beginners-guide

How to avoid a property lemon

By Georgia Brown
How to avoid a property lemon

Buying a problem property could land you in serious financial strife and bring your investment plans to a halt. So what can you do to avoid investing in a property lemon?

What makes a property a ‘lemon’?
There are many characteristics that can make a property a potential lemon, but two of the biggest factors are its condition and location. Both of these aspects will affect the success of an investment property enormously – but there are ways to ensure you know what to look out for during your property search.

Property faults
When it comes to a property’s faults, there are plenty that can be easily repaired. Also known as non-material faults, these do not make a property a lemon. Material faults, on the other hand, definitely have the potential to turn a house into a problem property.

A building and pest inspection provides you with an inspection report detailing the condition of the property. The report covers everything from minor cosmetic damage to major structural faults.

A building and pest inspection report informs the prospective buyer of all things great and small that are wrong with the property. It is the responsibility of the prospective buyer to determine the difference between deal-breakers and easy fixes.

Material faults
Material faults in a building and pest inspection report are a cause for concern, and may be a big warning sign of a property lemon. Some examples of material faults are:

  • Termites
  • Structural faults
  • Electrical faults
  • Rising damp
  • Major water penetration

Non-material faults
Non-material faults in a building and pest inspection report are faults that are easily repairable. Including:

  • Broken tiles
  • Leaky taps
  • Loose doorknobs
  • Hairline cracks
  • Jammed windows

The importance of building and pest inspections in avoiding a lemon
It may seem like overkill to conduct a building and pest inspection on a property that you are yet to make an offer on, but it should be seen as non-negotiable if you want to avoid buying a problem property.

Buying property is generally the biggest financial decision a person will make in their lifetime. It is for this reason that it is essential to be sure the property really is what it appears to be. A building and pest inspection report is a valuable tool for property investors, as it can help to analyse all aspects of the property and avoid landing a lemon.

When should I conduct a building and pest inspection?
Wherever possible, an independent building and pest inspection should be conducted prior to entering a contract. However, in some instances this may not be possible. If the property is in high demand, for example, and the vendor is looking for a fast sale, timing may restrict your opportunity to conduct an inspection. In cases such as this one, it is essential to protect yourself by having the building and pest inspection listed as a condition of the contract. A solicitor can check the wording of the clause to ensure you are covered.

If the property is going to auction, it is essential to get a building and pest inspection report prior to auction day, as buyers who are successful under the hammer are making a non-negotiable commitment to purchase the property. If you neglect to conduct an inspection before auction, you could find yourself in a difficult position, as the property faults could be substantial.

A property vendor is under no legal obligation to disclose building faults. That means that if you do not conduct an independent building and pest inspection prior to success at auction, you are automatically accepting any undisclosed building faults.

Location
‘Location, location, location’ – it has long been thought that location is everything when it comes to buying property.

In the short term, a property’s location will determine your prospective tenant pool. If it is in a blue-chip suburb and close to lifestyle amenities, it will have a large potential tenant pool and the area is unlikely to struggle to attract tenants. If it has limited local facilities, you may face the challenge of having a smaller tenant pool, and the property will have the potential to become a problem property. There are pros and cons for all locations, but choosing the right one begins with coming to terms with your own personal property investment goals.

In the long term, property location is important for increases in property values. Investors should look at the potential for capital growth in the suburb.

Looking at property data to avoid a lemon
Knowing how to interpret property data, which statistics to monitor and what to ignore are keys to making a well-informed property investment purchase.

You might have heard property investment described as a ‘numbers game’. That’s largely true. Just like any investment, a property’s success will depend on how the numbers stack up.

Getting out of the traditional owner-buyer mindset of judging a property as a home, and instead adopting a performance-based method of assessment, is critical to your success as a property investor. But what type of property data do you need to analyse and where can you access it?

Start with median sale prices, vacancy rates and gross rental yields. Once you can confirm that your desired property succeeds in these areas, dig deeper and look into the area’s demographics and population growth.

Property data is useful but it does have its limitations, so make sure you know what to look out for, how to interpret it, and what it will mean for your portfolio.

Assessing your personal property investment goals
It is essential to look for a property that fits your individual investment goals to ensure the purchase will have long-term success in your portfolio. In order to find the right property, you need to have a clear brief in place. Consider asking yourself some questions about location preferences to narrow down the search – such as the following:

  • Do I want to invest in a city or regional area?
  • How important is it that the suburb in which I invest has growth drivers such as schools, shops, restaurants, cafes and parks?
  • Would I feel more comfortable investing in a suburb I am familiar with or would I think more objectively if I purchase somewhere new to me?
  • Is it essential for my investment to be positively geared?
  • What is my desired rental yield range?

Answering these questions will help you to determine the area in which you will be able to get what you want and stay within your budget.

If you neglect to analyse your own personal circumstances, you could purchase a property that may be perfect for someone else, but that becomes your property disaster.

Beware property spruikers
Promoting – or ‘spruiking’ – the benefit of a property investment strategy, scheme or development isn’t overly problematic. The property industry, like so many others, is heavily sales-based, and while every property promoter wants to make a profit from their activities, the majority do so in a transparent manner.

Unfortunately, the legality of some schemes is not always clear cut, and it’s easy to be duped by bold claims without assessing how they apply to your personal circumstances. Investors need to be methodical in their analysis of spruiker claims to avoid being ripped off.

Some tell-tale signs of property spruikers are highly publicised investment seminars and training materials – usually targeting new property investors, promising quick gains and easy forms of wealth creation. Property spruikers rely on bold claims and hype around the power of the property market.

Knowing how to spot a spruiker, assess their marketing material and do your own due diligence on their proposal will help you avoid a lemon property purchase.

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