Your Home : Buying, Selling, Renovating, Building

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Harvey Grennan has worked in journalism and corporate and political media relations for 40 years. He has bought, sold and developed properties all his life and worked briefly as a real estate agent. He is currently a writer on real estate and local government with The Sydney Morning Herald. Dominic Ogburn is an independent building consultant with Sydney-based firm Access Property Services P/L, and the bane of developers and insurance companies who try to dodge their responsibilities to home owners. He has been a builder and project manager and is an expert witness in building disputes, an adviser on national building standards and the author of an Internet course for owner-builders. Harvey Grennan and Dominic Ogburn are responsible for exposing the serious building defects and certification problems in many new apartment blocks and the failings of the home warranty insurance scheme. The publication of their findings resulted in a parliamentary inquiry in New South Wales and subsequent government action to change the law and establish new authorities and procedures to protect consumers. Harvey Grennan brought the scandal of poor building practices to public attention through a series of articles published in The Sydney Morning Herald. Dominic Ogburn, as a building consultant and consumer advocate, felt consumer’s rights were being eroded and, growing tired of corruption in the industry, hounded Grennan to write the story.


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your HOME Buying, Selling, Renovating, Building

Dominic Ogburn & Harvey Grennan


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First published in 2004 Copyright © Dominic Ogburn and Harvey Grennan 2004 All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage and retrieval system, without prior permission in writing from the publisher. The Australian Copyright Act 1968 (the Act) allows a maximum of one chapter or 10 per cent of this book, whichever is the greater, to be photocopied by any educational institution for its educational purposes provided that the educational institution (or body that administers it) has given a remuneration notice to Copyright Agency Limited (CAL) under the Act. Allen & Unwin 83 Alexander Street Crows Nest NSW 2065 Australia Phone: (61 2) 8425 0100 Fax: (61 2) 9906 2218 Email: [email protected] Web: www.allenandunwin.com National Library of Australia Cataloguing-in-Publication entry: Ogburn, Dominic. Your home : buying, selling, renovating, building. ISBN 1 86508 891 9. 1. House buying. 2. House selling. 3. Dwelling Remodeling. 4. House construction. I. Grennan, Harvey. II. Title. Set in 10/13.75 pt Sabon by Bookhouse, Sydney Printed by Griffin Press, South Australia 10 9 8 7 6 5 4 3 2 1


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CONTENTS Your home Contents Acknowledgments Introduction

xi xiii

SECTION 1: BUYING YOUR PROPERTY

1

1 Selecting a home

3

How do you choose the right suburb for your household? 3 What sort of house or unit suits your lifestyle and will give you good capital gain? 4 What should a first home buyer look for—a house or a flat? 5 Location, location, location. Why is this the golden rule of real estate? 6 How do you use the web to find properties? 7 What questions should you ask the agent? 8 Should you use a buyer’s agent? 9 How do you avoid paying too much for a property? 11 What is gazumping and is it legal? 12 v


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What colour is a ‘green’ house and can you afford one? What is a ‘smart’ house and can you have one yet? 2 Buying an investment property

Why should you invest in property? How do you become an intelligent investor? How do you select an investment property? How do you calculate the real return on an investment property? What are the costs of owning an investment property? What is negative gearing and what other tax deductions are available? Which are the most expensive and the cheapest cities in which to buy? Why are renovations booming? What are the rules for making money out of renovating? What are the legal obligations of landlords? What are the rights and obligations of tenants? 3 Pre-purchase inspections

Do you need a building inspection before making a purchase agreement? What should you look for in a building/pest consultant? Why don’t agents/vendors provide a PPI report as part of the contract? What do you need to do before booking a PPI for an existing house? What about preparing for a PPI on an apartment/villa/townhouse? Do you need a PPI when buying an apartment or villa off the plan? What should you get for your money in a building inspection report? What won’t you get in a standard PPI building report? What don’t you get in a pest inspection report? Why should unit buyers get a strata scheme search? What else do you need to do when buying off the plan? vi

14 16 17

17 19 21 23 23 24 26 27 27 29 30 32

32 34 36 37 38 39 40 41 41 43 45


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4 Making an offer and bidding at auction

What are the rules for buying at auction and how do you handle the bidding process? How can unsuccessful auctions work for the buyer? What are the laws relating to dummy bidding and other questionable practices? How do you make a complaint against an agent? Should you make an offer before the auction? Why should you target private treaty sales? Buyer’s checklist

47

48 49 51 52 52 53 55

SECTION 2: BUILDING OR RENOVATING

57

5 To build, knock down or renovate?

59

What is a ‘knock-down’? Should you move out when renovating? Should you order a pre-renovation building survey? 6 Selecting the right builder or architect

How do you find the right builder for your job? What can go wrong in a ‘typical’ building project? How do you find a good architect? How long does it take to build a house? What are the different ways of hiring a builder? What is the cost of building a new home? 7 Owner-building

What is an owner-builder? What skills do you need? Will owner-building save you money? What’s the best way of dealing with the local council? 8 Contracts and variations

Contracts, contracts, contracts!!! Why must you have one when building? What is a construction manager? Should you get the builder’s progress claim schedule right before signing?

59 60 61 63

63 68 69 70 70 71 73

73 78 80 82

82 85 86 vii


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Variations: What are they and how do they work? How can you ensure the builder will return to fix faults, and what is a retention sum? Why is documentation so important? Records: Why should you keep them? Can’t the builder do that? Why should you hold regular site meetings? What do you do if the building runs late? What is practical completion and why is the final progress claim so critical? So what is the secret of avoiding disputes when building or renovating? 9 Getting problems fixed in new units

How do you go about getting faults in your brand-new unit fixed? What can you do if the developer/builder will not fix building faults in your unit? Can you go to council if the developer or builder still won’t fix the faults? Building checklist

86 88 89 90 92 93 94 95 96

96 98 100 102

SECTION 3: LEGALS, FINANCE AND INSURANCE

105

10 Legals

107

What is a conveyance and should you handle it yourself? Purchase contracts: What do you look for? Why should you get a lawyer to review a residential sale contract? What are the various types of property ownership or ‘title’? What is a private treaty sale? Can foreigners buy property in Australia? Do you need a survey? What is a final building certificate/certificate of occupancy? What does the law say on dividing fences and who pays for the fence? Fence-building tips viii

107 109 111 112 114 114 115 116 116 118


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11 Organising your finance

Should you take out a variable rate loan or a fixed rate loan? What are the other features of a home loan, such as an ‘offset facility’? Setting a budget: How much can you spend? What is a ‘honeymoon’ interest rate and why should you be cautious? What government assistance is available for the first home buyer? Is it better to wait longer and save a higher deposit before buying? Should you use a mortgage broker and will it cost more? Where do you go if the bank says no? The secrets of the non-conforming loan How can you pay off your home loan faster? What is a reverse mortgage? What is mortgage insurance and what does it cover? What are the hidden costs of buying real estate? What are the rates of stamp duty in different states? What is land tax and how does it apply in the various states? How does GST affect property? When does it apply, and when does it not? 12 Insurance

Why do you need home and contents insurance? How much should you insure your home for? How do you estimate the current costs of replacing your house? And what about contents? What is landlord’s protection insurance? Security checklist

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122 124 125 126 127 129 130 131 132 134 135 136 137 138 141 144

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SECTION 4: SELLING YOUR PROPERTY

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13 Auction or private treaty?

157

Should you auction your home? How will you know what a place is really worth? Should you try to sell privately to save the agent’s commission? 14 Choosing an agent

How do you pick the right agent to sell your home? What are the questionable practices agents can get up to? How do you avoid questionable practices? What are the different types of agency agreement? Should you bargain over the rate of commission? What are an agent’s responsibilities? How do you make a complaint against an unethical agent? 15 Advertising and presentation

Do you get good value from advertising your property? What are the various forms of advertising available to you? How far do you need to go in presenting your home for sale? Seller’s checklist Contacts, websites and further resources

x

157 159 160 162

162 164 166 168 169 170 171 172

172 174 175 177 178


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ACKNOWLEDGMENTS Your Home Acknowledgments Much of the motivation we had in writing this book came from passionate clients and professional associates and friends, many of whom asked us to write specifically about certain issues of common concern and interest. With respect to home renovations, owner-builders and dealing with builders, our thanks goes to Dr Tom Boland, Stephen Hutcheon, Fiona Ismay, Anthony Shore and Denise Fraser. In particular, Tom Boland motivated Dominic Ogburn to write about how to successfully undertake building renovations and minimise building disputes; a subject with which we both have had considerable experience but that Dominic had never thought to write about until Tom implored him to do so. Interestingly, this became one of the most rewarding sections in the book to research and write. A special thanks goes to Denise Fraser for her constant words of encouragement and enthusiasm for a book she always felt had great worth and appeal. Regarding building contracts, legal definitions and conveyancing law our many thanks go to the boundless enthusiasm and generosity xi


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of Marion Bailey (Massey Bailey), Tony Baine (Carroll & O’Dea) and Ron Jarvin (Prentice Jarvin). Thank you to the Insurance Council of Australia for their contributions on insurance, and to the Royal Australian Institute of Architects for their input on most matters architectural. Thank you to the National Committee on Rationalised Building for their kind permission to reprint their specialist building and contract term definitions. Thank you also to Rex Wood (Owners Corporation Network) for his considerable experience in strata issues. New South Wales Department of Infrastructure and Planning provided considerable assistance regarding council and development matters, as did the NSW Office of Fair Trading in providing advice on consumer rights, and the Australian Building Codes Board. Finally, to our respective spouses, thank you for your endless patience and assistance over the 20 months it took to research and write this book.

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INTRODUCTION Your Home Introduction It’s the most trite of all sayings about real estate, but it’s true for almost all of us: buying or building a home is the biggest investment we will ever make. But it’s not something we do every day. Most people decide on that big investment with little or no experience or expertise in property and, worse, are guided by real estate agents who represent the other side of the transaction—the vendor. It can be a recipe for an expensive disaster. The wrong decision can take many forms—paying more than a property is worth, buying in the wrong locality, inheriting major building problems or simply choosing the wrong type of loan. Mistakes like these will live with you a long time and can diminish your chances of good capital gain. The world of real estate is fraught with traps for the unwary buyer. One of the biggest is the auction, which can be manipulated by an unscrupulous agent to suck in buyers and play on their emotions, then create a false market by calling dummy bids. On the other hand, a failed auction can be a disciplined buyer’s best friend. xiii


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Poor building standards and one-sided sales contracts are other pitfalls which await the unprepared buyer. Modern project homes and apartment blocks are more likely to have problems than not. While the number of multi-unit dwellings being built has climbed dramatically, so they now account for over half of all new housing in the big cities, there has been a corresponding decline in apartment building standards. The contracts to sell these units are drawn up by the developers and are loaded all their way. Developers chase the cheapest quote for each part of the job, governments have weakened laws on supervising construction, a proliferation of off-the-plan sales means buyers sign contracts before they can see the finished product, and there are major gaps in the building codes. Is it any wonder building standards are falling? Never think you don’t need a pre-purchase building inspection because the property you fancy is brand new. Quite the opposite is now the case. The inspiration for this book was our desire to answer all the important questions about buying or building a home or investment property to spare consumers the agony of getting burnt in the property game. It covers all aspects of property purchase, from how to choose the right area to selecting the best finance and researching local values to ensure you don’t pay above the market. The other big questions are also answered. What’s the best approach to bidding at an auction? What are the hidden costs of buying real estate? How do you uncover faults in a building? What do you look for in an investment property? What are the pitfalls in building a new house or renovating an old one? What are the benefits available for first home buyers? Should you do your own conveyancing? How do you find a good real estate agent? A major section of the book is devoted to those building their own home or buying a new apartment. Building a dream home can become a nightmare but there are ways to guard against this happening and to keep the dream alive. The fruits of many years of experience sorting out the problems of hundreds of clients with building problems large xiv


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and small are passed on in the chapters on building and renovations and building disputes. The easy-to-follow Q&A format is user-friendly—you can read the book from cover to cover for all the answers or if, like the rest of us, you are time poor you can go straight to those questions you want answered first. Importantly, Your Home will provide you with the tools to avoid the many pitfalls and maximise the personal and financial benefits of buying real estate. It will give you the confidence to make the right decision on the biggest investment you may ever make. Happy home hunting!

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SECTION 1 BUYING YOUR PROPERTY

Buying a home remains one of life’s most traumatic experiences even when you have done it a few times before. For the first-timer it is even more intimidating. It’s a complex process which involves deciding what sort of house or unit you want, where you want to live, looking at endless properties, negotiating with real estate agents, researching prices, checking for building faults, facing the horrors of auctions and gazumping, negotiating finance with a lending institution and consulting a lawyer. If you are buying an investment property there are even more considerations. Do you buy a house or a unit? What are the costs of owning an investment property? What are the real returns after paying these costs? What are your obligations as a landlord? The first chapter in this section takes you through the complicated web of buying property, pointing out the potential pitfalls, and the various steps and checks you should take to end up with the right property for your needs and your pocket. 1


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Subsequent chapters take you through investment properties, building inspections and auctions. One of the best ways of investing and making money out of real estate is to renovate an older property—but it can also be one of the surest ways of losing money. We tell you the traps to avoid and the right way to go about it. A pre-purchase inspection is a vital step in buying any property, but what exactly should you get in a building report and how much will it cost? Do you have any protection if the building inspector misses a major fault which costs tens of thousands of dollars to fix and wrecks your budget? And the biggest hurdle of all might be how to handle an auction. You have found the property you want, you have spent hundreds of dollars on a building and pest inspection and getting a solicitor to check the contract—and now you must run the gauntlet of auction day. What are the rules for buying at auction? Should you try to snap up the property before the auction? For the answers to these questions and more, read on.

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CHAPTER 1 SELECTING A HOME Selecting a home The first step in buying a home is to find it. One of the most useful tools for doing this is the Internet. Most agents have their own websites but the more useful sites are the megasites which lump together the listings of many agents. When you do make contact with an agent what questions do you ask? Should you use a buyer’s agent to find properties for you? What is the best way to avoid being gazumped? We start at the beginning—where should you look and for what?

HOW DO YOU CHOOSE THE RIGHT SUBURB FOR YOUR HOUSEHOLD?

For most people, buying as close to the city as you can afford is a good rule of thumb. You are closer to transport and other amenities and the prospect for capital gain is greater. For others, living in the outer suburbs has different lifestyle advantages, such as a bigger backyard and more parks; it can be a good option if it means you 3


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are close to family and friends and the support network they provide for young families. It can also be the right choice if it is close to your place of employment. The biggest problem facing most buyers is affordability, particularly in Sydney where first home buyers (if they can raise the deposit) are spending an average of 40 per cent of their income to service their loan. The last decade has seen a huge swing in demand for inner-city property as families and singles seek to lessen transport costs and live closer to work and lifestyle facilities such as restaurants and entertainment. The surge in demand has led to a big increase in prices with, for example, the median price for a house within 10 kilometres of the Sydney CBD in early 2004 around $775 000 and in Melbourne $555 000. The same is happening to a lesser degree in the other capital cities. What better proof that property close to the city has the best prospects for capital gain? However, don’t buy an inner-suburban property at the cost of inheriting an incurable problem. This may be a flightpath over your bedroom, semi-trailers past your front door every 30 seconds or a structure that is uneconomic to rectify. Better to look a bit further out to a middle-ring suburb with good public transport, a stock of older houses of character worthy of renovation, and established community services and infrastructure. It boils down to affordability and priorities. What may buy a small unit near the city may secure a three- or four-bedroom house with room for the kids to play in an outlying area. In the outer areas look for a location close to public transport, preferably a railway line. This is particularly important if children are not to be socially isolated when they reach teenage years.

WHAT SORT OF HOUSE OR UNIT SUITS YOUR LIFESTYLE AND WILL GIVE YOU GOOD CAPITAL GAIN?

Again, price is the major consideration in deciding whether to buy a house, a townhouse/villa or a unit. But there are other factors that will determine if a property is suitable for your particular circumstances. 4


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Don’t look for more rooms than you really need, rather for rooms of adequate size and good solar aspect. Many traditional homes have separate lounge and dining rooms which are rarely used. How much better to have one much larger living area where you will really spend your time (unless you need a separate area to get away from the kids). Other things which contribute to quality of life are heating and cooling (depending on the local climate), a usable outdoor living area (preferably under cover), off-street parking, built-in wardrobes and cupboards, a modern kitchen and bathroom (but you can change these yourself if the purchase price is right), views, a quiet neighbourhood and proximity to transport and shops. These factors may not show up in a building report but they will have a big impact on how you live and the resale value.

WHAT SHOULD A FIRST HOME BUYER LOOK FOR— A HOUSE OR A FLAT?

On a tight budget the choice for a first home buyer is usually a house in the outer suburbs or a unit or townhouse closer to the city. If you can afford a house in the area where you want to live, that is the obvious choice. But in your rush to find something affordable do not consider a property with a serious drawback you can do nothing about like a main road, very noisy aircraft or a power pole farm next door. Buying a unit as a first step is a sound approach. If you live there for five years and its value increases by $50 000, that is another $50 000 you will have for the deposit on your second home, quite apart from the amount you will have paid off. And by then your income should be higher and you will be able to afford higher repayments. The important thing is to get your foot on the bottom rung of the property ladder so that capital appreciation can help you get into the (second) home you really want. You could consider an older unit in a middle-ring suburb instead of a fibro house 30 kilometres from the CBD. While the prices of units in the inner suburbs of Sydney, Melbourne and even Brisbane have gone through the roof, this is not always the case in the middle-ring 5


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suburbs (10–20 kilometres from the CBD) which still have good public transport, shops, schools and other facilities. Some middle-ring suburbs such as Canterbury in Sydney have yet to be discovered and are still quite cheap. It makes sense that as the inner suburbs become unaffordable the middle-ring suburbs will be the next to show good capital appreciation. Whether it’s a house or a unit, try for a place with the potential to improve its value by renovation or extension, and try for an area which has the potential to improve in value. Don’t be confounded by the experts, just look at the fundamentals. A potentially good area is one with proximity to services such as transport, shopping and entertainment and that has housing stock which is capable of improvement (for example, Federation). The closer it is to the city or the beach the better. Who ever thought Redfern in Sydney or Docklands in Melbourne would become trendy? Those people who looked at the fundamentals, that’s who.

