Purchasing a fixer-upper

Buying a home that is in need of attention can be a highly lucrative investment. However, this depends on whether you take the necessary precautions and follow the right procedures.

Irrespective of the type of property that you are looking to invest in, it is imperative that you do the necessary research and lay down the groundwork before committing to the purchase. Doing your homework is particularly important when considering properties that would be considered ‘doer-uppers,’ because you will need to pay additional money onto the property to renovate it. Understanding what is a good buy and what should be steered clear of is a key aspect to success when purchasing a fixer-upper property.

There are several advantages to purchasing a home that needs renovation. For a property investor with the capital to spend on renovating, buying a fixer-upper is a way of securing a higher profit margin when they sell the property, provided of course that they are savvy with how much they spend fixing the property.

Another advantage is that there is often less competition in the market for these kinds of homes, which means that they generally sell for lower prices than most of the homes in the area. Again, this increases the potential return on investment – especially if the property is purchased at a good price. A property buyer’s return on investment will largely be based on the decisions they make at the beginning of the transaction. The ideal property might be concealed under the guise of some unsightly features that would normally turn potential buyers away. Buyers looking at doer-upper homes will need to see past the home’s cosmetic appearance and see the home’s true potential.

Here are a few tips when looking for the ideal fixer-upper home:

Location is key

Few aspects will have a greater impact on a property’s potential for appreciation in value than its location. A property’s location determines so much of its current value, as well as its potential growth in the future. From an investment perspective, homes that are in proximity to a range of amenities such as shopping facilities, train stations, business hubs, entertainment areas, and excellent schools generally see a higher percentage of capital growth over the long term than those that aren’t.

The home’s design

Renovating a home is one thing, but completely changing the design of the property can be very costly. It is important that the shell of the home is designed well and laid out correctly. Sometimes it is better for buyers to walk away than to try to correct a bad design.

Overall condition of the home

While certain renovations are manageable, if there are too many defects or possible structural damages, the home may not be worth the money or the effort. A good fixer-upper is a home that is at least in a livable condition. The cosmetic appearance of a home is fairly easy to change. However, major alterations to the home’s structure or foundation require a lot more money and expertise. A home with these kind of issues will be a money-trap rather than a good investment.

Gathering as much information as possible to make an informed decision will pay off in the long run. If you are unsure of anything seek the advice of a reputable contractor to ensure that the home is structurally sound. It better to go into an investment with both eyes open, than blindly hoping for the best.

Beware of a possible double commission scenario

If you are not happy with the estate agent you are using and decide to move to another agency, be sure to give the first agency the appropriate notice period or you run the risk of paying a double commission. This is according to Roger Collings, Office Manager of RE/MAX Central in Victoria.

“There are cases where a buyer views a property but does not put in an offer. After the property has been on the market for some time with one agency, the seller decides to open up the listing to other agencies. After dealing with the second agency, the same buyer goes back to the property for a second viewing – this time making an offer. The previous estate agency can argue that while they did not close the deal, they introduced the buyer and therefore should be paid a commission,” says Collings.

He notes that a situation such as this emphasizes the importance of canceling one contract before entering into another. The cancellation period allows the previous agent to follow up on any existing leads as a result of their marketing. “The notice period is normally around 14 days; however, it all depends on the contract the seller has signed. In some cases, the notice period can be as much as four weeks. Before signing any contract with an agent, be sure to read through it carefully and check the fine print to see what the expected notice period is if you wish to cancel and instruct another agent,” Collings advises.

Even after the notice period, there could be some continued liability to the agent, which again, is determined by the contract. While there is no standard definition of what is deemed to be an introduction, see how the term is defined in the contract. It is possible that the contract defines an introduction as anyone who has viewed the property or even seen the brochure. “If the contract or the agent suggests that you will remain liable for a fee if a person they initially introduced to the property went on to buy it, request a list of the names of those introduced so that you can provide it to the new agent,” says Collings.

According to legislation, any exclusive agency agreement is required to include a double commission warning which states that if another agent introduces a buyer who purchases the property while the agreement is in place, the sole agent will be paid commission, as well as the agent who introduced the buyer. If you decide to instruct a new agent, be sure to inform them of your previous experience and list of names of people who have expressed an interest in the property. “If the new agent is aware of the situation they might be able to strike a deal with the previous agent and work out how the commission can be split between them fairly, rather than a double commission scenario. In most cases, agents will be willing to come to some agreement that will benefit all parties involved,” Collings concludes.

How crucial is your listing price?

