the pointy end of the process when you’re under time pressure to sell your home or investment property. I recommend you speak to your bank, financial adviser or mortgage broker before setting the wheels in motion.

Putting aside borrowing considerations, the nature of property you are selling and what you wish to buy can help determine the order in which you transact the property switch. Essentially, you want to move first on the most difficult transaction, as it is likely to take the longest to effect. So if you’re looking for something that is relatively rare or unusual – say a four-bedroom house in an inner suburb dominated by cottages – whilst selling something where demand is always good – a two-bedroom cottage in the same suburb – then it is probably wise to try and secure the four-bedroom house first, as you know you’ll probably sell the two-bedroom house reasonably quickly. Conversely, if your circumstances are the mirror image of this example, focus on selling the four-bedroom house before buying the cottage.

By studying the market dynamics for the respective properties and planning the switching campaign accordingly, you’ll likely save yourself from a lot of stress, enhance your negotiating position and reduce your costs.

Property Q&A

This week:

Considering Karratha.
Should my son sell his house?
Will the NBN lift property prices?
Which Deco apartment?

Karratha investment

My partner and I are looking at buying an investment property in Karratha, WA, and have seen some new house-and-land packages that we assume are aimed at providing accommodation for mining company workers. The houses have four bedrooms, four bathrooms and cost about $760,000; they are estimating a 10% rental yield is achievable, which would seem to provide a healthy positive return in excess of our expected interest cost. What do you see as the long-term capital potential of such an investment? Our understanding is that the number of workers in Karratha will only increase, but we are unsure of how many new dwellings might be in the pipeline to satisfy demand. Are there any other factors we haven’t considered?

Karratha, in the northwest of WA, is booming off the back of the mining and natural gas developments in the region. It is a small town of about 15,000 people, some of its suburbs have a median value above $1 million, and its annual growth has been close to 20% over the past decade.

We are told by economic forecasters that the mining boom is expected to last many years which, if true, bodes well for property prospects in Karratha. However, mining can be very fickle, so it is a risky investing in an asset entirely predicated on an endless mining boom and a continued lack of housing. What would happen if conditions change and the boom halts? Or if there is steady increase in housing? It’s not as if there is a lack of land in this area. It is likely that both rents and prices would collapse.

Also bear in mind that Karratha has a harsh environment and is a costly place to buy services you’ll need to maintain the property. Property investment in Karratha remains a speculative play rather than a blue-chip investment.

Should he sell?

My son has built a home at a cost of $585,000 (with some financial help from us, which we are happy to write off). The outstanding debt is $525,000 and the property is valued at $615,000. In the current climate, my son feels he would be better to sell the house for a possible $650,000. After paying estate agent commission of around $20,000 and discharging his mortgage he would have cash in hand of $105,000. He’d like to pair this with his cash savings of $40,000 to build a home to the value of $550,000 (20% deposit of $110,000 and $35,000 additional equity) as owner occupier then build/buy an investment property. What are your thoughts?

I am missing a critical set of information here to provide a definitive view. Essentially, I don’t know the relative capital growth performance of the current dwelling and the prospects for any future intended dwelling.

Generally, self-built houses tend to be built on land in outer suburbs where the prospects for sustained capital growth is low. As such, I suspect your son would be trading one poorly performing asset for another. Further, substantial sums of money could be burnt in transaction costs. Moreover, your son may be somewhat optimistic to expect to receive $650,000 for his house when the valuer says it is only worth $615,000 in current conditions.

More fundamentally, your son perhaps needs to be careful about not being too aggressive about mixing his lifestyle needs and his investment needs. The best route may be for him to hold on to the current property and enjoy it as a home while paying down debt quickly, and then use the equity in the house to invest in an established property in a good inner suburb with a track record of capital growth.

NBN and property

I notice that parts of Brunswick in Melbourne are among the first to receive the National Broadband Network. Is this a positive for the buying an investment property in the suburb?

The signing of contracts between the Commonwealth and Telstra and Optus last week appears to signal that the National Broadband Network is definitely going to be built. Brunswick is one of several areas that will trial the technology ahead of the main roll-out, with 2600 properties in a square bounded by Sydney Road, Glenlyon Road, Stewart Street and Lygon Street given the opportunity to experience super-fast broadband.

I could envisage a scenario where the prospect of accessing faster broadband before elsewhere might be a drawcard for some home-based workers and IT early adopters, and this demand could push up rents and prices in the trial area.

However, I expect this would be a modest and short-term phenomenon at best, given that the rest of us – or at least 93% of the population – will be linked up in the next few years, so Brunswick’s NBN exclusivity and associated NBN premium will dissipate quickly.

But for now there are still plenty more persistent qualities to Brunswick that will make it attractive to investors and home buyers alike.

Deco dilemma

I’m looking for an investment property and have discovered two apartments that have just come up for sale at the same time in a block in Darlinghurst, Sydney. The block itself is great: it’s Art Deco with only 12 units, it is on a quiet street, with dedicated off-street parking. One unit is on the ground floor, and has a small, private courtyard. The other is on the top floor. They are listed for comparable prices. I’m not sure which one I should buy.

It sounds a difficult call, with each unit having benefits and drawbacks. The courtyard is an obvious plus for the ground-floor apartment, and the ease of access will be highly rated by many prospective renters, especially families with small children and older people. On the other hand, ground floor apartments tend to be viewed as a higher security risk and can be quite dark.

In contrast, a top-floor apartment is likely to be lighter, more private, quieter and may have views. But access can be more problematic. It is good that both have car parking and it is likely that either could work as an investment. But based on the limited information I have at this point I would probably prefer the top floor, but remember this is purely subjective.

Monique Sasson Wakelin is managing director of Wakelin Property Advisory, an independent firm specialising in acquiring residential property for investors.

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.

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