LOCATION, LOCATION, LOCATION. WHY IS THIS THE GOLDEN RULE OF REAL ESTATE?

If you look at the history of real estate prices you will see that the highest capital gains are always achieved in certain specific locations, most notably those close to the city or near the water. You have hit the jackpot if you have both, such as a home on Sydney Harbour or the Brisbane River. There is another golden rule of property: Buy the worst house in the best street rather than the best house in the worst street. You can improve a lesser quality house, even knock it down and build a new one, but you can’t change its location. In the major cities the best locations are those with quality housing, attractive streetscapes and good transport within easy reach of the city. Proximity to the beach, a harbour or river makes the location even more desirable and a water view is the icing on the cake. The simple economic dictum of supply and demand means that these properties are assured of greater than normal capital gain in the years ahead. Away from the cities similar rules apply. Places such as the Morning6


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ton Peninsula and Portsea outside Melbourne have outstanding natural features and are only an hour from the CBD. Ditto Terrigal and Bowral near Sydney. There are exceptions to the proximity rule, such as Byron Bay in New South Wales and Noosa in Queensland, but they are more vulnerable to price volatility in bad economic times. Even if you are not a millionaire the ‘location, location, location’ rule can still be applied to any area or suburb. Look for good surrounding homes, a quiet street, closeness to transport and other facilities such as shops and schools and a pleasant outlook. Don’t worry too much about problems like a purple bathroom—you can fix that—but avoid like the plague those you can’t, like noisy neighbours. Some real estate websites like <www.domain.com.au> and <www.property.com.au> have ‘suburb snapshots’, which give details of facilities in each suburb and can be very helpful if you are looking in an unfamiliar city; you can also visit <www.australiantowns.com>.

HOW DO YOU USE THE WEB TO FIND PROPERTIES?

The best tool for finding properties is the newest—the Internet. So powerful is the web that many properties are now bought sight unseen by overseas buyers. This practice is not recommended, however. The beauty of real estate websites is that most have a ‘search’ function which enables you to select only those listings which fit your requirements. This facility allows you to nominate the suburb or postcode, price and type of property you are looking for. A good website gives a full description of a property, a selection of pictures and possibly a virtual tour. What a pity therefore that so many agents make such poor use of their websites, offering only minimal descriptions and sometimes no pictures. Another useful feature of some websites is an ‘alert’ system, which will email details of new properties meeting your criteria as they come on to the market if you register with them. The main real estate websites are <www.domain.com.au>, which is very strong in Sydney and Melbourne, <www.realestate.com.au> and <www.property.com.au>, as well as the sites for major franchises 7


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such as LJ Hooker, Ray White, Stockdale & Leggo, Elders, Raine & Horne, PRD Nationwide, Century 21, Richardson & Wrench, and so on. A particularly good site is <www.propertypage.com.au>, which combines the listings of all the main franchises and organises listings from the cheapest to the most expensive. In Sydney <www.mcgrath.com.au> and <www.dijones.com.au> are good sites for inner-city properties, and in Melbourne <www.bigginscott.com.au>. For rural properties try <www.propertyguide.com.au>. Keep track of the websites of the big franchises and those agents with offices in the area in which you are looking.

WHAT QUESTIONS SHOULD YOU ASK THE AGENT?

Buyers cannot pick and choose agents as vendors can, because they have no control over which agency has that dream property on its books. Most of the time you are following up promising properties that have been advertised. But there is a lot that can be achieved by culling out unsuitable places in that first phone call to the agent and saving yourself a heap of time on wasted inspections. Use that initial call to put aside the beguiling images in the blurb and check off each of your essential requirements. Is the house in a quiet street? Does it have the required number of bedrooms and bathrooms? Does the ‘five-minute walk to the station’ require a gold medal? Is there a power pylon in the backyard?

Tip

It’s a good idea to print off mulitple copies of a checklist and head each one with the address so you don’t waste time on multiple listings or forget, if you’re still looking months later.

If you progress to an inspection there are more useful questions. How long has the place been on the market? The seller may be getting desperate. Why is the vendor selling? There may be some urgency in 8


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the sale which could give you a negotiating advantage. A bankruptcy, death or divorce is great news, for you at least. Are there any problems with the property? You will probably not get a straight answer here, but listen to what the agent may be saying between the lines. ‘You should rely on your own inquiries’ is code for a known defect but they can’t tell you about it. Have the vendors already bought elsewhere? This is another question which could reveal pressure to sell quickly. Asking ‘Have you received any offers?’ will let you know if there is any competition for the property. Watch carefully how the agent answers these questions because any hesitation or hedging is an indication they are being less than frank. And, of course, none of these questions does you much good in a hot market when even a dog kennel sells quickly. You are better off asking ‘What figure will buy this property today?’ A common mistake made by buyers is to withhold information. Some people feel that if they are frank about their budget the agent will push them up to something they can’t afford. Others tell the agent they want one sort of property and end up buying something quite different. This is the ‘buyers are liars’ syndrome which can make the agent’s job very difficult. Problems in the relationship are not always of the agent’s making. Sure, some may seduce you with low estimates of what a property will bring to get you to the auction, but they can’t be expected to find the property you want with a phoney brief.

Four key questions for buyers

•

Why is the vendor selling?

•

How long has the property been on the market?

•

Are there any known problems or defects?

•

Have they had any offers?

SHOULD YOU USE A BUYER’S AGENT?

A real estate agent is paid to act on behalf of the vendor but a buyer’s agent is one who acts exclusively for a buyer—to find a suitable 9


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property and negotiate the best price. Buyer’s agents are usually employed by people who do not have the time or the confidence to look for the right property. Often they are used by overseas or interstate buyers who don’t know the area they are buying into or who simply cannot be there. Buyer’s agents take note of your requirements and then offer a choice of properties for you to inspect within those parameters, often with photographs and plans. If required, they will negotiate a private treaty purchase or bid at auction on your behalf. At an auction a buyer’s agent will quite often act very aggressively, staring down other bidders or questioning the auctioneer whether bids are genuine or whether the reserve has been reached and the property is ‘on the market’ (which means it will be sold to the highest bidder on the day). Fees tend to vary from agent to agent and are negotiable; some charge a fixed fee, others a percentage of the purchase price. A rough guide is around 1 or 2 per cent of the price to find a property and 1 per cent to bid at auction if successful. The best way to find a buyer’s agent in your city is through the Yellow Pages (Real Estate Buyer’s Agents) or through Internet search engines (Yahoo, Google, Ninemsn, etc.).

Glossary of real estate terms

A blank canvas: Lacks any appeal or character Would suit artist: House is falling down Endless possibilities: We don’t have a clue Needs complete renovation: Bulldozer required TLC required: Smaller bulldozer required Easy access to highway: On the highway Handy to transport: Freeway 3 metres from front door Water glimpses: The view from the roof Double glazed: Under a flight path Simply stunning: Agent has very limited vocabulary Separate lounge-dining: Agent can’t spell

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Sun-drenched: There’s a big hole in the roof Commanding position: A cliff outside the back door Apartment or condominium: A unit Sub-penthouse: A unit Cooling sea breezes: Subject to gale-force winds The ultimate getaway: 100 kilometres to the nearest shop Prestige Southern Highlands location: Somewhere south of Braidwood Compact living: Skinny people only need apply Unleash the potential: It’s a dump Let your imagination run riot: It’s a dump Landmark site: Any corner on any main road

HOW DO YOU AVOID PAYING TOO MUCH FOR A PROPERTY?

There are a number of research tools available to consumers to determine what a property is worth based on recent sales of comparable properties (see page 159). What faults or defects should you look for when first inspecting a property?

How do you avoid paying for a professional building inspection when you could have disqualified the house yourself? There is no substitute for a professional building and timber pest inspection report before you buy a new home. But there are a number of things you can do before committing to that expense. •

•

Ask if the vendor can supply a council building certificate or certificate of occupancy and a survey. These give only limited protection but, provided it is recent, the survey will show if the building is properly within its boundaries. Look for obvious problems such as cracks in floors and walls, silicone slapped around shower recesses, evidence that moisture has 11


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•

• •

•

•

•

•

damaged finishes, rusting gutters and downpipes, shoddy workmanship, flaking or bubbled paint, poor drainage outside. Have a close look at the condition of the kitchen and bathrooms— these are the most expensive rooms to renovate. Look under the kitchen sink for water damage to cupboards. Open all cupboard doors and turn on all taps and stove elements to check their operation. Visit the property at different times of the day. Is there a noise problem from aircraft or traffic? Does the property get enough sunlight throughout the day? (Use a compass.) Ideally, living areas should face north and bedrooms south. Check the sewerage diagram (also called a helio) in the contract and make sure all the connections in the dwelling are shown on it. If they’re missing, they just might be illegal additions. Ask the local council whether any negative developments are planned for the area, such as factories, new roads or power lines. Is the area subject to bushfire, flood, erosion or landslip? Look at the certificate of title and deposited plan (which are in the contract) for any easements, restrictions, covenants or other encumbrances. Be wary of tasteless modifications. It costs to undo them as well as replace them.

The main areas of concern are structural problems, poor drainage, signs of land subsidence, illegal or poor quality building work, and materials due for replacement like a roof or guttering system—things that are expensive or sometimes impossible to fix. Don’t be too fazed by minor termite damage disclosed in a timber pest report. There are worse problems and it can be used as a bargaining tool. Ask the inspector to estimate the cost of repairs.

WHAT IS GAZUMPING AND IS IT LEGAL?

Gazumping is not against the law. It happens when you have agreed on a purchase price with the vendor or their agent and the property 12


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SELECTING A HOME

is then sold to a buyer who offers more money. Buyers who are gazumped can become very emotional at missing out on their dream home, especially if they have paid for a building inspection or finance application—but they seldom consider the vendor’s feelings if they change their mind about purchasing a property. The cold, hard fact is that the deal is not binding until both parties commit themselves by signing and exchanging contracts—except at auction. A ‘holding deposit’ has no legal force; it is simply an indication of good faith, although the NSW Office of Fair Trading says that once a deposit is paid the seller or agent must let you know if someone else subsequently makes a higher offer on the same property. The correct protocol for a vendor presented with a higher offer is to give the first buyer the chance to match it, but there is no legal obligation to do so. So if you want a property badly, exchange contracts as soon as possible. If you are concerned about a particular issue that needs checking ask if the vendor will include a clause in the contract making it conditional on that concern being addressed—say, a pest inspection or bank approval. If there are termites present or the bank says ‘no’ you can withdraw from the contract on those grounds but are otherwise bound. The best way to avoid gazumping is to exchange contracts quickly, but here you are in the hands of solicitors or conveyancers. Often the vendor’s solicitor is slow in issuing the contract to the buyer’s solicitor, and the buyer’s solicitor is just as slow in checking the contract and making the necessary inquiries prior to an exchange. You should ask the selling agent to press his client to issue the contract without delay and you should demand quick service of your own solicitor. You can of course exchange contracts immediately through the agent and rely on the cooling-off period for your solicitor to check the contract. (If contracts are being exchanged through your solicitor the vendor usually requires you to waive the cooling-off period.) Solicitors advise against exchanging contracts through the agent for two reasons—it forces them to hurry along, and if you withdraw from the contract within the cooling-off period there is usually a cost. In 13


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New South Wales it is 0.25 per cent of the contract price—but this is a small price to pay if you find something seriously wrong with the property. Gazumping is often vilified in the media and vendors who accept one offer and then accept another, higher offer are criticised as being greedy and unethical. But buyers who make an offer which is accepted and then pull out because they have found a better deal are not similarly castigated. They are allowed to say that they have just changed their mind. This is part of a community mindset which favours the purchaser over the vendor and makes little logical sense. Why should sellers not be able to change their minds if buyers are quite free to do so? What is immoral, however, is when a vendor fails to tell the first buyer of a higher offer so as to ‘hold’ them in reserve in case the second, higher bidder falls through. If you really want a property the best advice is to have your finance approved before you make an offer, to make every effort to exchange contracts as soon as possible and to hound both solicitors until you have done so.

WHAT COLOUR IS A ‘GREEN’ HOUSE AND CAN YOU AFFORD ONE?

We hear a lot about ‘green’ homes—homes that are environmentally friendly—but just what is a green home and how much does it cost? It’s an important question because many local councils now require a certain level of energy efficiency in a new house before it will be approved. Indeed, there is now a national standard for energy efficiency in the Building Code of Australia (BCA), which sets down requirements that vary according to eight different climate zones. Victoria has a higher standard than the national one. The standard covers such things as insulation, ventilation, shading, and sealing of doors and windows. A software program called NatHERS (variations are BERS and FirstRate), developed by the CSIRO, is normally used to calculate a star rating (0–5 stars) for energy efficiency and whether a house design will meet the BCA or local council requirements. 14


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There’s nothing new about good solar design, of course, but never before has it really been a part of mass-produced housing in Australia. There are GreenSmart display homes in several states (see below) showing how an ordinary project home can be energy efficient, and some project builders are marketing green add-on packages. So what makes a house green? First, it should be built on a concrete slab (as most are) with tiled floors to soak up heat during the day and release it at night. This saves on heating costs. Living rooms should face north to catch the sun; the bedrooms and bathrooms, which don’t really need sun, can face south. Windows should be placed to allow for good cross-ventilation. There should be eaves, blinds and awnings to keep the hot sun off the windows—many project homes don’t have eaves so as to save money and/or make them fit small allotments. Ceiling fans and roof vents are a good idea. A green house should have insulation in the walls and ceilings, solar hot water, gas cooking, tinted windows, weather strips on external doors, fluorescent light bulbs, dual-flush toilets and triple-A taps and shower heads. Gardens should have the types of native plants and grasses which don’t require as much precious water as many exotic plants, and a rainwater tank can be used to water the garden. In the kitchen all appliances should be 5-star rated, which means they use less power. A green house doesn’t need to cost a great deal more. The right basic design and layout need not cost any more at all, and the rest depends on how many energy-saving features you include. The good news is that if you spend another $10 000 or $20 000 on such a house you will recoup it in lower power bills within 10 years, and in the meantime the house will be a lot more comfortable to live in.

GreenSmart villages

Melbourne: Innisfail Estate, Point Cook Brisbane: Delfin Lend Lease Village, Springfield Lakes Townsville: Fairfield Waters Estate Perth: Harvest Lakes

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WHAT IS A ‘SMART’ HOUSE AND CAN YOU HAVE ONE YET?

In simple terms, the ‘smart’ home is created by special cabling and computer equipment that enable you to turn particular power points on and off from a portable control pad or touchscreens placed around the house. These controls can also be operated remotely via the Internet. The concept also embraces smart appliances like the ‘Internet fridge’, which in the future will be able to order the groceries automatically as they run out. The fridge can read the barcode on each item as it enters and leaves the fridge and knows when to contact an online grocer for more. Until recently these toys have been the province of the very wellheeled, and indeed the full monty can still cost up to $200 000. But now, for just a few thousand dollars, you can have a new house under construction smart-wired by the electrician so it can handle all the paraphernalia of a smart home—things like phone, Internet, fax, smart lighting, security, cable and digital television, audio in every room and automatic garden sprinklers. This amount will give you the basic wiring, phone and Internet plugs in six rooms and audio, security, and cable and free-to-air TV connections in four rooms. The fancy appliances like plasma TV, home entertainment systems and computers come on top of that. What is living in a smart home actually like? From the flat-screen monitor in the family room you can shop, pay bills, email friends, download a recipe, check the baby’s room, chat to neighbours, reprogram the air-conditioning, dim the lights, water the garden or switch on the sound system in the garage. On a business trip to New York you can switch on your laptop and via the Internet check each room through cameras mounted on the ceilings. See <www.smartwiredhouse.com.au>, <www.smart.com.au> and <www.isecurity.com.au>.

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CHAPTER 2 BUYING AN INVESTMENT PROPERTY Buying an investment property In recent years there has been a scramble to invest in property, for a number of reasons—the wealth of baby boomers, low interest rates and disenchantment with the share market, to name just three. Such is the rush that the banks now lend more money to property investors than to home buyers. This has led to a sharp increase in property prices and an equally sharp reduction in returns. Where once you could get a return of 6–7 per cent on residential property, in some cities it is now more like 3–4 per cent. The number of vacant older rental properties has increased as developers build more and more apartments to satisfy investor demand. Wise investors can still do well but there are dangers. Read on.

WHY SHOULD YOU INVEST IN PROPERTY?

While not all residential property is a fantastic investment, home ownership is a form of enforced saving that creates financial discipline and has led to Australians having one of the highest investment home 17


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ownership rates in the world. It provides most of us with the largest single asset we will ever possess. Often there is media speculation of an impending ‘boom’ or ‘bust’ in residential property but the reality, according to the Australian Housing and Urban Research Institute (AHURI), is that ‘since the Great Depression, there have only been a few large downward market corrections in housing values. However these downward corrections have, for the most part, been an exception, as house values have generally risen’. AHURI notes that falling housing demand is normally reflected in fewer house sales rather than falling prices: . . . when demand drops off most owner-occupiers do not put their properties up for sale, but instead wait until the market recovers. This is because most of us need a roof over our heads and if interest rates do not massively increase, generally we can afford to hang on. It is really only those owner-occupiers or investors who must sell, at whatever price, that produce a significant downward pressure on existing housing values. Source: M. Berry, ‘How the media reports on housing’, ABC Radio National, 14 Oct. 2002.