A common mistake among homeowners wanting to sell their property in the current market is incorrectly pricing their home. While there are valuations tools available to sellers online, to set the right market-related value, requires specific area knowledge, an understanding of the conditions surrounding the market and insight into the mind of buyers.

A number of aspects affect property pricing, which is why setting the ideal price can be more difficult than it seems in the beginning. Two homes could be situated in the same neighbourhood across the street from one another, but certain distinguishing features could push the perceived value of one up. Determining the perfect listing price can only be accurately done if all the external influences are considered and weighed in.

Pricing a home to sell is an art that takes into account market movement, buyer demand, the home’s condition and yes, its location. Another vital aspect that impacts pricing is the term of the lease, as well as any restrictions it may contain. An experienced, reputable estate agent with specific area knowledge will be a valuable asset when trying to establish the correct listing price.

So, why is it so crucial to price the home correctly? Well, the first reason is that if people view the home as being overpriced, it will be overlooked by potential buyers and will sit on the market for longer than it should. Instead of giving yourself room to negotiate, you are simply making other comparable homes appear to be bargains. Why help your neighbours sell their home instead of yours? On the other end of the scale, pricing your property below its market value means possibly leaving money on the table and sacrificing profit unnecessarily.

So what aspects need to be considered to find the right listing price? RE/MAX London Regional Director, Peggy Su points out three crucial aspects that can’t be ignored when setting a listing price:

Past sales in the neighbourhood

Looking back can sometimes provide some insight into the future. Reviewing the area sales history over the past six months will provide you with insight into what buyers are prepared to pay for homes situated there. Time spent on the market should also be considered, along with the gap between the initial asking price and the eventual selling price.

Other factors that might impact the property’s exact value include its proximity to excellent schools and other sought-after amenities, the condition of the property, its size, finishes and fixtures, and any other features that could set the house apart from others in the areas.

Trends in the market

While elements such as government policy, access to finance and unemployment will impact the property market throughout the country – there are specific influences that impact micro markets in particular areas.These include new companies moving into the area or plans for improving local amenities such as parks or shopping malls.  When setting a listing price, estate agents will look at all the unique elements and consider how they will influence the perceived value of the property. Both the wider general influences and localised factors will affect home’s perceived value among buyers.

Type of property

Is the home a freehold or leasehold property? If the home is a leasehold property, the length of time remaining on the lease will have a bearing on its price in the market. A home with a  lease that is more than 80 years long will be more expensive than one with less. A property with 50 years or less on the lease is generally not mortgageable, so will only be able to be bought with cash. This will dampen demand for the home, which will lower the price.

Listing the home at a price that is ‘just right’ from the beginning is key to selling within the fastest time frame and for the best price – it all about finding the sweet spot or the Goldilocks price. Working with a reputable, experienced estate agent will help to ensure that the home is listed at the correct price from day one, which will make all the difference in achieving your goal.

Top tips for investing in property

Over the long term, property has proven itself to be a solid asset class in which to invest. However, there are aspects that property investors need to consider before they make a final decision and sign on the dotted line.

Much of property investment success is based on the decisions made at the start of the investment. If possible, it is best to try and make your money right from the start of the deal. How is this possible? By finding properties that are listed at values below market value. To know whether a property is below market value requires investors to do their due diligence and research.

Look online

Where do you start? Before going to see a property look it up online and read the agents or seller’s comments regarding the property’s condition and its construction. Also, see how long the home has been on the market and whether there have been any other interested parties who have possibly made an offer. Knowing the seller’s position is also an advantage, as it provides insight into how open they are to negotiation.

Compare apples with apples

Once you have this information, look for other homes within proximity that have recently sold and for how much. Find similar homes that have sold within the past year, ideally no further than a mile away from the home you are looking at. Start with properties on the same road and work out from there. Having an idea of the pricing in the area will provide perspective as to what would be considered a fair market value of homes in the vicinity.  Also, look at the current rentals in the area, particularly if the home is being purchased as part of a buy-to-let portfolio – this will provide insight into the possible expected rental income.

Google Streetview

A great tool to view the surrounding properties and neighbourhood is Google Streetview. From the comfort of your home, you will be able to get an idea of the amenities in the nearby area, as well as the overall look and feel of the neighbourhood. While they may not be completely up to date, the online images will provide you with a picture of where the property is situated in relation to the town centre, main roads and public transport.

Council information

Another excellent resource is the area’s council planning portal, as this will provide a planning history on the property. Knowledge of any failed plans will give you valuable insight into what may or may not be done to the property to add value.

