Fact Finding for Property Buyers

There was an interesting article in a free circulation yesterday. The person who wrote in urged the government and related bodies to implement a fact-finding process for potential homebuyers in Singapore. Property acquisition is a financial decision and it should start with finance.

In my opinion, there are two groups of buyers in Singapore; owner-occupiers and ’speculators’. I have come across very few buyers who are thinking of holding long-term with Singapore properties. Buying is the easy part; holding is a test of your perseverance and your vision of reaching your long-term goals. And because there is no capital gains tax in Singapore hence speculators are encouraged in this market.

And perhaps many dismiss the idea of holding property long term in Singapore; the idea of fact-finding becomes irrelevant. The speculators would want to dispose their assets as quickly as possible to the next buyer. However, having said that, owner-occupiers generally do their sums before they take the leap.

My investors are all long-term Australian property investors. I don’t entertain short-term speculators and hence it is paramount that I conduct proper fact-finding for my clients. As a trained engineer, I have been doing that for a long time and without sounding too arrogant, I am happy to say most of clients are pleased with what I have done for them…

Three weeks ago, I met up with a prospect-cum-good friend, and to protect his privacy, let’s call this person Mr. C. It’s has been over a year since we first met in the CBD. Things changed and he has moved on to another company and is doing very well. His career has taken off big time and he updated his recent events to me.

Some years ago, he was lured into acquiring a student type accommodation with promise of good yield from a local agent representing a developer from Australia. Believing he would be able to obtain finance of up to 70%, he signed the contracts and they have gone unconditional. Let’s call this investment property IP#1. Lately he bought a residential unit from another agent. Let’s call this second investment property #IP2.

He reversed his decision to hold on to both properties and he sold both securities prior to settlements. The respective agents that sold him these two investment properties managed to sell them for him, IP#1 being sold at the original price and #IP2 higher than what he has originally bought.

It was quite refreshing to me. In my opinion, I felt he ‘lost out’ on a very good opportunity in disposing #IP2. Some months ago, he told the valuation for #IP2 is higher than the purchase price and to be honest, that kind of price cannot be replaced especially at the location where he has bought. If he has settled it, he would have ‘instant equity’ created in his portfolio.

Not to mention if he is to refinance and uplift his equity next year or the year after, it would be quite comfortable and easy for him. By on selling his property, he lost money in agents’ commission, and some other fees (he still manage to reap some profits in the end) that he otherwise would not have incurred if he didn’t sell. When I was talking to him, I was trying ‘tracking his chain of thoughts’. Then I realized he had a very strong trading mindset. He was obviously trying to ‘get out’ and consolidate his position when there was an opportunity to. And the thought of getting into ‘debt’ was obviously too trying for him.

I said to him that if I were him, I wouldn’t have sold it because in 10 or 20 years’ time, it would be 4 times the value of what’s it worth now. I guess I was just being frank, and if that offends him, too bad. I was just being frank and straightforward. At the end of the day, the decision was his. He has spent a great deal of time researching on properties he had acquired only to on sell them before settlement for a profit that’s not worth mentioning. How does that work…?

Reserve Bank of Australia Governor Glenn Stevens has not ruled out a possibility of a rate cut in Jan 2009.

Traditionally the RBA Board does not meet in the month of January. The first meeting next year has been scheduled on Tuesday, 3 February 2009.

Following this month’s 100 basis point cut to reduce the federal cash rate to 4.25%, further economic uncertainty has caused debt futures market to predict a further 25 basis point cut in January 2009.

With increased home loan approvals in October, the benefits of a 300 basis point cut since September ‘08 is beginning to surface. Whether it will prevent the Australian economy from going into recession remains to be seen. On a more optimistic note, in response to a question, Mr. Stevens said Australian house prices were unlikely to decline by 30 to 40%, like the US, because of an undersupply of housing.

“I think we can rest easy,” he said.

Mr. Stevens said Australia was unlikely to fall into a “deflation trap” amid falling energy prices.

Last night I had a very interesting meeting with the Founder (and his main marketing man) of one of the largest trading education groups in the region. Together with two very good mates, we held interesting discussions on business opportunities, trading and property investment.

During the discussion, I was asked about the state of the property market in Melbourne since I am constantly looking at that market. Without a single hesitation, I answered, ‘I don’t know’. The reality is it didn’t quite matter to me the state of the property market. As Singaporeans are pretty used to the huge ‘peaks and troughs’ of the Singapore property market, the state of the market becomes a critical topic for discussion. In Australia, yes prices do plunge, but statistically, prices don’t plunge 30%!

I recalled a statement made by Christopher Joye, Director of Rismark International in The Weekend Australian Review, 1-2 November 2008. He mentioned, “Sensationalist and unsubstantiated claims predicting large house price falls in Australia ignore the empirical facts that house prices are determined by both demand and supply”. In my opinion, there’s already a shortage of accommodation in Melbourne as witnessed by record levels of population growth, fueled mainly by immigration numbers, coupled with the crisis and drop in building approval rates, the only confirmed trend is rents are going to rise.

I looked at property investment from a ‘holding cost’ point of view. I do care if the price is right, by doing some comparables around the estate. But that’s as far as I go. I do not professed to be a statistical Guru, or a full time property market researcher because that’s not my job. It’s difficult to say how market has performed, because to me median prices are not the true indication of the state of the property market.

Put it this way, you acquired a property. At settlement, you secured financing and the valuer came back with value equal to or higher than the contract price (usually valuers will cheat by looking at the contract price so they rarely return a value higher than contract price). You financed it and it’s cashflow positive and you continue to replicate what you were doing without max-ing out on your borrowing capacity.

So, what happens if property prices drop?

Well, as long as you keep up with repayments, banks don’t really bother you. The critical thing is to have a tenant secured and that can be organized by a professional property manager.

It makes sense to me…and I sure it does to you as well…so how’s the market performing again, mate…? Have a great weekend ahead!

 Another round of rate cut by 100 basis points brought relief to home owners, property developers and investors. In a widely anticipated move by the Reserve Bank of Australia, it announced a rate cut of a full percentage point, bringing interest rate down to 4.25%. It’s the third consecutive rate cut since October 2008.

Banks are expected to pass on the benefits of the rate cuts to consumers and business owners. If banks pass on the savings to consumers, there would be a $250 per month savings in interest cost on a $300,000 loan.

For property investors on a standard variable rate, more rate cuts are expected come Feb 2009 (RBA does not meet in Jan) and increased rental, you can be assured of an improved cashflow from your property portfolio.

For full article report, click HERE.