According to the Reserve Bank (RBA Occassional Paper No. 16, Nov. 2003), housing is different from other markets largely due to four main factors: 1. Australia’s immigration and peculiar urban consolidation—leading to development in small concentrated city areas and along the coastline—which put pressure on what is a limited resource and result in an ever-spiralling supply/demand on housing stocks 2. monetary policies—including interest rates being utilised to control inflation, which can have an effect on property affordability 3. tax policies—the very significant tax benefits afforded most Australian home owners (including CGT and GST exemption and negative gearing) which also apply, to a lesser degree, for smaller private landlords 18


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BUYING AN INVESTMENT PROPERTY

4. polarisation of the labour market—the wealthy and the nonwealthy, very large increases in part-time employment and long-term structural unemployment. The Australian Bureau of Statistics ‘experimental estimates’ state that the wealth of the average Australian household rose by 45 per cent from 1994 to 2000 and that this was largely due to increasing property values. In real terms the average Aussie household is almost twice as wealthy as it was 25 years ago, with New South Wales by far the ‘richest’ state with the average household holding about $345 000 in net assets, followed by the ACT with $309 000. In a similar vein, Reserve Bank deputy governor (Mr G. Stevens) said in October 2002 that over the past 15 years household assets had risen to seven times annual income, compared with four times (annual income) in preceding years. This was a ‘striking result’ and was as large as the relative increase in assets of American households that occurred in the late 1990s stock market boom. Much of the Australian increase had been, ‘particularly over the past few years, a result of rising house prices’. A recent survey by the Centre for Urban Population and Research found that Sydney, for instance, will in the foreseeable future suffer a housing shortage because the number of people moving to the city is outnumbering those leaving by three to one. To some degree increasing housing asset values have social consequences, which are beginning to be reflected by the growing number and increasing age of children who remain at home instead of renting, and the declining number of first home buyers, seemingly due to the daunting prospect of trying to purchase an expensive home. Increasingly, parents are now providing ‘gift’ loans to help their children into their first home by borrowing against the equity in their own homes. HOW DO YOU BECOME AN INTELLIGENT INVESTOR?

Successful and sound property investment is all about research—and heaps of it! Investing in property is not unlike investing in shares and 19


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should be seen as a medium- to long-term proposition. Start off small, at a level you can comfortably afford, and work your way up. Unless you are a professional you should never borrow more than you can safely pay off, and if you intend to substantially renovate you should aim to keep the property for a minimum of three to five years to give your potential capital growth a chance to take effect. When considering a potential area, you need to take into account many factors such as the size of the city (the larger the town the better are job and tenant availability), planned improvements to accessibility (new railways, light rail or motorway extensions) and future amenities (planned restaurants, shops, closure of noisy roads). Urban consolidation and ever-increasing traffic loads have meant more and more people want to buy good architecturally designed units or period style houses within 8–12 kilometres of the CBD. These areas have good growth potential because of limited supply. With this formula in mind it is a fair bet that, in time, the high capital growth rates of the inner-city areas will begin to move outwards. Get in your car and drive around the areas you are interested in, keeping an eye out for the emergence of the trendy new cafes which are an indicator of a changing social demographic (gentrification). When purchasing a freestanding house it is a good idea to buy in areas close to schools, shopping areas, parks and good public transport. Look for properties which can be upgraded inexpensively in quieter streets. You should then start tracking sale prices (in an exercise book or loose-leaf folder) of interesting properties in your selected areas, taking photos and noting the size of the land, the number of bedrooms and so on, so that you can: 1. confidently know what represents good value 2. determine if property prices are going down or plateauing (usually a good time to buy) 3. know if property prices are moving upwards again (a good time to sell). 20


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When purchasing a unit consider areas that may have water views, are close to bars, cafes and restaurants, or to beaches and handy transport, rather than areas that are, say, near schools, a more important consideration when purchasing a freestanding house. One fundamental requirement when buying a unit, often forgotten by investors who have previously owned houses, is the need for storage space. Check on storage availability and note that in many developments you can now buy separate, lockable storage spaces costing from a few thousand dollars up to $40 000 for a couple of square metres. These areas can often be sub-let to other tenants desperate for storage and can represent a good investment, particularly if they are scarce.

Fact

The CSIRO Future Dilemmas study found that the size of traditional freestanding houses in metropolitan areas has grown from 100 to 150 square metres in the last 50 years. The CSIRO model assumed that in the next 50 years they will stabilise at 200 square metres—but if current rates of growth continue, they may reach 250 square metres.

HOW DO YOU SELECT AN INVESTMENT PROPERTY?

More and more people are investing in units rather than houses because they are easier to manage—no lawns to mow, no exterior painting— and normally they do not incur land tax. Developers have responded to the demand for investment units to the point of over-supply in some areas so care must be taken in choosing which unit to buy. In some inner-city areas banks are now requiring deposits of 30 to 40 per cent because units are considered a higher risk, or will not lend against bachelor units smaller than 50 square metres. It is also wise to avoid highly volatile markets like the Gold Coast unless you are a very experienced student of real estate cycles and are prepared to take a certain degree of risk. 21


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The first rule is to buy in a safe area. Don’t take a plunge on the latest trendy area just because it’s become fashionable to live next door to a tannery. Look at the areas which have shown consistent capital growth in the past. Buying near a beach or in a sought-after suburb is a pretty safe bet. New infrastructure in the area such as a new railway line will help boost future values. Don’t be seduced by flash marketing. In general, brand-new units are significantly more expensive than second-hand ones. People pay more for new units because of the force of marketing campaigns, because they prefer a shiny, brand-new product and because they don’t have the time to look at one unit in each of 10 older blocks when they can look at 10 units in one new block. There are advantages in new units—they are easier to let and the depreciation allowance helps your tax situation—but is it worth paying another $50 000 or $100 000 for essentially the same thing? Whatever you do, don’t take what the selling agent tells you about capital growth or likely rents at face value. Obtain an independent rental appraisal from an agent specialising in rentals in that area. If a rental guarantee is being offered, ask yourself why the developer feels it necessary to offer such a guarantee. And if the agent is so confident about capital growth, ask whether they have bought a unit in the building themselves. Have the unit you are interested in buying inspected by a professional building inspector. The building may have serious faults—even if it is brand new. Common problems in new developments—even very expensive ones—include poor waterproofing, noise transmission between units, fire risks, bad drainage, mechanical ventilation problems and high management fees. All things being equal, ownership of land holds more promise of capital gain than a unit. Land can be redeveloped, sometimes into multiple dwellings, while a unit cannot. It is already the ‘highest use’ for that site. But you can ‘set and forget’ a unit to some degree, which is not all that easy with a house and land. 22


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HOW DO YOU CALCULATE THE REAL RETURN ON AN INVESTMENT PROPERTY?

Consider what you really want from your investment—the highest rent or the highest capital gain. You are unlikely to get both. For a high rental return look at a studio or one-bedroom unit near the city, a university or a big hospital, or possibly consider a commercial property. For high capital gain look for a two-bedroom unit—something you might live in yourself—in a desirable area like the Lower North Shore in Sydney, South Yarra in Melbourne or Cottlesloe in Perth. Your real rate of return is the sum of the rent and the capital gain less costs like rates, strata fees and maintenance. If you are getting a 4 per cent rental return and a 10 per cent capital gain each year, your total return on investment is 14 per cent less costs. Perhaps the best approach is not to look for a huge rental return or huge capital growth, but a reasonable average for each. That way you are at least partly protected if one or the other slows down.

WHAT ARE THE COSTS OF OWNING AN INVESTMENT PROPERTY?

Owning a residential investment property is an expensive business and would not be worth the proverbial candle without the concessional rate of capital gains tax (half the marginal tax rate). It’s a lot more hassle than owning franked shares where the dividends are tax free, but there is less risk in property than shares. The main costs of being a landlord are: • • • • • • •

council and water rates maintenance and repair of the property insurances, including landlord’s insurance agent’s commission on rent collection (around 7 per cent) strata fees and levies (for a unit or townhouse) interest on any loan land tax (if applicable) 23


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• •

building inspections depreciation schedule.

The big killer is land tax, which is a charge on the land value of any property you own in addition to your principal place of residence. On a Queensland investment property you pay land tax on the total unimproved value of the land if it is worth more than $275 997. On a $500 000 property the tax is $5750 a year. Land tax is not usually payable on units because the land value is divided by the number of units and the resulting amount is normally below the threshold for imposing land tax. (See page 138 for land tax rates in each state.) If you are looking at negatively geared investment property (see below for more on this), you should have a depreciation schedule professionally prepared so as to maximise tax deductions. The cost is approximately $400–$500 (for metropolitan areas) and is very worthwhile. See <www.pagekirkland.com.au> for further information.

WHAT IS NEGATIVE GEARING AND WHAT OTHER TAX DEDUCTIONS ARE AVAILABLE?

In simple terms, negative gearing is borrowing money to buy a rental property where the net rent received does not cover the interest payments and other costs of running the property. Thus not only do any capital repayments each week or fortnight have to come straight out of the owner’s pocket, so also does the shortfall between the rent received and the interest and maintenance costs. The reason that investors negative gear is because the interest on a loan is a tax-deductible cost of that investment, just like rates and maintenance costs. While to some people it may seem silly to invest in something that makes a loss, the negatively geared investor is punting that the capital gain on the property, which is taxed at a concessional rate, will be greater than the ‘subsidy’ they paid out of other earnings to keep it going. 24


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Negative gearing is often seen as a ‘magic bullet’ for anyone at all to make money out of real estate, using borrowed money and the help of the taxman. But it is really only suitable for high income earners as a means of reducing their tax and hopefully moving them from a high income tax rate to a lower one. There is little benefit if you don’t pay much tax. Negative gearing can cause a great deal of distress to an investor with little or no discretionary income if they cannot find a tenant or the tenant stops paying rent. In these circumstances the owner has to make all the loan repayments with no income from the property. This scenario has the potential for ‘mortgagee sale’ written all over it.

Example

If your loan interest and other running costs on an investment property fall short of your rental income by $3000 in a financial year, and the tax rate on your other income is 42 per cent, you would be able to claim that $3000 loss against your other income. You would get back from the taxman the $1260 you had paid in tax on $3000 of that other income.

All costs associated with maintaining an income-producing investment are tax deductible. They include such things as advertising, commission to the managing agent, council and water rates, strata fees, insurance, maintenance and repairs, and cleaning. You may also claim depreciation on the building (if built since 1987) and on appliances and other contents. The capital costs of improving a property are not deductible in a single year but can be depreciated over a number of years. Work valued at more than $500 is usually regarded as a capital improvement, as is any work done after you buy the property but before you lease it. The Tax Office has a publication called Rental Properties which spells out what deductions you may claim, or you can visit 25


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<www.ato.gov.au> and look under ‘Booklets and Publications’. You should also seek the advice of your accountant.

WHICH ARE THE MOST EXPENSIVE AND THE CHEAPEST CITIES IN WHICH TO BUY?

The dearest place to buy a home in Australia is Sydney in general and Point Piper in particular. The cheapest capital city is Hobart. In the March quarter of 2003 the median price of a house in Sydney was $430 000 and for a unit it was $354 000. (The median price is the point at which half the houses sell above that price, and half below.) But of course there is a great variation between the different areas of that sprawling metropolis, with the median for the eastern suburbs and city being $860 000 while in the outer western and southwestern suburbs it is less than half that—around $330 000. The median for units ranges from $215 000 in the south-west to upwards of $420 000 on the northern beaches and in the eastern suburbs. After Sydney come Melbourne, the Gold Coast and Canberra, while the halfway point for house prices in Brisbane, Adelaide and Perth is not much over $200 000. The pecking order for units is slightly different, with Canberra being dearer than the Gold Coast. The median price for a Melbourne house in early 2003 was $382 500, with a low of $254 000 in the south-east and a high of $518 000 in the inner south. Units were cheapest in the north ($219 000) and dearest in the inner south ($303 000), with a median for the whole city of $280 000. Penthouses in the Docklands were reaching six figures but were still looking cheap by Sydney standards. Median house prices in the other major centres were $300 000 on the Gold Coast, $295 000 in Canberra, $215 000 in Brisbane, $205 000 in Perth and $200 000 in Adelaide. For units they were $230 000 in Canberra, $200 000 on the Gold Coast, $165 000 in Brisbane, $155 000 in Perth and $147 000 in Adelaide. Source: Home Price Guide 26


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WHY ARE RENOVATIONS BOOMING?

Renovations are booming largely because stamp duty and other taxes are making it too expensive for many people to move or build a new house (see page 138), not to mention the cost of the agent’s commission on selling your old home. Australians are spending half a billion dollars every month on renovations—and that does not include small handyman or trades jobs. A study by the Housing Industry Association in 2003 revealed that $120 000 of the cost of a typical house-and-land package in Sydney goes in indirect taxes to federal, state and local governments. In Melbourne the figure is $92 000, Brisbane $66 000, Perth $62 000 and Canberra $48 000. On top of GST, which is applied twice in the chain of production, there are more than 20 state and federal taxes on new housing development, including stamp duty on land and house-and-land packages, public transport levies, council contributions and levies for community facilities, roads, drainage, libraries and public open space. In 2002–03 new home buyers paid $11 billion in indirect taxes, for an Australia-wide average of $67 000 per home. No wonder home owners are doing up their existing homes. WHAT ARE THE RULES FOR MAKING MONEY OUT OF RENOVATING?

One of the more tempting ways to make money out of property is renovation—the renovation of your own home or of a property for rental or resale. But not all renovations are successful and are always more effort than the TV infotainment shows would have you believe. A bad or tasteless renovation will lose friends among buyers, not make them. More often, however, the problem is that too much money is spent on the wrong things and the property is overcapitalised. In other words, you’ve done a nice job but you can’t get your money back. There are a few tricks to avoiding overcapitalisation or, worse, buying the wrong property in the first place. It is important to assess 27


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a property’s profit potential with a design and cost analysis before you purchase. It’s too late to do this after you have signed the contract. Ensure the structure is suitable for the renovation you envisage. For example, if you want to add a second storey make sure the existing building will support it by having an engineer look at it. Check the planning regulations to avoid having to go to court for development approval. Better still, talk to the council planning department about what you want to do. Don’t overcapitalise with design, finishes or fittings. Ask yourself: is this really an area where people will pay for solid gold taps and an indoor swimming pool? Do include in the design the lifestyle features that the market is looking for. Perhaps a media room and stainless steel appliances are the go if you are renovating in, say, Darlinghurst in Sydney or Prahran in Melbourne. Check out the reputation and track record of the architect and the builder (see Chapter 6 ‘Selecting the right builder or architect’). Talk to people who have used them before. And use the builder to check the architect’s estimate of costs. For a fee of $950 you can obtain a renovation report from an architect through a branch of the Royal Australian Institute of Architects called Archicentre—this will tell you if a renovation job is feasible and what it is likely to cost, and give you a concept design of what it might look like. There is also the website <www.archicentre.com.au> which gives you some basic tips such as buying a property that is structurally sound and buying in an area of strong demand. One trap for renovators is that GST is payable on ‘new residential premises created through substantial renovations of a building’. This rule can even apply to the renovation of a unit. This a tricky area and if you are contemplating a big renovation you may need to consult your accountant. The trick to avoiding GST on a renovation or extension appears to be to leave at least one part of the existing building unrenovated; to fall foul of the GST ruling on renovations they must directly affect most rooms in a building. Finally, check the sale prices of similar projects in the same area. 28


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Talk to local agents to make doubly sure the market can bear what you are proposing to do. (See also ‘How will you know what a place is really worth?’ on page 159.) Typical renovation costs* Single room extension $14 000 to $30 300 (shell only)

Concrete driveway $46 to $61 m2 Re-wire house $4900 to $7400

Single room upstairs $22 000 to $38 500

Replace tile roof $7280 to $10 750

Renovate bathroom $7800 to $20 500

Paling fence $45 to $75 metre

Renovate kitchen $8600 to $25 800

Wall tiling $77 to $135 m2

Colorbond guttering $28 to $40 metre

Bricklayer, plasterer, carpenter, painter

Painting $520 to $710 room Plastering $1150 to $1500 room

$34 to $48 hour Replumb house $5965 to $10 060

Source: <www.archicentre.com.au> (August 2003) *Sydney, Hobart and Canberra are in the higher end of price ranges.

WHAT ARE THE LEGAL OBLIGATIONS OF LANDLORDS?

Laws vary between states but the New South Wales rules are a good general guide. Before a lease is signed a landlord or agent must give the tenant a copy of a standard lease, a condition report on the premises, a list of all upfront costs and a copy of the Renting Guide. The condition report is important because it may need to be relied upon later in any dispute between the landlord and the tenant. The bond paid by the tenant must be sent to the state Rental Bond Board within a certain time. The maximum bond you may charge for unfurnished premises is four weeks rent. A tenant must pay rent in advance—two weeks if the rent is under $300 per week and one month if over $300 per week. You must provide receipts unless the money is paid directly into a bank account. Want to put up the rent? You must give the tenant 60 days notice and they can challenge it before the Residential Tenancies Tribunal. Want to check out if the property is being properly looked after? 29


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A landlord or agent can inspect the premises four times a year but must give seven days notice each time. Two days notice must be given for repairs unless they’re urgent. ‘Reasonable’ notice must be given to show through prospective buyers or future tenants. The landlord must carry out all repairs but can charge the tenant if an occupant caused the damage. If the lease is about to end you must give 14 days notice in writing to vacate; if the lease has already ended you must give 60 days (or 30 days if the property has been sold). If the tenant is behind in the rent more than two weeks you may give them two weeks notice to get out.

WHAT ARE THE RIGHTS AND OBLIGATIONS OF TENANTS?