Purchasing investment property can be a highly lucrative endeavour provided the research is done, and the investor goes into it with their eyes open.

Purchasing a leasehold property

Depending on whether your home is a flat or house will determine the process required to purchase the freehold of the property, says Peggy Su, RE/MAX London Regional Director.

Talking about leaseholders living in flats, she adds that provided they meet the necessary criteria; they have the legal right under the Leasehold Reform, Housing and Development Act 1993 to act together to purchase the freehold of the building they reside in.

“A group of leaseholders purchasing the freehold together is known as a collective enfranchisement, and is considered to be the more formal way of obtaining the freehold,” says Peggy Su.

She notes that the Act lays out a procedure and timescales to be adhered to should the leaseholders decide to acquire the freehold in this manner. If leaseholders decide to follow the formal route, the Property Chamber, also known as the First-tier Tribunal, can determine the prices and terms of the transaction if the parties fail to agree.

“A less formal way would be for the leaseholders to negotiate with the freeholder and acquire the building by agreement.

In this situation, there is no right to purchase the freehold, and as a result, the leaseholders will not be able to approach the Property Chamber to determine the terms. Even so, depending on a few aspects the agreement remains enforceable through a County Court.”

In the case where the property is a house, rather than a flat, the leaseholder’s legal rights will be governed by the Leasehold Reform Act 1967, however, they will still have the two routes to acquire the freehold – namely formal and informal.

With the introduction of the Commonhold and Leasehold Reform Act 2002, some of the clauses in both the Leasehold Reform Act 1967 and the Leasehold Reform, Housing and Development Act 1993 have been amended, which will impact the specific procedures that each route requires for a successful acquistion of the freehold.

If for any reason it is the freeholder who wishes to sell the freehold, they are required to offer it to the leaseholders before opening the offer up to any other potential buyers. This is known as the leaseholder right of first refusal.

While leaseholder has the right to ask the freeholder if they can purchase the freehold at any time, the process can be somewhat complicated to negotiate. “Ideally, before any leaseholder decides to attempt acquiring the freehold of the property they should seek out the professional advice of a solicitor and surveyor with knowledge and experience in this area.” Peggy Su concludes.

Five things every first time buyer should consider

While renting a property offers a tenant the luxury of selecting a home that meets their short-term needs, purchasing a home is a far larger commitment that requires more careful consideration. The importance of thorough research before purchasing a property can never be overemphasized.

Here are five things that every first-time homebuyer should consider as they begin the process of purchasing a property:

Is there the possibility for growth?

Because property is a medium to long-term commitment, it is important to look for a property that can grow with your developing needs. If possible, shop for a home that meets their current requirements with the potential to adjust to a changing household. It’s not an exact science as your five-year plan may not pan out as expected, but it is a good idea to consider the possible life changes that could occur and impact your need for an extra room or additional space.

The growth of your family is not the only growth that should be considered. Any property purchase is an investment, so it makes sense to ensure that the property has the potential for growth in value too. Adhere to the adage of location, location, location. Also, check area statistics and figures to ensure that the home is purchased at fair market value. Doing these things will ensure that you can be fairly certain that your investment will see capital appreciation over the long term.

Make sure of the basics

While your first property may not have many luxury features, you need to ensure the basics are in good condition. The property should be thoroughly inspected to ensure that there are no hidden defects that could be costly to repair.

Everything has a lifespan

Along with identifying aesthetic and structural defects, it is important to look at features of the home that are currently in good condition but may need repair or replacing shortly. Everything has a lifespan and may require repairs at some stage, so look at the condition of features such as the roof and flooring. How long will it be until these need to be placed? Researching the expected remaining life on large-ticket items can help you plan for the future.

There is no perfect home, just the right home

It is possible that the first home you buy may not be in perfect condition, but it’s important to make sure that it is the right home for you. Ensure you are buying the right home by prioritizing the elements you can’t live without, nice-to-have and the things you are willing to compromise. While an allocated parking space is nice to have, it may suit you more at this point to have an additional bedroom. The importance of each of the features will depend entirely on your tastes and needs.

Weigh up all the costs

Remember that it is not just the mortgage repayments that need to be budgeted for and considered. There are other recurring monthly costs involved in owning and maintaining a home. It is vital to choose a property that meets your budget regarding what the full living costs will be and not just the mortgage repayment. Things to consider would be the cost of the utilities, council taxes, land rent and maintenance costs.

To ensure that the correct decision is made, which will result in a return on investment and more importantly your happiness, take the time to weigh up all the options available to you.