Things first-home buyers should avoid
Buying a house is one of the most exciting times in your life, but it can also be the one of the most stressful. It’s a major purchase, which can come with some major mistakes if not carefully considered. And if you’re a first home buyer, it’s only harder, as you’re competing against hundreds of experienced buyers, investors or agents. It can be overwhelming, which is why many first home buyers opt to build their first home instead of buying an established property.
Building often means there is less competition as you’re buying one of many blocks of available land in a new estate. It also means there’s less compromise in terms of layout and design, as you largely get to choose.
But even if you choose to build, there’s still some mistakes at the buying stage to avoid. We’ve listed the 5 most common mistakes people make below.
Mistake #1: Not understanding the difference between titled and untitled land
There’s a few options when buying land for the house you want to build. You can purchase untitled land, which requires you to sign a contract before the land purchase can be finalised. This is often cheaper than buying titled land, but it means you may wait a long time before you can finalise the purchase and start building.
Whether you buy titled or untitled land depends on your goals and timelines. Are you willing to wait and reap the potential benefits of the land value increasing as the development progresses? Are you risk-averse and would prefer to pay for something further along that you can start building on ASAP? Each has pros and cons, and it’s important to know the difference.
Mistake #2: Underestimating the cost of buying a home
Everyone’s heard about the “hidden costs” of buying a home, such as Lenders Mortgage Insurance, Stamp Duty and Site Inspections. Most first home buyers are savvy enough to factor these costs into their budget these days. But there’s also other things, such as new furniture, any renovations or upgrades you need to complete – or in the case of building, all the upgrades you select on top of your build contract.
Then there’s all the ongoing costs to consider, such as mortgage repayments increasing due to interest rate rises, as well as council and water rates, building insurance, and maintenance costs. A good tip is to look into any grants you may be eligible for, such as the first home owners grant or stamp duty concessions.
Mistake #3: Throwing in the towel after a bad bank valuation
When you apply for a mortgage, the bank values the property you’re purchasing, which is part of the approval process. If their valuation is less than what you’re paying, your mortgage will not be approved without the shortfall being covered. For example, if your house and land package comes to $500,000, but the bank values it at $480,000, you’ll need to cover the additional $20,000 for the mortgage to be approved and the build to go ahead.
This used to be really uncommon as the Australian property market has been growing exponentially for decades. But in recent years we’ve seen it crop up more often, particularly in new developments where the property value is determined by the likelihood of the development being completed.
If you don’t have the money for the shortfall, you don’t need to throw in the towel right away. There are other things you can try:
• Challenge the bank valuation by providing recent sales in the area to prove it should be higher.
• Arrange a second bank valuation through another lender; this could lead to a more favourable figure.
• Try to negotiate the purchase price based on the valuation. If the mortgage falls through, nobody gets paid, so depending on the size of the shortfall this could be an option.
Mistake #4: Not considering rentvesting
You’ve probably heard the saying before: “Rent money is dead money” – but this isn’t always the case; it all depends on your lifestyle and goals. For example, many first home buyers can afford to pay rent in the location they want to live in, but buying a house there may be out of their price range.
This doesn’t mean you have to sacrifice on location or make the mistake of stretching your budget. You also don’t have to give up your dream of owning property. Instead, many first home buyers are now choosing to build a house in an area that is projected to increase in value over time, and also have a high rental yield. They then rent out their home, and continue to pay rent in the location they want to live in while building financial equity. Taking this approach is known as rentvesting, and it’s becoming increasingly popular.
Mistake #5: Not choosing the right builder
There are a lot of builders out there, and it may seem like the best idea to pick the cheapest or the one building the most homes in the area you want to buy in, but this may not be the best plan of action. There are several other considerations you should factor into your decision when choosing a builder. These include:
• Reputation – are they known for quality homes? Are there any good testimonials?
• Stability – how long have they been in business? Are they financially stable?
• Home style – what kind of homes do they build? Is it a house design you’d want to buy?
• Working relationship – what’s their communication style like? Does it align with yours?
Lastly, the best thing you can do as a first home buyer is really understand your goals. Once you understand that, it’ll help guide you throughout your journey and help you avoid making these home buying mistakes.
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Simonds acknowledge Aboriginal and Torres Strait Islander peoples as the First Australians and Traditional Custodians of the lands where we live, learn and work.