A tenant’s rights normally include: • •

• • • • •

•

30

to be given a copy of the lease and a copy of the Renting Guide from the Office of Fair Trading (check with your state equivalent) to be given a condition report on the premises noting any damage The tenant must return this report to the agent within seven days and should add to it any other problems noted to have the bond lodged with the Rental Bond Board or equivalent to move into clean premises to be given rent receipts unless the rent is paid to a bank-type account to be given seven days notice of an inspection and two days notice if access is required for repairs (unless they are urgent) to receive 60 days notice of a rent increase which, like any other dispute, can be taken to the Residential Tenancies Tribunal or equivalent to receive 14 days written notice to end the lease if the tenant has broken it in some way or is approaching the end of the lease. If the lease has already expired the tenant is entitled to 60 days notice (or 30 days if the place has been sold)


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•

to have repairs carried out within a reasonable time. The landlord must carry out all repairs but the tenant pays the bill if it’s their fault.

A tenant’s obligations are: • • • • • • •

to pay rent on time and look after the premises to obtain the landlord’s written permission before someone else moves in to report any necessary repairs and not to make any alterations without written permission not to use the premises for illegal activities not to interfere with neighbours’ peace and quiet to give 14 days written notice to terminate a fixed-term lease and 21 days for a continuing lease to leave the premises in the same condition as found.

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CHAPTER 3 PRE-PURCHASE INSPECTIONS Pre-purchase inspections Many people obtain an expert inspection of a $10 000 used car but fail to do the same for a $500 000 second-hand house. As a result they may be forced to spend a large sum on rectification or, in some cases, attempt to resell the property to another buyer at a loss. But there are still traps for those wise enough to order a building inspection—if you choose the wrong company or have unrealistic expectations of what a building report will tell you. And there is another ‘paper’ inspection that unit buyers should arrange.

DO YOU NEED A BUILDING INSPECTION BEFORE MAKING A PURCHASE AGREEMENT?

An Archicentre survey found that only 30–40 per cent of Australian homes are professionally inspected before purchase whereas in the United States the figure is more like 60–70 per cent. Are we too trusting or simply naive? Most sale contracts for existing homes have caveat emptor (buyer beware) clauses making the purchaser liable for any latent or patent defects; this is hardly surprising when you consider

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PRE-PURCHASE INSPECTIONS

that many people sell their homes for much the same reason they sell second-hand cars—because they have some costly problem which is usually concealed or hard to detect. Commissioning a professional building and pest pre-purchase property inspection (PPI) report before buying a new or existing dwelling makes extremely good sense provided that the inspection is thorough and competent. It should pick up all visually apparent significant building faults such as damp, structural termite damage, defective roofing, some structural faults, surface drainage issues and inadequate subfloor ventilation, to name just a few. Being aware of these problems in a prioritised manner and having some idea of the likely cost of fixing them enables a property purchaser to make a more informed decision on what they should pay for the property. This is particularly important when buying at auction when, in the heat of the moment, passion can overtake commonsense. Under a private treaty sale (see page 114), the bigger problems can often be used to negotiate a lower price. The real estate agent may not be aware of any patent (apparent) or latent (concealed) property defects, and probably wouldn’t tell you if they were, so a building report becomes a very useful bargaining tool. Indeed, some industry insiders suggest that many agents are ‘ignorant’ of the property condition because of a fear of being sued for failing in their duty of disclosure to intending buyers.

Case study

Gillian and Wal made an offer of $380 000, subject to a building inspection, on a single-storey terrace in innercity Marrickville in Sydney. The building inspector found a problem with rising damp on one side and a subsequent report estimated the cost of remediation at $20 000. Presented with the report, the vendor accepted a revised offer of $360 000.

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WHAT SHOULD YOU LOOK FOR IN A BUILDING/ PEST CONSULTANT?

In some states anybody can call themselves a building consultant. You should spend sufficient time researching the skills and licensing of the person or company you propose using, and whether they carry professional indemnity and public liability insurance cover should their report prove to be negligent. Accepting the lowest price can be a real trap, and can and often does lead to incompetent inspection reports that omit significant building faults. There have been many cases of building and pest consultancy firms being sued for negligence and incompetence; there are even stories that some of these consultants have purchased the properties in question to avoid expensive litigation.

Case study

John, a high-powered banker type, had considered a number of multimillion-dollar properties and rejected them because of unfavourable PPI reports. He found another suitable property that was going to auction within two days but because his usual inspector was heavily booked John decided to use a large firm of building consultants which provided a part-written and part-oral report which basically gave the property the ‘thumbs up’. Based on this advice, and contrary to his wife’s wishes, John bought the house for over $2 million. Within a week of moving in Mrs John was complaining of foul damp smells and had noted that paint had peeled off the lower walls. John called in his usual building consultant to investigate. The consultant found that the original inspection firm was negligent as the property had massive rising, falling and penetrating damp as well as substantial subsurface drainage problems (it had been built into excavated rock), most of which were visually

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apparent. The cost of remedial works was likely to be $140 000–$200 000. John decided, on legal advice, to sue the original consultancy firm for negligent and deceptive conduct for the sum of $200 000 plus costs. After two years of waiting for the case to be heard the other side settled on the steps of the court. In hindsight John did not think his action was worthwhile given the large legal costs.

There have also been cases of buyers suing their lawyers for recommending a building consultant who missed major problems. This scenario can arise when consultants do not carry professional indemnity insurance on their work and the lawyers have failed to advise their clients that they as purchasers, not the vendors, are liable for any defects. There are Australian Standards for the inspection of residential property, AS 4349.1 (inspections of buildings) and AS 4349.2 (timber inspection). Note that like all such standards these are the recommended minimum requirements. You should always ask whether the inspection report will be in accordance with, or better still exceed, the requirements of the relevant standard. If not, you’d do better to find another consultant. The New South Wales and Queensland governments have decided that all building inspectors must be licensed. Professional indemnity insurance is not compulsory, and provides consumers with a safety net in the event that a consultant makes a big mistake, or provides wrong advice. The insurance does not cover the client directly, but covers the inspector against claims for negligent inspections. When considering claims most insurers require that the ‘negligent’ report be in writing or that the consultant has kept a record of any verbal discussions. If a consultant offers a verbal report, such advice may not be covered by insurance and is best avoided. Always check that your inspection consultant has current professional indemnity and public liability insurance, preferably is licensed 35


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and is a member of a professional association such as the Australian Institute of Building and so subject to professional disciplinary action and a code of ethics. A good building consultant should be capable of providing a sample inspection report, possibly by email, to see if you are comfortable with the layout, the clarity of descriptions and the ease with which the report can be understood. Pay particular attention to the disclaimer clauses, usually located at the front. Essential equipment for a standard building inspection includes a dictation unit, moisture meter, torch, 3.6-metre ladder, overalls, respirator, gloves, compass, spirit level and binoculars. The time taken to adequately inspect a property varies according to the type of inspection report, the size of the residence and the number of problems encountered; as a guide, however, you should expect nothing less than one hour for a building inspection and 30–45 minutes for a pest inspection. A good building consultant will spend considerably more time than this, writing up the report and discussing any areas of uncertainty with you once you have read it.

WHY DON’T AGENTS/VENDORS PROVIDE A PPI REPORT AS PART OF THE CONTRACT?

The groans of disaffected and unsuccessful buyers can be heard across the land on this issue, particularly when they have expended wads of money on multiple reports without actually buying a property. The concept of the agent or vendor providing a PPI report for the sale property to all intending purchasers has been around for a long time and been considered by some states, as there could be big savings to consumers in having just one report completed and shared by all. In essence, most authorities have found there is a potential for conflict of interest and corruption if such a policy were to be adopted when the vendor is unlikely to be liable for the condition of the property under the contract and the consultant is not required (in many states) to be licensed and have professional indemnity insurance. Nevertheless, a number of agents and building consultants have 36


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attempted to set up such a system. Unfortunately, what often happens when the consultant finds very unfavourable results is that they are put under pressure by the agent or the vendor to change their findings and present the property in a more favourable light. There are duty of disclosure laws which may bind the agent and possibly the vendor but the conflict of interest is still a strong temptation. There are many instances of agents freely passing out building or pest inspection reports but as most indemnity insurers require that each PPI report be in the name of the person who paid for it, the consultant is only insured for the person whose name appears on the report. Some lawyers might argue that such reports are public documents and therefore might be used by any intending purchaser but it’s a risky argument. Until such time as a government-approved system evolves where consumers are fully protected it is better to make your own inquiries. The ACT is an exception in that they have introduced legislation (Sale of Residential Property Act 2003) which makes it compulsory for the sellers of all previously occupied residences (except class A units) to provide both a building and pest inspection report with the contract for sale. The cost of PPI reports is expected to rise significantly (in the ACT), given the much increased liability of a single consultant’s report to all buyers.

WHAT DO YOU NEED TO DO BEFORE BOOKING A PPI FOR AN EXISTING HOUSE?

As well as checking the consultant’s insurances and licence there are a few practical steps you should take. You should ask the agent or vendor whether there is access to the subfloor and roof spaces because it is important that your consultant inspect these high-risk areas. The Australian standard requires that house access traps be a minimum 450 × 400 mm and that the area under timber floors has a minimum crawl space clearance of 400 mm, but diligent consultants will inspect areas with much less access. If no access is provided written permission should be sought from 37


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the vendor for you to create access traps. Many consultants will cut in access traps for an additional fee. Obtain a copy of the sewerage service diagram (or helio), which must be attached to the contract, and a survey of the property, and give these to your building inspector prior to the inspection.

WHAT ABOUT PREPARING FOR A PPI ON AN APARTMENT/VILLA/TOWNHOUSE?

The strata records inspection report (see page 43) should be provided to your building inspector so they have a better idea of what to look for based on historical defects, and can see if there is sufficient money in the sinking and administrative funds to cover any problems. You should also ask the managing agent (or owners’ corporation secretary) whether regular pest inspections have been undertaken on the building, and seek a copy of the latest report. If no pest inspections have been undertaken you should seriously consider engaging a pest consultant yourself as many multi-unit buildings have substantial pest problems. In New South Wales all multi-unit residential buildings built since 2000 or which have had a council fire order placed on them are required to have an annual fire safety inspection. You should also seek a copy of this report. Australian Standard 4349.1 is considered by many in the industry to be inadequate as, for instance, there is no requirement to remove ceiling or service-duct access panels and inspect the crucially important areas behind, nor is there a requirement to inspect any common areas other than those directly around the apartment. Try to find a consultant who will exceed the minimum standard in their inspection. There are numerous examples of apartments where an earlier incompetent inspection report has revealed just a few surface defects but a subsequent inspection has uncovered many major faults. Contrary to popular belief, a thorough inspection report for an apartment can be a lot more expensive than for an existing house, particularly if the apartment is new, you are buying off the plan or 38


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you wish to more fully inspect the common areas and more fully understand your future liability for special levies. A thorough inspection should include checking the unit-separating walls and service pipes via access panels in the ceiling for fire safety purposes. Many older apartment blocks have non-existent or inadequate fire safety services and while these normally require a specialist report, a good building inspector will provide some basic advice. This is important because the cost of any future rectification can be enormous.

DO YOU NEED A PPI WHEN BUYING AN APARTMENT OR VILLA OFF THE PLAN?

Many off-the-plan and brand-new property contracts are quite draconian from the buyer’s viewpoint. They typically require that the developer (proprietor) or vendor be formally advised, in writing, of all building faults within a limited period (the ‘defects liability period’) which is usually 90 days after settlement. The proprietor is required to rectify the building faults within a ‘reasonable time’ after the expiration of the defects liability period. It is now quite common for contracts to stipulate a maximum of one or two notifications of building faults (that is, the buyer gets only one bite of the cherry). Many contracts also stipulate that the proprietor will only fix those faults they deem ‘reasonable’, with little or no right to dispute their judgment. Given this trend and the much-publicised inadequacy of current building standards it is vital that you undertake a comprehensive building survey report as soon as you take possession. If done well, the cost of these reports is much higher than a standard pre-purchase property inspection because a good building inspector should report on the quality of work (although this is not required by the standard) and all apparent unacceptable building faults, plus request copies of warranties and certification documents. The cost of such inspections is in the range $395–$1100 and they should include photographs. Again the cost depends on the size and 39


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complexity of the residence, the number of building faults encountered and the comprehensiveness of the report. Remember, these reports are often required to support any home warranty insurance or litigation claim against the proprietor or builder. WHAT SHOULD YOU GET FOR YOUR MONEY IN A BUILDING INSPECTION REPORT?

There are three main types of PPI report: • • •

a standard report for an existing residence a report for new residences a specialist or special purpose report.

The cost of a standard report can range from $195 to $550 excluding pest inspection, which is around $195–$285 more. The variance reflects whether the consultant carries the appropriate insurances, which are now expensive and difficult to obtain, and the amount of time spent making the inspection and writing the report. Cheaper reports are commonly a standard format with ticks and crosses, often handwritten, with very little detailed explanation. This can make it difficult to properly understand the significance of the findings. This type of report should state any item which was not inspected and the reasons why, together with any recommendations for further investigation. Photographs are not usually included in a standard report, although their inclusion can often be very beneficial in understanding specific problems. A good report summarises the findings, at the front, in a prioritised, concise and easily understood manner. The summary is the most important part of a standard inspection and should list all significant faults found and include an opinion as to the property’s overall condition relative to similar buildings. Question and answer type reports, where the purchaser is required to read the report and then ask the inspector specific questions, are best avoided as they place an unreasonable responsibility on the purchaser recalling the problems and having specialist knowledge. 40


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Many better consultants provide reports well in excess of the minimum standards which include an estimated cost of repairs. WHAT WON’T YOU GET IN A STANDARD PPI BUILDING REPORT?

Contrary to the expectations of many consumers, there are many things you will not get in a standard PPI report. They include: • • •

• • •

• • •

estimates for the cost of repairs detection of illegal building work areas which could not be accessed, including timber stud walls, footings, concealed damp-proof courses, illegal stormwater connections to sewers latent (concealed) defects advice as to the type and causes of damp areas outside the consultant’s expertise such as some site drainage issues, plumbing, electrical work, air-conditioning, pools and pool equipment, alarms, smoke detectors, intercom systems and many structural defects floor coverings operation of appliances and spas minor defects.

If your consultant is of large girth or not very enthusiastic and the access traps or ground clearances are below the minimum required, the report is likely to say that ‘access could not be gained’ to a particular area. Most of the excluded items can be covered by a separate specialist report; a good consultant will recommend that you engage, say, an engineer if moderate to heavy cracking is found. WHAT DON’T YOU GET IN A PEST INSPECTION REPORT?

Pest reports are usually so heavily weighted with disclaimers that it is often difficult to understand what exactly is being said. You should 41


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always ask your pest consultant to give a verbal report at the end of the inspection so you clearly grasp the findings. Many people think that a ‘clear’ pest report means there is no termite damage in the building. This is not so. A clear pest report indicates there is no live or ‘active’ termite infestation. There may be plenty of dead ones, and extensive damage from previous infestations. Termite damage really frightens buyers but there can be much worse faults. If you can establish that the damage is fairly limited it may become a great bargaining tool; however, many pest consultants will recommend that you have a builder determine which timbers are structurally defective. The vendors may not have been aware of the damage and may be so alarmed at finding out they may drop the price substantially in fear of not finding a buyer at all. A good building consultant should be able to estimate the cost of rectification; if the amount is not high it may not be good tactics to share this information with the vendor.

Case study

After many months of looking Andrew found the rural property he was searching for and before contracts were exchanged he told the agent he wanted to get a building and pest inspection. The agent suggested there was no need for a pest report because he could provide a clear report which had already been done. Andrew insisted on getting his own, which he did the day before contracts were to be exchanged. The building/pest inspector found extensive termite damage in the roof timbers which, since termites come from the ground, meant there would probably be similar damage right through the concealed areas of the house. Later Andrew discovered that the walls of some of the termite-damaged rooms had been cheaply replaced and the person who had organised these repairs was the agent. The eventual buyers of the

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house spent six figures rectifying the damage and lived in a major construction zone for seven months.

WHY SHOULD UNIT BUYERS GET A STRATA SCHEME SEARCH?

When purchasing an apartment, townhouse or villa which forms part of a strata plan, body corporate or company title you should obtain a search of the strata scheme records from a strata search company. This often gives clues to prior or current building problems and the funds available to fix them. A strata inspection report costs $180–$550 depending on the size and complexity of the building and whether a prior inspection has been done. The quality of these reports can vary enormously and it is wise to ask your solicitor or the National Community Titles Institute (or state-based associated member organisation) for a recommendation. Again, check that the firm you engage holds current professional indemnity insurance as many don’t. A good report summarises the more significant findings, which should include prior building defects and complaints and, most importantly, the current monies in the sinking and administrative funds and any special levies that may be current. It should also give information on issues like pet ownership, insurance, any past or current disputes and the history of works in the complex.

Case study

The owners’ corporation of a two-year-old harbourside apartment complex with leaking bathrooms and roofs commissioned a common area building defects survey which found very serious building defects and indicated that the cost of repairs could exceed $10 million. When the owners were given the bad news many were

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concerned about word getting out and the value of their property decreasing, so they instructed their strata manager not to put the report on the strata records (it was locked away in the building manager’s safe) so it could not be accessed by potential buyers. Some owners decided to sell instead of staying and fighting the builder or developer, leaving unwitting buyers with a bucketload of trouble. The case serves to show that strata inspection reports do not always accurately reflect a building’s true condition.

You can carry out a strata records search yourself by making an appointment to go through the files of that particular development at the strata manager’s office. A fee of about $25 is charged. You will need a letter of authority from the agent or the unit/villa owner. Unit owners and subsequent purchasers are usually responsible for maintaining anything they have installed themselves. If a strata search identifies that such work has been carried out on a unit you are likely to be liable for its maintenance upon purchase.

