Property investors are often faced with difficulties when it comes time to purchase a dwelling – but there are some risk-mitigating actions that can be implemented to avoid this.
Blogger: Cate Bakos, director, Cate Bakos Property
There are many property nightmares out there, but I’ve captured four common ones in this two-part blog, along with some ideas for swift action which might just make a positive difference. The latter two nightmares relate to finance applications being rejected after a property is purchased, and dealing with a vacant investment property.
Nightmare #3: The third nightmare is when a buyer has purchased without a finance clause and the lender has either rejected their loan application, or the valuation has come in so low that they can’t complete the purchase.
Risk-mitigating action: This is not an uncommon nightmare and it is not necessarily the end of the world. My years in mortgage broking taught me that a rejected application is not always due to the applicant. It is often based on the lender’s policies for different types of applicants, their appetite for risk or their decision regarding their exposure to a certain asset type. Lenders rely on buyers having an adequate deposit, an ability to ‘service’ (or pay for) the loan repayments, a good credit character and a stable income. But every lender has different tolerances and categorisation of these elements, and what one lender may say no to, another will willingly finance. Examples include citizenship, employment types, supporting documentation required, years’ worth of business financials and so on.
Most good brokers will have a Plan B and a Plan C for a buyer who has experienced an unforeseen rejection to their application for finance. And for those buyers who have not done any research or preparation, even an insufficient deposit amount or salary can be helped with the inclusion of a partner or parent on the loan. While not everybody has someone who can assist, most buyers I deal with who had loans rejected found a way to move forward with the purchase.
And as for valuation shortfalls; it’s not uncommon for a valuation to come in ‘short’ (ie. under the price paid). The implication for the buyer is that they will have to bridge the shortfall or they could find themselves unable to finance the property altogether. But before throwing away deposits and writing the property off, it’s also important to remember that valuations are subjective. It’s quite possible for two valuers from differing panel lenders to have conflicting valuations. Some brokers choose to ‘challenge’ the low valuation if they feel it is unfair, although these days it is becoming harder. I’ve produced recent comparable sales for brokers in the last few years to support their valuation shortfall challenges and the valuers have argued their work and stood by their valuations. The option if this occurs is for the broker to order an alternative valuation with a different lender. In 100 per cent of the cases I’ve challenged, the ‘new’ valuation has landed on purchase price and the purchaser has been able to finance their property with an alternative lender. While it’s stressful, if the purchaser is confident that similar sale results back up the price they paid, they may have options.
Nightmare #4: The final nightmare is holding a vacant property which is proving hard to rent.
Risk-mitigating action: There is always a reason for a property not renting. It could relate to the condition of the property, the neighbourhood of the property, the ‘quirkiness’ of the property or even just the vacancy rates in the area. Buyers may not want to hear this, but eventually a price point will solve this challenge.
A property will rent at a price, albeit a terrible low price. But a good, experienced property manager will be able to shed light on the rents in the area, the elements which are of importance to a tenant, the items which could be fixed/installed and could make a difference, or even a change to ad copy or photos.
Whatever the issue, a quality property manager needs to be bought on board immediately so that a suitable tenant at the right price can be found. I’ve given advice to countless enquiring investors who have purchased their own properties and then sought my help in a desperate attempt to solve the vacancy crisis.
In every single case I’ve been able to point them to a great property manager who has turned their situation from nightmare to tenancy. Another mitigant is to provision for vacancy and to have a buffer. Easier said than done if the investor’s buffer funds are depleted by the vacancy, but at least if investors can anticipate vacancies along the way, the burden can be less of a shock when it happens.
Nightmares need not go on forever. Sometimes the problem can’t be solved but it can often be improved. Often the nightmare can be obliterated altogether with the help of someone who knows their stuff.
About the Blogger
Cate Bakos is an independent buyers advocate, a qualified property investment advisor, and owner and manager of Cate Bakos Property.