Case study 1

A New Year’s Eve party in Western Australia was attended by a number of doctors and specialists at premises which had been converted into a residential strata complex. Thirty of the party-goers were on the balcony when it collapsed; four became quadriplegics and many were injured. The claim against the owners’ corporation stands at $30 million, far in excess of the public liability cover of $10 million. The matter is yet to be resolved. (Source: <www.strata.com.au>)

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Case study 2

In 1996/97 it was brought to the attention of the owners’ corporation of a block of units in Sydney’s north-west that a retaining wall needed repairs and in 1998 a quote was obtained for $6400. As repair work was not carried out, in 1999 the neighbours took legal action against the corporation but because of poor communication this was not conveyed to all owners until May 2001. What originally started off as a relatively small problem has now escalated to repair costs of $180 000 plus legal fees. Unfortunately for the owners’ corporation they were insured through HIH Insurance, which collapsed soon after, and now may not obtain compensation. The matter was subsequently settled outside of court as both sides were concerned how their evidence might be interpreted. (Source: <www.strata.com.au>)

WHAT ELSE DO YOU NEED TO DO WHEN BUYING OFF THE PLAN?

You should always have a specialist off-the-plan lawyer review the contract and advise you on the proprietor’s liability for building faults, the defects liability period, what constitutes an agreed building fault, how many defect notices are permitted and how long after written notification the faults will be fixed. Many contracts say that the proprietor will fix agreed faults ‘within a reasonable time’ after the expiration of the defects liability period or settlement. But a lot of buyers have been left with unacceptable building faults 18 months after purchase. Your solicitor may be able to negotiate more acceptable contract terms, including withholding sufficient funds to cover the cost of any repairs until they are satisfactorily completed. Arrange for a building inspection prior to settlement or during the 45


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defects liability period. Ask your building inspector to contact the principal certifying authority (PCA) to request the various ‘certificates of compliance’ for the building. (The principal certifying authority may be the council or an accredited private certifier whose job is to confirm that the building complies with council-approved plans and the Building Code of Australia, and is fit for occupation.) These certificates will enable your inspector to provide you with a more comprehensive report and give you some understanding about the likely performance aspects of the building in relation to acoustics, fire safety, waterproofing warranty and mechanical ventillation, for example. At this point you should ask the proprietor to provide you with an ‘as-built’ plan of your unit showing the location of lounge rooms, bathrooms and kitchens in properties adjacent to your own to assist your building inspector. While proprietors are not compelled to provide these documents, if they genuinely believe their property has been well constructed they should oblige. Also ask the proprietor or builder for copies of the all-important warranties covering such aspects as waterproof membranes, termite barrier treatments, air-conditioning systems and windows.

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CHAPTER 4 MAKING AN OFFER AND BIDDING AT AUCTION Making an offer and bidding at auction

More and more properties are being sold at auction—where the nod of your head can put it in a noose. The whole idea of an auction is to force you to make up your mind to buy a property within a few short weeks and to engage you in competition with other emotionally driven buyers. This is a recipe for disaster if you are not well prepared, made even more risky by some dubious practices which have grown up around the auction system. These include agents giving low estimates of what a property might bring to encourage you to attend the auction, agents employing dummy bidders (now illegal in New South Wales) at the auction to force the price up and agents giving vendors unrealistically high selling prices and then signing them up to exclusive long-term agency agreements. Preparation, research and discipline are the keys to winning at an auction.

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WHAT ARE THE RULES FOR BUYING AT AUCTION AND HOW DO YOU HANDLE THE BIDDING PROCESS?

There are two golden rules of buying at auction: do all your homework beforehand, and bid within your upper limit—no higher. The property being auctioned will be subject to a ‘reserve price’, which is the minimum the vendor will accept, unless it is advertised as ‘without reserve’. At the auction, stand where you have a good view of other bidders so you can watch their tactics. Are they dummy bidders? Are they strong? Are they weak? Raise your hand to make a bid, and if you wish to move your bid by a greater or smaller amount than the previous bids, call it out. There are several ways of putting pressure on other bidders. •

•

•

•

Jump in early and set a cracking pace to intimidate other bidders. Make your next bid immediately after the previous bid. If the auction is moving in $5000 increments try a knockout blow and increase the next bid by $10 000—always keeping in mind your budgeted limit. Another approach is to wait until the bidding has slowed and the last remaining bidder thinks he or she is about to win the fray. Then come in with strong bidding which could destroy your opposition. The property cannot be sold until it reaches the reserve, and at that point the auctioneer will declare it ‘on the market’. Start bidding then. Don’t lower your increments of bidding towards the end of the auction. This shows you are nearing your limit and weakening.

Buyer’s agent Byron Rose of Rose & Jones uses a couple of techniques at auctions. One is to continually bid on a property from start to finish and ‘never show that you are weak’. But if you are limited in your price range then he believes it might be prudent to wait until the auctioneer calls the property on the market (that is, it has reached the reserve and will be sold) and then go for one or two serious bids. 48


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MAKING AN OFFER AND BIDDING AT AUCTION

A more risky tactic for the professional player, he says, is to start the bidding at a figure well above the expectations of other bidders. If there are a lot of bidders this can knock out the bulk of them in one blow. Auctioneers do take bids ‘off the wall’ or ‘off the phone’, particularly if there is only one genuine bidder. This normally does not happen after the reserve price has been reached, so once the property is declared ‘on the market’ you must be in it to win it. Before that, the only genuine bidder you can be sure of is yourself. If you’re nervous about bidding, attend some other auctions first or ask an experienced friend or an independent buyer’s agent to bid for you. Check the time of the auction the day before so you don’t arrive late. Also make sure there have been no late changes to the contract you were given. If you are the successful bidder, you will be required to sign a contract on the spot and pay a deposit, normally 10 per cent. There is no cooling-off period with an auction. When the hammer falls, you are committed. If you’re unsuccessful you may still incur costs for building and pest inspections and solicitor’s and valuation fees. If the property is passed in, you can make an offer to buy it by private treaty, when you may be able to negotiate amendments to the contract, such as a ‘subject to finance’ clause or an extended settlement period. You would then gain the benefit of the cooling-off period (be aware, though, that a contract signed the same day as the auction is under auction conditions). For a property that has passed in, don’t be afraid to make an offer below the highest bid—it may not have been genuine.

HOW CAN UNSUCCESSFUL AUCTIONS WORK FOR THE BUYER?

If a property has failed to sell at auction the vendor will be devastated after spending perhaps thousands of dollars on advertising. A canny 49


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buyer follows up failed auctions as they may present an opportunity to ‘steal’ the property with a low offer. Find out as much as you can from the agent about the seller’s circumstances and why they are selling—is it financial trouble, divorce, have they already bought another home? If they are under some sort of pressure they may be amenable to a low offer. Don’t be squeamish about starting low because the agent is a buffer between you and the vendor and once you make an offer, any offer, the agent may well divulge more useful information about the vendor’s situation.

Case study

Dom had his fully renovated two-bedroom house up for auction and set about trying to find a larger house away from the flight path where he could start a family. The house he found was going to auction one week after his own property was to be auctioned and was poorly marketed and presented, unlike Dom’s house which was pristine. Dom’s house failed to sell at auction and his agent told him he would probably have to sell for a lower price. The following week Dom attended the other auction but did not bid, telling the agent that as he did not sell his own house he had no money. The agent knew Dom was the only keen buyer and tried all sorts of tactics to get him to bid, including using the local butcher as a dummy bidder. The vendors were divorced and desperate for the money and the property was passed in well below what Dom was willing to pay. After the auction Dom and his own agent negotiated an attractive purchase price and a 13-week settlement to leave time to sell his own property at a reduced price. Dom sold his house two weeks later and adjusted the settlement term to coincide with that of the house he

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was buying. Everyone thinks Dom got a steal as he purchased a home for $295 000 that had previously been passed in (by another agency some eight months prior) at $340 000.

WHAT ARE THE LAWS RELATING TO DUMMY BIDDING AND OTHER QUESTIONABLE PRACTICES?

Dummy bidders act on behalf of the vendor or agent in an attempt to artificially push up the price of a property at auction. Some auctioneers pull dummy bids ‘off the wall’ without actually having a dummy bidder in place. Dummy bidding became illegal in New South Wales on 1 August 2003 as part of a package of real estate reforms which also makes agents more accountable for their price estimates. The review of the law came about because an agent was discovered using litigation in an attempt to silence a buyer’s advocate who had complained about his use of dummy bidding. Some of the new New South Wales legislation includes: • •

• • •

making it an offence for an agent to quote a price that does not reflect a true estimate intending purchasers at a residential auction or rural land auction must first register their names in a bidders’ record to stamp out dummy bidding continuing professional education for agents as a condition of annual licence renewal licensees ensuring their employees are properly supervised a cooling-off period of one business day—including Saturday—to be included in all sales agency agreements for the sale of residential property or rural land.

Very similar and possibly more comprehensive initiatives are being considered by the Victorian Government. The ACT has also introduced similar legislation which has not addressed the issue of dummy bidding. 51


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Notwithstanding various state legislation, the Australian Consumer and Competition Commission has commenced a national campaign to stop deceptive practices (such as inaccurate selling price estimates) in the property industry by enforcing the Trade Practices Act after having received 350 serious complaints.

Case study

Angus was selling his house by public auction. His father Cyril made various bids at the auction even though he had no intention of buying Angus’s house. He simply wanted ‘to help Angus get the price up to the reserve’. If the New South Wales legislation was applied in these circumstances there is, failing any other explanation, sufficient evidence for a court to convict Cyril of a breach of the law even if Angus had not asked Cyril to make any bids.

For more information on real estate legislation visit <www.reiaustralia .com.au/government/index.asp>.

HOW DO YOU MAKE A COMPLAINT AGAINST AN AGENT?

See page 171 in Section 4, ‘Selling your property’.

SHOULD YOU MAKE AN OFFER BEFORE THE AUCTION?

This is one of the hardest decisions to make when trying to buy a home. On the one hand you may get the property more cheaply than by waiting until the heat of the auction when bidders can get carried away. On the other hand you may just become a ‘platform’ to be used by the agent to attract higher bids. Once the agent has got an 52


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offer he can say to all the other lookers that the price will be ‘at least so much’ with great confidence. Your bid is being used to jack everybody else’s up. If you do sense there is strong interest in a property or that the vendor would be happy to make a sale before the auction, then it can make sense to make an offer before the auction. The offer should be in writing as this helps ensure it actually gets to the vendor. While making a low bid to start can make sense in a private treaty sale, leaving you plenty of room to negotiate, it only makes sense for a property going to auction if the agent and/or vendor are worried the auction will be a dud. In a strong market with plenty of buyers give it your best shot. At the auction anything can happen. It’s a good idea not to leave your written offer open too long. Give the agent a deadline for a response and tell them you will not be attending the auction unless a response is received. Convey the strong impression that if a deal is not done within a specified time frame (say, 48 hours) you will ‘walk’. Say you are negotiating on another property, or you are not prepared to pay for a building inspection without a firm deal, or simply that you hate auctions. Be convincing. And you can always change your mind, can’t you?

WHY SHOULD YOU TARGET PRIVATE TREATY SALES?

Anyone who has unsuccessfully bid at multiple auctions and paid for the associated building/pest inspections and solicitor’s advice will tell you why they believe fixed price sales are better. Often they have been unable to bag an auction property because the agent’s sales price guide proved way too low and the home sold well above their financial limit. Even making a pre-auction bid can prove disastrous because, unless it is accepted, it is likely that the agent will quickly run the bidding up to that amount on auction day knowing at least one buyer will pay that much. With properties for sale through an agent by private treaty, or 53


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directly through the vendor, you are fully aware of what price will secure it and you can often use the negative findings of a building inspection to negotiate the price down. You can also more easily negotiate the conditions of the contract, such as a lower deposit or a longer settlement period if you have not yet sold your own property. There is far less pressure with private treaty sales and you avoid the often-traumatic process of auctions.

Case study

Anthony, a builder, had been looking at inner-city properties for over a year and knew property prices well. He found an unrenovated terrace owned by a deceased estate which was to be auctioned and had a building inspection which found it fairly sound. The agent’s price guide was $480 000 at the last open house. The agent did not bother to record the names of prospective buyers inspecting the property and simply sat on the front fence. Anthony decided to make a generous pre-auction offer of $515 000 and gave it to the agent in writing. The agent did not return Anthony’s many calls and in the final pre-auction week an ad appeared in the paper saying that it had been ‘Sold Before Auction’. Anthony rang the agent who advised him the property had been sold for $505 000.

If you are fortunate enough to find a suitable property being sold directly by the vendor (that is, a private sale), you get to negotiate with the owner and there is no agent’s commission. But be aware that sometimes private vendors have an inflated idea of what their place is worth and are selling privately because they did not like the agent’s advice. The downside to private treaty sales is that gazumping can and often does occur. This is where a buyer makes an offer which is 54


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accepted but before exchange of contracts a higher offer is received and the property is sold to that buyer.

Buyer’s checklist

•

Obtain finance approval from a bank, building society or non-bank lender or through a mortgage broker (take along employment history, payslips, group certificate, bank statements, details of other loans/ debts and credit cards see ‘Finance’ page 121).

•

Choose the area in which you wish to live and obtain details of recent sales there. Home Price Guide (02 9339 8200) provides Australia-wide information.

•

Inspect properties through newspaper advertisements and/or Internet and/or agents located in the area.

•

If interested in a property ask for a contract and refer it to your solicitor or conveyancer to check special conditions, encumbrances, etc.

•

Conduct at least two inspections before deciding to

•

If the house appears to have had significant

buy, and ask for details of council and water rates. alterations, request a coucil final certificate from the vendor. •

Check the sewerage diagram in the contract to ensure all connections in the dwelling are on the diagram.

•

Once you have negotiated a purchase you can pay a holding deposit which, while not binding, is evidence of good faith. The balance of the 10 per cent deposit is payable on exchange of contracts.

•

Contact your legal adviser to go over the contract in detail.

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•

Organise a building inspection and timber pest report, and survey report if necessary.

•

Advise your lender of the purchase and when it has approved the property your solicitor will exchange contracts.

• •

Arrange insurance for the building (see page 144). Ascertain completion time for the contract and book a removalist.

•

Your solicitor will ask you to pay the stamp duty prior to settlement.

•

When a firm date has been set for settlement, arrange power and phone connections, newspaper delivery and house contents insurance (see page 144).

•

Notify your change of address to the motor registry, house and car insurers, road service organisation, medical fund, union or association, electoral roll, etc., and get the post office to redirect other mail.

•

Conduct a final inspection with the selling agent on the morning of the settlement to ensure that the vendors are moving out, that the inclusions in the contract are being left and that there is no excessive rubbish.

•

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Collect the keys from the agent and move in.


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SECTION 2 BUILDING OR RENOVATING

Building or renovating a house is normally a long and often painful experience with, hopefully, a happy ending. Building methods have improved considerably in recent years both in terms of cost and quality. A project home can still be built for as little as $500 a square metre and has many more features than in the past. However, building problems persist, especially in high-rise apartment buildings. Not so long ago one of the biggest project builders in the country vacated the New South Wales market following a long string of consumer complaints. In 2002 there was a parliamentary inquiry into building quality in the same state which found that a lot still needs to be done. The other issue bedevilling the industry has been the difficulty for builders of obtaining home warranty insurance (see page 98). A rash of insurance claims resulting from shoddy work caused some insurance companies to withdraw from home warranty insurance, and the few 57


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companies remaining greatly increased their premiums and made it harder for builders to qualify for insurance. Many good, smaller builders were denied insurance and left the industry and others were limited in the value of work they could undertake. Add to this situation the fact that there is a building boom underway across the nation and it has never been harder to find a builder, let alone a good builder. If you do find one you will have to wait to be slotted in, and even then every building job has its problems, not least of which is getting it completed on time. Renovation work is also booming with home owners spending something like $6 billion a year on improving their homes. A full-scale renovation is even more complex and costly than building from scratch and requires much care in planning and execution. There are some basic rules in trying to ensure a good building job and none are more important than having a comprehensive set of plans, a sound contract and the right builder. Many an opportunistic builder has doubled his profit with ‘variations’ (see page 86) requested by the owner during the course of the job, made possible because the original plans were insufficiently detailed. Then there is the question of how to get problems fixed when the job is finished, not only with houses but with a new unit that may have been bought off the plan. We tell you how.

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CHAPTER 5 TO BUILD, KNOCK DOWN OR RENOVATE? To build, knock down or renovate?

The renovation industry is now as big as, or bigger, than the new dwelling construction industry. Largely this is because many people don’t want to move because they are close to facilities, family and friends or because they don’t want to fork out tens of thousands of dollars in dead money on the agent’s commission on the sale and on the stamp duty on buying another property. There is an alternative to renovation and this is knocking down your existing house and building a new one in its place. Using a project home builder, this can often be cheaper than renovating and extending the old joint.

WHAT IS A ‘KNOCK-DOWN’?

People renovate and extend their homes because they need more space but want to stay where they are, and because knocking the place down and building a completely new house is just too expensive. 59


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BUILDING OR RENOVATING

But is it really? Certainly getting in an architect and a custom builder would cost $1200–$3500 or more a square metre, plus the rental cost and inconvenience of moving out for six or 12 months while the job is done. But extending a home can cost up to twice as much per square metre as starting a new building from scratch. This is because of the extra time and trouble involved in working around an existing structure, doing up the old bits and making the new bits fit the old. You can build a brand-new project home on the site of your existing house at project home prices, using their standard designs and taking advantage of their huge purchasing power and mass-production techniques. Fifty per cent of the work of some of Australia’s biggest project builders is now what the industry calls ‘knock-downs’. The cost of doing this is not much more than a normal project home. There are extra costs for demolition and non-level sites, of course, and sometimes in established areas there are access problems or a difficult council or a troublesome neighbour. According to one leading builder, the average contract for a knock-down (after demolition) is about $30 000 more than normal, but the knock-down replacement is usually bigger than the average project home. The great majority of home owners who are taking this path to a bigger and better home have obtained quotes for extensions or renovations first, and then decided it will be more cost effective to knock the house down and start again. Thanks to computerised estimation, project builders will now amend their standard designs to move a wall or window or change the layout without it costing you the earth. SHOULD YOU MOVE OUT WHEN RENOVATING?

Lots of people think that they will benefit by staying put during renovations. They see advantages such as being on the spot to answer the builder’s questions or imagine that they will enjoy being present at the birth of their new home. For many, the money they think they will save can be spent on better quality fittings. 60


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TO BUILD, KNOCK DOWN OR RENOVATE?

However, the inexperienced have little idea of the enormous trauma of renovating, particularly if they continue to live in the house. Cohabitation with builders who are likely to clock on at 7 a.m., and exposure to lead from old painted surfaces, pesticides, volatiles found in polyurethane floor coatings, construction noise and general mess and mayhem for months on end are not conducive to calm oversight of the job. An increasing number of professional builders will not take on a substantial renovation if the client intends to live in the property. Some would argue that if you cannot afford to move out then you cannot afford the renovation. Many a marriage has suffered irreparable damage as a result of a live-in renovation. You should seriously consider moving yourselves and any furniture in the renovation zone out and finding alternative accommodation. This is particularly true for that group which can probably least afford it—families. Renting elsewhere can be a relationship-saver and also makes good contractual sense as it often gives the builder an economic imperative to finish on time or face penalties. If you rent elsewhere the true cost of the rent can be included in a damages clause in the contract (often called ‘liquidated and ascertained damages’) and applied against the builder if he runs late. If you stay in the house during the renovation you have no real evidence of your costs upon which to base a claim for damages if the project is delayed, although the law is changing around the country in this regard. (Liquidated and ascertained damages is an amount payable by the contractor as compensation for losses incurred by the principal (client) as a result of failure to complete the building works within the agreed or extended contract period. Source: Standards Australia)

SHOULD YOU ORDER A PRE-RENOVATION BUILDING SURVEY?

If your house is more than 12 years old it is worthwhile having a prerenovation building survey (typically $390–$600) made prior to the 61


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completion of renovation tender documentation. Too few architects or engineers thoroughly inspect the under-floor and roof voids or use a moisture meter to check for damp in internal walls when preparing plans for a renovation. These pre-renovation reports should pick up most apparent and some concealed building defects which might well become the subjects of cost variations if discovered later in the project, and separate them into essential or optional repairs. With this prioritised information your architect or draughtsperson can alter the design or include the rectification of significant faults in the plans/specifications so that all the bidding builders include the cost of the works up-front.

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CHAPTER 6 SELECTING THE RIGHT BUILDER OR ARCHITECT

Selecting the right builder or architect

Choosing the right builder for your renovation or new home construction is probably the single most important thing you can do to achieve a successful outcome and yet few people take the necessary time and effort to properly research and check references. Choosing the wrong builder leads to confrontations, bad workmanship, cost and time blowouts and very often major disputes.

HOW DO YOU FIND THE RIGHT BUILDER FOR YOUR JOB?

The best way of finding a good builder is often by recommendation from satisfied clients. Membership of a professional association like the Housing Industry Association or Master Builders Association is a start, but not a guarantee of trouble-free progress. In a dispute such associations tend to defend their own. 63


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If you want to check out a particular building company some state departments of fair trading will tell you if it has been the subject of any complaints. Any builder proud of their work will be able to supply a list of satisfied clients and have a good record with the local building authority. Narrow your choice down to two or three and get each of them to quote on the job. Ask to see houses they are currently building and even if you are not an expert you can get an idea of the neatness of the work and the tidiness of the site. As you discuss your job you will form an opinion of how professional and businesslike the builder is. Make absolutely sure you have a written contract with the builder (in most states it is the law). A handshake deal often ends in tears. Ensure there is a time for completion in the contract, and plan for it to run late. Almost all contracts give the builder numerous opportunities to claim delays for such things as bad weather and strikes. Check that the builder has the proper insurances. You should be given a copy of the builder’s home warranty insurance policy, where required by state law, which protects you against incomplete and poor work should the builder die, disappear or go bankrupt. You should also ask to see the ‘construction all risk’, public liability and workers’ compensation insurance policies so you know the builder is covered if there is damage to a neighbour’s property or an injury occurs on the site. If you are a real ‘babe in the woods’ on the building process, or just too busy to watch over the job, it can pay to engage a building consultant or architect to check the work at various stages. This may add a couple of thousand dollars to the overall cost but avoid distressing and protracted disputes later on when any problems have become much more difficult to rectify. The following steps will help you find the right builder: •

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Never select a builder simply because they have submitted the lowest price; any price differences can easily be eroded by variations, particularly if the project documentation is inadequate (refer to


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SELECTING THE RIGHT BUILDER OR ARCHITECT

•

•

•

•

‘Variations: What are they and how do they work? on page 86). Selection by price alone is possibly the worst criterion you can use. Large differences between the highest and lowest quotations can be an indicator of discrepancies within the tender documents and in such cases it is usually safer to consider the middle-placed builder. Before doing anything else check your builder’s licence number with your state-based building authority—check that the licence is current, what works the builder is licensed to undertake (for example, waterproofing) and whether they have been the subject of any complaints. Request all builders quoting on the job to provide you with a list of similar projects they have undertaken in the last three years, together with a current project and the names and contact details of the clients. Be wary of any builders who stall or provide only one example. Draw up a table like the one on the following page for each builder, listing the client/project names and the questions you wish to ask the various clients.

Ring the clients and politely ask them if they would mind discussing their builder, noting that it was the builder who provided their details. Ask the following questions and give them time to speak their minds freely as you might be surprised how much they are prepared to reveal: •

•

Contract type, value and date Ask what type of building works were undertaken by the builder, whether the works were overseen by an architect, superintendent or the client. Was the project done on a fixed lump sum, project management or cost-plus basis? What type of contract was used? Did the builder nominate the contract for signing and were they happy with it? Time to complete Did the builder provide a ‘construction program’ and did they regularly update it with any changes? What was the initial completion time and what was the actual completion time? How much of any increase could be reasonably attributed 65

Summary comments:

Time to complete

Variations

Communication

Account keeping

Quality of work

Defects and rectifications

General

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Client/project

Contract type, value and date

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Client/project

Builder X

Builder–client questions/checklist

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•

•

• •

•

to variations? Were they generally happy with the labour and materials programming and the final completion date? Variations By what percentage did the initial contract sum increase? How many of the variations were builder-generated or client-generated? Did the builder submit variation costs before undertaking the work? Were the variations reasonable or did they feel the builder had a go at them? Did the builder provide good substantiation for all variations? Communication How well did the builder communicate during the course of the project? Were they civil, professional and did they keep you up to date on progress? How did they interact with the subcontractors? Account keeping How was the builder with paperwork? Was it neatly presented (typed), accurate, on time and did it make sense? Quality of work and defects rectification Were they generally happy with the quality of work by the builder and subcontractors? Was there any independent expert review of the work and if so, did the builder respond positively or negatively? At the end of the project did the builder provide certificates of compliance from the plumber, pest consultant and electrician and written warranties for things such as waterproofing and termite barriers? Have the works since stood up to the test of time? General Did the builder work five or six days a week? Were there any large time lapses when nothing was being done?

If the builder has given you the details of a current similar project, ring the owner and ask if you can visit the site and look at the job as this can provide an insight into site safety, rubbish management, toilet facilities and the interaction with subcontractors. Architects have a list of preferred builders whom they invite to tender for their projects. Because these builders have an established track record they are often good, reliable operators but if they know they are a preferred builder they may price the job accordingly. 67


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WHAT CAN GO WRONG IN A ‘TYPICAL’ BUILDING PROJECT?

1. An architect or draughtsperson is appointed to draw up plans and specifications. 2. Completed plans are submitted to the local council for development approval and construction certificate or building approval. 3. Friends suggest builders who are then asked to quote. 4. A preferred builder is chosen based on lowest cost and least amount of time to build. 5. The owner decides that an architect or equivalent will oversee the work (called the ‘superintendent’) or they will do it themselves. The owner may decide to live in the property if renovating to save money. 6. The builder submits a partially completed contract which includes a progress payment schedule, a commencement date and a time to complete for signing by the owner. The builder should show evidence of various insurances and requests the owner to pay a deposit before starting work. 7. The builder ‘takes possession of the site’ and building works commence. 8. During the course of building there are additional works and costs (variations in time and money) which were not included in the original builder’s quote (contract sum). As a result the builder takes longer to complete the job. 9. The builder submits progress claims as the work progresses which are to be promptly paid by the owner. 10. The builder says that the project is ‘practically complete’. The owner accepts this and the builder submits the final claim together with many additional costs. 11. The owner wants possession of the house and after some discussion pays the final claim. 12. The owner subsequently discovers that there are incomplete or defective works and asks builder to fix them. The builder is now fully paid and busy on another job. 68


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HOW DO YOU FIND A GOOD ARCHITECT?

If you hire an architect you get a design specifically tailored to your taste, your land, your needs, the climate and, if you are lucky, your budget. Ideally you will get a design that gives you floor-to-ceiling windows to take in a water view (if you have one), a design which is energy efficient and a layout that really works for your lifestyle. Architects have very strong views about their profession and their role in projects, and they can have a tendency to think that you should go along with what they say is good for you. So even the most talented architect might not be the right one for you unless you have a very open mind about design. The first rule in choosing an architect is to find one who does the sort of work that you like. If you like traditional design, find an architect who likes it too. If you’re crazy about contemporary style with lots of glass, find a specialist in that area. There’s even an architect in Sydney who specialises in the mystical qualities of Eastern spiritual design. One option is to go to Archicentre, which is a sort of ordinary homeowner’s branch of the Royal Australian Institute of Architects. For under $1000, Archicentre in your state will find a local architect to visit your home or building site and talk through your ideas and requirements for your new home or renovation project. It’s a good idea to nominate the style of house you like when making your booking (phone 1300 13 45 13). A few weeks later you will be presented with a written report, design sketches and a preliminary costing, and if you don’t like it you can stop there. If you proceed, a full architect service including detailed plans, dealing with council and managing the builder through to completion costs anything from 10 to 15 per cent of the whole job. If you only want the plans and can handle the builder yourself, it will cost less. A word of warning: don’t take too much notice of an architect’s cost estimate—better to talk to a builder. There’s another option and that’s to use a building designer. They don’t have as many years at university as an architect but they are often very practical and experienced designers. 69


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For more information try <www.raia.com.au> and <www .archicentre.com.au> for architects and <www.bdaa.com.au> for building designers.

HOW LONG DOES IT TAKE TO BUILD A HOUSE?

Not counting the time for preparing plans and getting council permission (which may take many months), contract times for a new house can be as little as 13 weeks for some project homes but are normally around six months. Similarly, a kitchen or bathroom renovation may take 13 weeks and a major extension or renovation 6–12 months. While most individual trades take only two or three days there are many variables which slow down the job—coordination of deliveries and labour, the weather, availability of materials and trades, and the builder spending time on other jobs.

WHAT ARE THE DIFFERENT WAYS OF HIRING A BUILDER?

There are several ways to hire a builder apart from the normal fixed lump-sum tender. They are cost-plus, project management and negotiated tender. Lump-sum agreements minimise the risk of cost blow-outs and provide an end-cost before the first sod is turned (see ‘Variations: What are they and how do they work’, page 86). Under a cost-plus tender, the builder is engaged on agreed hourly rates for each trade plus the cost of materials plus an agreed profit margin, usually in the range of 8–15 per cent. This form of agreement is often used when the final cost is difficult to estimate, but is a very open-ended arrangement. Cost-plus can be a gold mine for an opportunistic builder, but it can save a lot of money if you can trust them. Construction or project management is where the builder is paid an agreed lump sum or percentage to manage and coordinate the building process, and is often used on larger projects. Building can be fast-tracked (like cost-plus) because many design decisions can be 70


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made during the course of construction rather than having to be documented up-front. In a negotiated tender, a builder (or builders) with a good track record is brought into the design and building process at an early stage and can advise on ways of simplifying construction and reducing costs.

WHAT IS THE COST OF BUILDING A NEW HOME?

A project home is the cheapest way to build a new house and the only one where you see what you are getting (if you ignore the fancy furnishings and landscaping) before you commit yourself. You cannot expect the same quality as in a custom-built home because project homes are built to a price, but they can represent very good value for money nevertheless. If you are tempted to owner-build or build a kit home to save money, just remember that project builders pay around 25 per cent less on average for building materials than an ordinary builder who, in turn, pays 10 per cent less than you will. Project builders also pay their subcontracted tradespeople less because they can offer a lot of work. Quality in a project home is a bit of a lottery in that it partly depends on which supervisor and subcontractors are used on your particular job. The most effective way of finding the better builders is word-of-mouth recommendation confirmed by a professional building inspection on completion. When you find a design you like in a display village, drive around a new area and knock on a few doors. Ask people who have built with that company what sort of experience they have had. You can also ask the builder for the names of recent clients. A custom-built home or extension is much more costly. You must have detailed plans on which the builder can quote; these can be prepared by an architect, or a building designer or draughtsperson; all three cost money. The job will progress a lot quicker if the plans have already been approved by the local council. An architect will cost between 8 and 15 per cent of the total 71


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building cost, depending on whether you want him or her to supervise actual construction. A draughtsperson will cost a lot less but will generally just be putting your ideas on paper (such a house design recently cost $1200). The other alternative is to use a builder who will help you design your house or extension with their own draughtsperson. Be aware that architect-designed houses are usually quite expensive to build unless you can find someone committed to designing lowcost housing. Redesigning or extending an existing home can be more tricky than a complete new home and really warrants the services of an architect or building designer, particularly if you live in an expensive area, whereas a minor renovation can generally be handled between you and the builder. Go and look at the latest display homes, apartment developments and appliance stores for up-to-date design ideas. Costing a building or extension depends very much on the complexity, standard and features. A conventional brick veneer home without any site problems and standard finishes (no driveway, fences, etc.) can be built from around $700 per square metre. An architectdesigned home can be anything from $1500 to $4000 per square metre and more depending on its design and degree of luxury. (Note these are Sydney prices; the costs in some states, for example Queensland, are lower.) Approximate building costs per square metre* Project home Private builder Architect design Alterations and additions (architect) Knock-down and re-build *Sydney prices, 2003

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$600–$800 $700 plus $1800–$2500 $1800–$3500 Add $8000–$15 000 for demolition


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CHAPTER 7 OWNER-BUILDING Owner-building It’s an appealing prospect to many would-be home owners—to save money by taking on the job of building themselves. This is not as easy as it sounds and some states now require owner-builders to complete an approved education course before they are issued with a permit to build. Building a house requires both management and technical skills and it helps if you are a tradesperson with a knowledge of building and contacts within the industry. There are two things many ownerbuilders forget: they lose income from their normal job while building and they do not have access to the substantial discounts enjoyed by the bigger builders. WHAT IS AN OWNER-BUILDER? WHAT SKILLS DO YOU NEED?

Recently there has been a massive increase in the number of people undertaking renovations as owner-builders rather than engaging a 73


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licensed builder. In New South Wales and Victoria some 35 000 people apply to become owner-builders every year, mostly for renovations, some to build a complete new home. Much of the increased demand can be put down to the high cost of changing houses, the popularity of home makeover TV programs and the shortage of builders caused by the home warranty insurance fiasco. Also, home building costs have increased significantly, further fuelling home owners’ desire to save money. The legislation on owner-building varies from state to state, so it is important to seek specific advice from your state-based consumer affairs office (see page 99). Here we mainly talk about the New South Wales and Queensland legislation, but there are many common principles applying in the other states. An owner-builder is defined as a person who holds a permit for work valued at over $5000 including construction, alteration, renovation, decoration or protection treatment of a dwelling, verandas, garages, carports, fences, pools and retaining walls. A $7000 pergola which requires council consent will need an owner-builder permit but a $51 000 paint job will not. When building is carried out by an owner-builder, and you sell the property within six years, it is mandatory in New South Wales, Victoria, Western Australia and Tasmania for the owner-builder to have taken out home warranty (or housing indemnity) insurance and to supply a copy to the buyer. This is effectively an insurance policy to protect future purchasers against defective work and must be attached to your contract of sale along with a notation that an owner-builder permit was issued for the work. Failure to do so can attract heavy fines ($10 000–$22 000) and can lead to the contract being voided at any time prior to settlement. The premium for home warranty insurance is determined by the age of the property and the ‘reasonable replacement value’ of the work, not necessarily the final cost to the owner-builder. It can be quite expensive. An owner-builder is liable to future purchasers for between two and seven years for: 74


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OWNER-BUILDING

•

•

all residential building work (including materials and subcontractors) to be carried out in a proper and workmanlike manner and in accordance with the plans and specifications all building work to be carried out in accordance with all laws and regulations and the Building Code of Australia.

Suppliers of kit homes are also required to provide home warranty insurance. In some states (specifically New South Wales and Queensland) owner-builders are required to undertake an accredited education course (costing around $160–$325) and to obtain a permit (approximately $124) before home warranty insurance will be provided. Most of these courses involve face-to-face training over one or two days, which is not always convenient for those who are time poor, but web-based training courses are also available, for example, <www .accessedu.com.au>, which provide up-to-date links with current legislation. Many owner-builders go into a project with their eyes wide shut and do not comprehend the huge task they are taking on. Because of the complexities and liabilities of building, contracts, taxation and insurances, all owner-builders owe it to themselves to undertake a training course whether required to by law or not. Some states put a limit on the number of buildings/renovations an owner-builder can undertake and the number of owner-builder permits issued to a person. In New South Wales the limits are two building jobs and one permit every five years (although exceptions are considered). This is to stop non-licensed builders from running a building business. Owner-builder requirements in the ACT and South Australia, however, are quite minimal, with no insurance or permit required. In Western Australia owner-builders are not permitted to sell an owner-builder renovated property within three years of being issued with a licence. Before deciding to become an owner-builder you should set a maximum budget and make certain of your finances. Lending authorities can be very nervous about lending to owner-builders; they 75


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may require you to have the property valued and/or only release funds in stages, which can make paying contractors and suppliers on time quite difficult. Usually you must keep copies of all receipts and provide them to your lender before it will release further funds. When applying for finance it is advisable to prepare a detailed budget with as many supporting quotes as possible and provide these to the lending authority. Some of the web-based owner-builder training courses offer an MS Excel project budget calculator in which you simply insert items and costs and the calculations are done for you. It looks very professional, which is what the banks like.

Case study

Warwick (an owner-builder) sold his substantially renovated house to Denise with a home warranty insurance certificate attached to the contract of sale, along with a note stating that the renovation was carried out by him using an ownerbuilder permit. Some time after moving in Denise discovered sewage water coming up through the bathroom floor waste and called in a local plumber, who told her the sewer service was illegal and would cost $8000 to fix. Denise contacted the insurer and submitted a claim for defective work for which she had to pay a $500 excess. The insurer pursued Warwick’s plumber to rectify the fault but he had gone out of business and moved interstate. The insurer then pursued Warwick and eventually got him to cough up the full amount because as an ownerbuilder he was responsible for the work to be carried out in accordance with the plumbing regulations.

As an owner-builder you are responsible for all the financial and some taxation requirements, for making sure that all contractors are licensed 76


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to do the work they have been contracted to do (electrician, plumber, etc.) and for ensuring a safe working environment. Surprise site audits by government authorities are becoming quite common and owners and their contractors can be fined. You are also responsible for obtaining all the necessary council and other approvals, which include as-built certification for specific elements such as waterproofing and termite treatments, and final certification or certificate of occupancy classification. You need basic management skills and some technical understanding to be an owner-builder. These are just some of the issues you will face: • • •

• •

• •

• • •

ensuring that plans and specifications fit your requirements and your budget before you submit them to council obtaining an up-to-date survey defining the site boundaries either during or after the works interpreting detailed plans and specifications and contractor quotations and researching and sourcing materials well in advance of them being required onsite calculating the cost of labour and materials, which can be made easier by using an MS Excel computer program being familiar with workers compensation and other buildingrelated insurance and site safety requirements such as Occupational Health and Safety preparing individual contracts for each trade supervising and coordinating the construction, dealing with any disputes and determining what is defective building work, which often involves trawling through codes, specifications and council documents dealing with progress claims and understanding the value of subcontractors’ work as it is completed understanding your obligations in regard to the GST and ABN requirements dealing with the council, private certifiers, engineers, consultants and obtaining as-built certification for various trades. 77


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Tips

Consider using a builder or building consultant to coordinate and/or supervise the works, recognising that you bear all liability as owner-builder. Get to know fellow renovators in your area as they can be a valuable pool of information on how to deal with the council and in sourcing materials and good subcontractors. Read and ensure you understand all of the DA approval and construction certificate requirements before you commence.

WILL OWNER-BUILDING SAVE YOU MONEY?

Profit margins for licensed builders are typically in the range from 8 to 20 per cent, so there can appear to be a potential for substantial savings—but remember that they have access to trade discounts as high as 50 per cent as well as ready access to a pool of known subcontractors. You may be able to negotiate discounts on materials, fittings and appliances with suppliers, which can be enhanced by offering cash payment but this will take a lot of time and effort. Make sure your plans and specifications cover all the works as there are many savvy subcontractors who know how to make money out of variations. Savings can be made if you undertake much of the labouring and non-licensed work yourself. Owner-builder jobs take considerably longer to complete. If you are renting the extra rent can be quite significant. The cost of rent, together with a 10 per cent contingency on all costs, should be built into your budget. One of the most effective means of saving money is to obtain multiple quotations for each trade well in advance of it being required. This requires a high degree of planning and considerable time. You 78


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must check and compare the quotations in respect to materials, scope and timing—and always negotiate. One benefit of being an owner-builder is that you can better control the quality of the finished works provided you have an understanding of good building practice, and you have more control of the cost savings of any works that you decide you can do without. One of the disadvantages is the loss of income if you take time off work to supervise the job. Of course, there is an income tax saving on any work you do yourself. Turning your building/renovating dream into reality can be a most truly satisfying and rewarding experience, or totally soul destroying, so it is worthwhile getting passionate and committed about the process.

Owner-builder government contacts

NSW: Department of Fair Trading 13 32 20 <www.fairtrading.nsw.gov.au/building> Vic: Consumer Affairs Victoria 1300 558 181 <www.consumer.vic.gov.au> Qld: Building Services Authority (07) 3225 2855 <www.bsa.qld.gov.au> SA: Office of Consumer and Business Affairs (08) 8204 9777 <www.ocba.sa.gov.au> WA: Building Registration Board (08) 9476 1200 <www.brb.org.au> Tas: Service Tasmania 1300 654 499

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NT: Consumer Affairs 1800 019 319 ACT: Building, Electrical and Plumbing Control Office (BEPCON) (02) 6207 6262 <www.palm.act.gov.au/bepcon/> Owner-builder insurers

Building Industry Solutions Pty Ltd

1800 244 224

ACI Insurance Brokers

(02) 9806 0344

Australian Owner Builders

1800 822 220

HIA Insurance Pty Ltd

(02) 9808 7222

Australian Home Warranty (Reward) Insurance Buildsafe Owner-Builder Warranty

(03) 9486 1500 1800 019 233

WHAT’S THE BEST WAY OF DEALING WITH THE LOCAL COUNCIL?

Getting plans through council can be a nightmare but there are ways of making it easier. Many people have horror stories of dealing with their local council. You can wait weeks, even months, to have a development application (DA) for a new house approved, and then it comes with a long list of conditions which you weren’t expecting and which, of course, will cost even more time and money. What makes things worse is the growing list of requirements being imposed by state governments in the approval process. There may be requirements for energy efficiency, water saving, effluent treatment or a bushfire risk assessment—all adding to the cost of the finished product. Technically, your protection against a council taking too long with 80


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your application is that you can take the council to court after 40 days, at least that’s the rule in New South Wales. But who can afford the $10 000–$15 000 required to do that? And wait six months for the case to be heard? The Housing Industry Association offers the following tips for getting your DA through the red tape as quickly as possible: • Ensure you are fully conversant with the planning scheme for your site. The local environment and development control plans will tell you what is permitted and what isn’t, and often these can be found on a council’s website. • Talk to council officers as early as possible in the design process. Most councils now have a pre-lodgment service where you can sit down with senior council staff and talk through what you want to do. • Also talk to neighbours early and see if they have any concerns you can reassure them about or take action to avoid. • Always lodge the application with council yourself. Don’t send someone else and don’t post it. Develop a friendly relationship with counter staff. • Don’t become aggressive and try to achieve verbal acceptance of your plans before you formally submit them. • Provide all the documentation requested by council. This can take a lot of time and trouble and you may need to pay for expert assistance, but if you don’t council will write to you and demand what is missing, adding weeks to the process. So do all the necessary investigations and paperwork before you submit the application. • Try to limit the arguments; better still, try not to argue at all. Usually it’s better to compromise than to fight. • Finally, remember that applications that fully comply with council’s rules are usually processed more quickly.

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CHAPTER 8 CONTRACTS AND VARIATIONS Contracts and variations

Building is not all bricks and mortar. There is paperwork too. Before you start you must have a complete set of plans approved by the local council. The more comprehensive those plans the less chance there is for things to go wrong. Ditto the contract with the builder and architect. Then there are the progress payments schedule, variation authorisations and practical completion certificate. Here is the good oil on how to successfully manage your project.

CONTRACTS, CONTRACTS, CONTRACTS!!! WHY MUST YOU HAVE ONE WHEN BUILDING?

It is amazing how many people begin building without a written contract and then, when everything goes wrong and costs and time escalate out of control, wonder why they have to resort to expensive mediation or litigation to get some redress. No matter whether you are doing a $1000 bathroom resurfacing 82


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or a $1 million renovation you should always have a written contract between the contractor (builder) and yourself before you commence the work and before any monies are paid. Many states have a mandatory requirement for contracts over a certain monetary sum. For instance, in Victoria all residential building work over $5000 must have a major domestic building contract in place. A good contract is the foundation stone of successful building or renovation and can save major grief later in the project so getting it right up-front is very important. Obviously it is best to have an experienced solicitor, architect or project manager prepare or review any contract, particularly when undertaking larger works (say, more than $60 000). All plans and specifications should be attached. There should be two original copies signed by both parties, with each page and document initialled, before works commence. You keep a copy and so does the contractor. The builder usually offers a standard contract from one of the building associations, which are normally weighted in the builder’s favour. Because a contract is essentially an agreement between the parties you have every right to refuse to use their contract and nominate your own. Despite laws to the contrary many builders do not provide a contract. This may be because the builder is unable to obtain home warranty insurance, a copy of which must be attached to any contract (in some states over a certain minimum contract value). If a builder undertakes work without this insurance he is breaking the law. He may suggest you take out an owner-builder’s permit, for which insurance is more expensive but usually more available; in this case, however, it is the owner-builder who then carries the greatest liability for what is built even after the property has been sold. Unfortunately, because of the serious shortage of builders some consumers opt to take the risk of travelling this often perilous path. If in doubt about the legal situation check with your state fair trading or building authority. The contract should, at the very least, describe the scope of the works, the contract sum, completion time and the payment terms— 83


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and you should read it!! If your builder does not offer a contract or you are unhappy with the one being offered, purchase two copies of a contract suitable for your type of building or renovation from your state fair trading authority. Some fair trading authorities sell residential building contracts which are suitable for small to medium fixed-price projects, but take care—some of these contracts do not provide adequately for such things as variations, a defects liability period, retention sums or liquidated and ascertained damages if the builder runs late. The defects liability period is ‘the specified period of time within which the contractor is required, at their own cost, to rectify any defects in the completed works arising from faulty materials or workmanship and notified in writing’ (Standards Australia Glossary of Building Terms). The period commences from the date of issue of the certificate of practical completion and lasts for the period stated in the contract. Standard contracts offered by the Royal Australian Institute of Architects (RAIA) are quite satisfactory and weighted more fairly towards consumers. However, they are only suitable where the architect is acting as the project superindendent. Contact the RAIA <[email protected]> for advice on a suitable contract. Most contracts stipulate the maximum permissible deposit that can be legally claimed before construction commences (for example, 5 per cent for contract values greater than $20 000). If not stipulated, check with your state fair trading authority, and never pay more than the maximum allowed by law. Contracts for building work done on a cost-plus or project management basis are more specialised. This is where the contract amount is not fixed and the builder gets a fixed fee or percentage (typical range 7–15 per cent) on top of all building costs (excluding architectural and consultants’ fees and GST). Such contracts can be purchased through the RAIA, Housing Industry Association or Master Builders Association. 84


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WHAT IS A CONSTRUCTION MANAGER? The superintendent is responsible to the ‘principal’ (client) for all aspects of the administration of the building contract and must be appointed in writing and the builder notified Source: Standards Australia Glossary of Building Terms

An increasingly popular alternative to having an architect supervise the construction is to have the architect provide a fixed price quotation for all documentation, council approval, the construction certificate and obtaining building tenders, and then the owner appoints a ‘construction manager’ or ‘superintendent’. Construction managers are often building consultants who are also licensed builders; they are appointed on either a fee for time, fixed price or percentage of total costs. Their role is to review the builders’ tenders, recommend a successful builder, draw up contracts and act as the superintendent on your behalf and oversee the project. Alternatively, if the owner wants to substantially oversee the works (or owner-build), the construction manager can be employed to undertake inspections at critical stages of the project, such as when progress claims are submitted. Many consumers and builders prefer this type of arrangement as construction managers are often considered to have a better understanding of the practicalities of building than architects. Whether you use an architect, construction manager or draughtsperson as superintendent, always check they have adequate insurances, particularly for professional indemnity, by requesting copies of current insurance policies. Insurance claims for negligence by such practitioners have soared some 600 per cent in recent years so it is vital they are insured. The minimum policy cover should be $10 million for public liability and more than $1.5 million for professional indemnity. Few draughtspersons will undertake the role of superintendent because of the highly complex nature and liability of the role and most are not qualified to do so. Some draughtspersons can act effectively as a superintendent, but few have any professional backing, they are 85


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not registered (and thus not subject to a code of conduct, disciplinary procedures, professional indemnity insurance, etc.) and do not have the support of the resources available through, say, the Royal Australian Institute of Architects.

SHOULD YOU GET THE BUILDER’S PROGRESS CLAIM SCHEDULE RIGHT BEFORE SIGNING?

If a builder nominates in the contract when progress payments are to be made and you simply sign on the dotted line then you are bound to pay the specified amounts when those works are complete, no matter how vague the descriptions or how excessive the claims. Some unscrupulous contractors ‘front-end load’ their progress payments schedule and poorly describe the corresponding works so they get large and often unwarranted sums of money early in the project. It is then difficult to get redress for bad or incomplete work at the end of the job because you have already paid for more than you have received. Before signing the contract you should have a quantity surveyor or competent building consultant review the progress claim schedule to ensure that detailed descriptions are given for each item and that the corresponding claim is reasonable. When it comes to dealing with each claim do not assume you must approve it. A competent person (such as the superintendent) should always inspect the works when a progress claim is submitted to confirm that all the claimed works have actually been completed. Some lending authorities insist on this process. If the works have not been completed the progress claim should be formally rejected and the reasons given.

VARIATIONS: WHAT ARE THEY AND HOW DO THEY WORK?

In simple terms, if the builder believes that a particular aspect of work involves a change to their original quote they will request a contract 86


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variation, which is usually formalised by a written variation order signed by both parties. In practice very few variations are deductions. Most are extras, adding further to the cost and possibly to the time to complete. It is common for variations to add 10 per cent or more to the original cost and you would be wise to factor this into your budget before starting. Cost increases and time delays resulting from variations are the most common causes of building disputes. Owners who constantly change their minds during the course of a project, and inadequate project documentation, are the usual reasons for variations arising. When first quoting a job most builders can readily spot if the project documentation is full of holes (read ‘opportunities for lucrative variations’) and some purposely submit a ‘low-ball’ quote to win it, knowing full well that later in the project they can recoup large wads of money (and possibly more time) from an unwitting client. Some will even suggest higher quality fittings during the course of a job for the same reason. The vast majority of building contracts stipulate that the builder must submit in writing to the principal all contract variation costs for approval before they undertake the works. There are a few exceptions, such as works that may avert imminent danger or prevent threat to life, and contracts which require that disputed variation works are charged at cost plus an agreed margin for the builder. In the latter case the builder is required to provide invoices substantiating the costs. Nevertheless, many builders fail to advise the owner of variations until late into the project and then present a long list of extras for approval and payment, a practice often resulting in heated arguments. On the other side of the coin, some owners are tardy in approving variations and the builder may have to complete at least some of them to avoid holding up the job, then to find that the owner does not want to pay. You should regularly raise the issue of variations with the builder and deal promptly with them. 87


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Many variation quotations are given verbally, or appear as a oneline description with a large sum of money at the end. To avoid this you should ask the builder at the beginning of the project to provide a detailed breakdown of costs for each variation as it occurs, in writing, before they undertake the work. In most cases when you do receive a variation quote you have three alternatives: • • •

approve it promptly in writing (either yourself or the superintendent) request that the builder provide further details of specific costs reject it in writing.

Failure to convey your decision in writing can have significant consequences. If you are not prepared to pay what the builder quotes, often they will not undertake the work. If you reject their quote you may be entitled to get another contractor to do the work. However, many contracts give possession of the site to the builder and they decide who may be allowed onto the site. If the variation work is a finishing trade such as carpet, painting or landscaping which is unlikely to have an impact on the builder’s work, it is usually safe to get your own contractor in.

HOW CAN YOU ENSURE THE BUILDER WILL RETURN TO FIX FAULTS, AND WHAT IS A RETENTION SUM?

As many building faults are only discovered some time after the builder has finished it is important that you incorporate a ‘retention sum’ and a ‘defect liability period’ in your building contract. The retention sum is an amount of money which is held back for the duration of the defects period, say three to six months, and is one of the most effective ways of ensuring that your contractor will promptly fix any problems. A retention sum often works like this. An amount is deducted from each progress claim and put into a special account until, say, 5 per cent of the total contract sum is reached. This stays in that account until the end of the project, when half of it is released; the 88


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other half is kept until the end of the defects period. Near the end of that period the owner writes to the builder advising of any problems or defects and requests that they be fixed before the money is released. The builder then has not only a contractual responsibility but an economic imperative to keep the owner happy so they will release the money. The retention sum is an agreed percentage of the contract sum retained by the principal as a limited security to ensure the satisfactory performance of the contractor in relation to obligations under the contract and the rectification of defective workmanship. At practical completion, part of the monies in the retention fund is released to the contractor with the balance released at the end of the defects liability period or upon the issue of a final certificate. Source: Standards Australia Glossary of Building Terms

The RAIA contracts deal with the retention sum very effectively. You should advise the builder before accepting their quotation that a retention sum will apply.

WHY IS DOCUMENTATION SO IMPORTANT?

Typical project (or tender) documents for a residential building are the architect’s and structural engineer’s drawings and a written specification. These documents are used by builders to calculate their quotation and they should be included (as a minimum) as part of the contract. Before getting builders’ quotes, you must have council-approved plans and specifications that comprehensively and accurately reflect not only the full scope of the proposed works but also stipulate the level of quality and the types of material required. For example, simply showing a door on a plan does not denote whether it is a solid or hollow type. Similarly, just showing a window does not indicate the frame or glazing material. When a builder gets poorly described and inadequate documents, he usually quotes on the cheapest commercially acceptable item. There 89


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is no real requirement for him to stipulate precisely what he has allowed. What often follows is that the builder installs the doors or windows, say, and if they are not what the owners had anticipated, conflict eventuates. When this happens many times in a project, relations between the owner and the builder deteriorate considerably. Remember, the builder was not responsible for the documentation. When contemplating larger projects consider using a qualified architect as they are usually best suited to the task of providing adequate documentation. However, you need to let them know what items you feel strongly about, providing a written brief and a maximum budget. Most architects work on a percentage of total building work costs (average 10 per cent). This fee usually includes preparation of all plans and documentation, obtaining council approval, calling tenders, letting the contract and overseeing the works by acting as the superintendent. Architects need to be properly retained under contract and as they normally use an RAIA contract it is wise to get your lawyer to check it. The contract should cover a full list of costs, what happens if the project is terminated, delays, budget overruns and who oversees rectification of defective works. Some people argue that when an architect works on a percentage of total project costs there is not a great deal of incentive for them to ensure that costs are kept to a minimum. However, a welldocumented project minimises the amount of costly variations and helps to ensure a quality outcome. Poor or inadequate documentation of the project almost always results in variations in both cost and time.

RECORDS: WHY SHOULD YOU KEEP THEM? CAN’T THE BUILDER DO THAT?

There is a generalisation about builders that those who are good at site works are poor at paperwork, and vice versa. Many builders hate paperwork and don’t keep proper records. Instead they discuss 90


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important project decisions and commit them to memory, often to be recalled wrongly at a later date. Given the complexities of building and that it is a dynamic, everchanging process, you should formally record all significant decisions or discussions with your builder and contractors. ‘Always put it in writing’ is a cardinal rule—because, should a building dispute arise, lawyers look first to what has been put on paper, and the very first place they look is the contract. If you are overseeing the job without a superintendent you should keep a diary and write down (on the correct diary day) all discussions, instructions, changes, verbally agreed costs, decisions, variations, completion dates and the personnel involved. This can help later if it comes to a case of who said what. Record at the back of the diary the contact details of all subcontractors; you may need them when the project is finished or as witnesses. A picture is worth a thousand words so keep a photographic record, preferably on CD-ROM if you have a digital camera, of the progress of the work. Some of the biggest successes against dodgy building practices are the result of experts having access to a pictorial record. Areas of particular photographic importance are those building elements that are eventually concealed by other building materials or linings. These are some of the things you should record: • • •

• • •

footing or slabs after reinforcement has been installed but just before concrete is poured floor framing just before flooring is installed wall framing or walls before gypsum plaster (Gyprock), wall linings or render is applied (These first three categories also record where electrical cables and other services are located.) external window and door openings just before windows are installed bathrooms and other wet areas after the waterproof membrane has been installed but before tiling ceiling framing just before ceiling linings are installed 91


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• • • • • •

party walls (particularly above ceilings) before wall/ceiling finishes are applied roof framing before roofing is installed the rear face of retaining walls before they are backfilled below-ground external services such as subsoil drains, sewer and stormwater lines before they are backfilled the fixings used on balcony handrails the (hopefully) compacted fill under paving.

If you feel like a ‘spy’, or are concerned that the builder might get paranoid about your photography, take your photos after the builder has left for the day (this is usually before 4 p.m. because builders start very early).

WHY SHOULD YOU HOLD REGULAR SITE MEETINGS?

Site meetings are an opportunity for all parties to raise any issues they are uncertain about. The minutes of site meetings act as an agreed, written record of what everyone said and serve to monitor the progress of the job. Should a dispute arise the minutes can help determine the matter. At the start of the project you should request regular (at least fortnightly) site meetings with the builder, architect or superintendent at an agreed time and day. An agenda should be drawn up, which might include a report by the builder on construction progress (whether the job is running on time), any new variations including costs, and deadlines for decisions such as tiles or paint colours. If an architect or superintendent is involved, ask them to take minutes in bullet-point form of who attended and what was said and agreed to. If not, take the minutes yourself in a diary or exercise book. These handwritten notes should be typed up or photocopied and copies given to all who attended before the next site meeting. Start the next meeting by confirming the minutes. If someone disputes their 92


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accuracy they should state their own version and the minutes should be amended accordingly (if no one objects). Regular site meetings help to keep the builder accountable for variations and timely completion and keep you up to date with what is going on. It is easier and less confrontational to have site meetings, which keep lines of communication open, than to rely on your own or the builder’s recollection of what was said months ago. Keep relations with your builder and architect as amiable as possible. Building is a team effort and a good team produces a better result.

WHAT DO YOU DO IF THE BUILDING RUNS LATE?

Late completion is one of the most common causes of conflict. Many consumers are dumbstruck when told by their architect or lawyer that they have little or no redress under the contract. Some builders underestimate the time to complete a job, so under no circumstances choose a builder only on the basis of their estimated time for completion. It is quite common for builders to take 12 months when they promised six, while you sleep on the floor among their rubbish. In these circumstances you have few if any rights unless you have insisted on a ‘liquidated and ascertained damages’ clause with the time for completion in the contract. Such a clause must be based on a genuine estimate of your loss or damage if the works are delayed. Many builders are, of course, reluctant to agree to a damages clause and you might need to use a stick-and-carrot approach. Just as you might reasonably penalise a builder for being late, it is also fair and reasonable to reward them for an early completion. You could offer a bonus clause (for example 50 per cent of the damages allowance) should the builder finish earlier than the nominated completion date. This approach provides a real incentive for a good builder to finish the job early. 93


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WHAT IS PRACTICAL COMPLETION AND WHY IS THE FINAL PROGRESS CLAIM SO CRITICAL?

The section on ‘practical completion’ in the contract is very important. This section should include a requirement that the final certificate and payment is conditional upon practical completion of the project. (According to Standards Australia Glossary of Building Terms, practical completion is when the project is essentially completed and is fit for its intended purpose except for minor omissions and defects that do not prevent its use, and with tests required under the contract having been carried out.) Usually the builder will advise you in writing when they think they have reached practical completion, and you are asked to agree. The superintendent is responsible for determining if practical completion has been reached or, failing that, the owner. In both cases you are normally required to return to the builder a certificate of practical completion within the contractually required time (sometimes as little as five days after being notified). Because they want the money, builders may try it on by seeking practical completion much too soon. In far too many cases approval and final payment have been given to a builder while major defects are still present. Withholding the final payment (when contractually allowed) is one of the surest ways to ensure that your builder stays on the job and completes it to your satisfaction. Approve and pay too early and you will be battling to get the builder to fix defects or complete works. It can be wise to get a building survey when the builder claims practical completion. These reports identify visually apparent and unacceptable defects and ask that the builder provide all warranties (for example, for the bathroom waterproof membrane) and certification documents (for example, termite barrier treatments). A copy of this report should be given to the builder and any minor defects or faulty items accepted by the parties should be agreed to in writing prior to the release of final payment. If any of the reported defects are significant (such as windowsill flashings not installed) or ‘prevent the intended 94


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purpose usage of the property’, the practical completion approval should be denied until rectification is complete. If you do not consider that practical completion has been reached, promptly notify the builder in writing, stating your reasons (for example, toilet not installed or not functioning). Where practical completion approval is wrongly given it is very difficult or impossible to withdraw later. In these cases builders can demand release of the final payment simply because the contract entitles them to do so. If you refuse to pay, the builder can apply to the local court, pay a relatively small fee and get an order for you to pay. These applications usually take about 14 days to be heard.

SO WHAT IS THE SECRET OF AVOIDING DISPUTES WHEN BUILDING OR RENOVATING?

Because of the emotional trauma and costs associated with building disputes, few people openly discuss their bad experiences. They are embarrassed and think they are somehow alone. But these people are far from Robinson Crusoe, for there are literally thousands of disgruntled consumers who have had a bad building experience. The NSW Building Tribunal averages 5000 complaints a year, with 80 per cent of the disputes being initiated by dissatisfied consumers. Building is a highly expensive and complex process involving multiple trades and technical matters which are often beyond the comprehension of lay people. Building works are constantly subject to delays. Disputes can be avoided or at least minimised if you understand what you want and what you are getting, adequate contract documents and contracts are in place, proper records are kept and communication between you and the builder is good. And don’t be afraid to seek expert advice.

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CHAPTER 9 GETTING PROBLEMS FIXED IN NEW UNITS Getting problems fixed in new units

When you buy a new apartment you do not get the same opportunity to check on progress during construction as you do when building a house. An apartment building is a far more complex structure than a house with many more things that can go wrong, and is often built with little or no independent supervision. If you find building defects after you move in you are dealing with people far more rich and powerful than yourself—big developers and major construction and insurance corporations—and they may not want to know about your problem. You really do need to know the ropes of dispute resolution.

HOW DO YOU GO ABOUT GETTING FAULTS IN YOUR BRAND-NEW UNIT FIXED?

Along with the huge increase in new apartment buildings in the major cities and along the east coast has come a rash of serious problems. A new building carries no guarantee of being problem-free—quite the 96


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GETTING PROBLEMS FIXED IN NEW UNITS

opposite, in fact. Many apartment buyers and strata committees have found that millions of dollars are needed to fix their buildings and have ended up in protracted and expensive litigation against builders and developers. In New South Wales the problem is so widespread it led to a parliamentary inquiry in 2002 into building quality, which came up with 55 recommendations to change the laws and set up new departments and procedures to protect consumers. The most serious problems usually relate to waterproofing, fire safety, drainage and mechanical services. Dealing with problems in your unit may involve ordering building surveys, hiring specialist lawyers, long delays and a lot of money. It is important to follow the correct procedures if you are to safeguard your legal rights. Ensure that you submit a building defects survey report within the defects liability period (usually 90 days after settlement), together with any faults you find yourself and a covering letter to the proprietor (developer) asking for prompt rectification. Such items as minor hairline cracking are not generally regarded as building faults and will not be repaired. Faults should be corrected within a maximum of three months and the proprietor should provide you with a list of all completed repairs. All too often a proprietor will simply stonewall on rectification until the defects liability period has expired and hand you and your defects over to the builder. This is often because all the apartments have similar faults and rectification of yours would set a very expensive precedent. Your solicitor should put pressure on the proprietor to rectify the faults, particularly where they are bound by the contract to do so. If the proprietors refuse to rectify any building defects they should be asked to advise in writing the reasons, under the terms of the contract, for not doing so. This information can then be provided to your solicitor and building consultant to determine what further action you can take. 97


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WHAT CAN YOU DO IF THE DEVELOPER/BUILDER WILL NOT FIX BUILDING FAULTS IN YOUR UNIT?

Most states have implemented a form of home warranty/indemnity insurance against defective building work (for homes, low-rise units and for owner-builders), for periods ranging from two to six years for licensed building work having a minimum contract value. With the exception of New South Wales, no other state requires such insurance for multi-residential buildings (units) of three or more storeys. On 31 December 2003 New South Wales introduced legislation cancelling the need for home warranty insurance on units of more than three storeys built after that date, substantially diminishing consumers’ rights. As such, the main form of redress for unit owners (in all states) in unit blocks of more than three storeys is by civil legal action if the builder or developer refuses to fix problems. However, many thousands of units in New South Wales constructed prior to 31 December 2003 would be covered by home warranty insurance for some six to seven years and many are likely to have substantial faults. Under these circumstances, when an aggrieved consumer fails to obtain redress from the builder or developer the next step is the home warranty insurer. If the insurer ducks responsibility, then it’s the courts. The New South Wales Government has underwritten insurance for such buildings since late 2002, when insurance companies stopped providing policies. Generally, the insurance cover is up to $200 000 per residence. You should check your insurance policy and contact your state-based building authority to see what exactly is covered. In off-the-plan sales in New South Wales prior to 31 December, a certificate of home warranty insurance must be given to the purchaser within 14 days of the insurance being taken out by the builder. Most of these building insurance policies incorporate significant disclaimers, such as no cover if the owner is considered to be ‘reasonably aware’ of the building faults for more than six months. Your solicitor should review any policy disclaimers prior to taking further action. 98


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The situation in New South Wales is a good example of how consumers’ rights are being eroded. Between 1 May 1997 and 1 Apri1 2002 the Home Building Act required that all residential construction with a contract value greater than $5000 (including renovations and multi-unit residential properties) be covered by a certificate of home warranty insurance. From 2 April 2002 the contract value of work requiring insurance was increased to $12 000 but other changes were far more prejudicial to consumers. On policies issued before June 2002, home warranty insurance effectively covers owners and subsequent owners against defective and incomplete works, including structural works, for seven years. On policies issued after June 2002 the insurance covers against defective and incomplete works for only two years, and against structural defects for six years, and is only applicable where costs cannot be recovered from the builder or if the builder is insolvent, dead or has disappeared. If your unit has significant building faults and your home warranty insurance pre-dates 30 June 2002, you should lodge a copy of your building defects survey with your home warranty insurance company within six months of receiving it. If the proprietor/builder does not satisfactorily fix the bigger building faults within a reasonable time you should consider lodging a formal claim with the insurer. Most insurers ask if the builder has been informed of the building defects and will want to know how they responded before considering a claim. If the builder does not respond or refuses to rectify the problems then the insurer may move to assessment. Insurers are required to give you a decision in writing in 45 days. If they do not it is deemed by law to be a refusal of the claim. If the claim is approved you will have to pay the policy excess (typically $500). If your insurance postdates 1 July 2002 and the builder is not dead or insolvent and refuses to rectify, then you will have to look to alternative forms of redress such as the Office of Fair Trading building tribunal, the Consumer Tenancy and Trader Tribunal, mediation or litigation for building disputes. 99


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Contacts

NSW: Office of Fair Trading <www.fairtrading.nsw.gov.au> Email: <[email protected]> ACT: ACT Office of Fair Trading <www.consumer.act.gov.au> NT: Department of Industries and Business Consumer and Business Affairs Division <www.caba.nt.gov.au> Email: SA: Office of Consumer and Business Affairs <www.ocba.sa.gov.au> Email: <[email protected]> Tas: Consumer Affairs and Fair Trading <www.justice.tas.gov.au/ca> Qld: Office of Fair Trading <www.fairtrading.qld.gov.au> WA: Department of Consumer and Employment Protection <www.docep.wa.gov.au> Vic: Consumer and Business Affairs <www.consumer.vic.gov.au>

CAN YOU GO TO THE COUNCIL IF THE DEVELOPER OR BUILDER STILL WON’T FIX THE FAULTS?

When you obtain a building approval or construction certificate for building works the plans and specifications become part of the development consent by the council and are therefore enforceable by the local council or the principal certifying authority (PCA), which 100


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may be the council itself or an accredited private certifier. (The job of the PCA is to certify that the building works comply with the council approval and with the national building code.) These plans cannot be changed without the permission of the council. Failure to follow the approved design and specifications is a breach of the development consent and the PCA can take action by way of a notice of intent to issue an order or on-the-spot fine. But that’s not to say it will.

Case study

The approved drawings for an award-winning inner-city apartment block specified that all balconies (which had a raised perimeter hob edge) were to have safety overflow drains installed. A pre-purchase property inspection report on one of the units picked up that these vital flood-prevention devices were not installed. When the omission was pointed out to the developers/builders they refused to install them, saying they were not needed. The building consultant believed this was because if they fixed one unit’s balcony they could be forced to fix them all. The hydraulic engineer who designed the drains told the consultant they were fundamentally important but refused to put this in writing because he was originally contracted by the developer and had a ‘conflict’. The matter was taken up with the local council which failed to act and then with the state planning authority which has yet to resolve the issue. The owner decided not to pursue the matter further due to the cost.

Note, however, that the PCA is not responsible for inspecting or commenting on the quality of construction, so you are not able to take up quality-related building defects with councils. The PCA must ensure that the fire safety certificates are issued before allowing occupation of the building. If any of your building 101


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faults relate to fire safety services or to works specified in the documentation that have not been completed or don’t comply with the BCA, then you may take the matter up with the PCA (private or council) which is obliged to investigate. Despite what many councils may tell you, the legislation, at least in New South Wales, does not prevent the council taking action when the building was certified by a private certifier, so you may raise any potentially serious breaches with the relevant council as well as the PCA. If either the PCA or the council fails to act you can lodge a complaint with the accreditation body (if an accredited private certifier) or the council’s general manager (if certified by council). If defects are related to fire safety services or fail to comply with the council approval or building code they can be taken to the council irrespective of whether it was the certifying authority.

Building checklist

1. Have council-approved plans that comprehensively cover the scope and quality of the work. 2. When renovating an older home get a pre-renovation building survey and incorporate essential repairs into the tender documents. 3. Research suitable builders to quote. Consider employing an architect or other qualified person to act as the superintendent and check their insurances. 4. If renovating, seriously consider renting elsewhere and include in the contract the cost of rent in a damages clause covering late completion. Offer the builder a bonus for completing early. 5. Seek professional advice in preparing a contract, which should include a retention sum, a defects liability period and a damages clause, and link practical completion to the final payment. 6. Get expert advice on the builder’s schedule of

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progress claims before signing the contract and do not pay more than the maximum legal deposit. 7. Once the builder ‘takes possession of the site’ keep proper records of all discussions by using a diary and camera. 8. Have regular site meetings and distribute minutes to participants before the next meeting. 9. At the outset ask the builder to submit a detailed breakdown of costs for each variation as it occurs before the work is undertaken. 10. When the builder says that the project is ‘practically complete’, get an independent building survey. 11. At practical completion release the final payment but retain part of the retention sum. 12. Just before the expiration of the defects liability period advise the builder of any defects or faulty workmanship in writing. When all rectification is complete release the balance of the retention sum.

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SECTION 3 LEGALS, FINANCE AND INSURANCE

The legal and financial aspects of purchasing a property are not a lot of fun but covering them properly is essential for your long-term security. While you should certainly employ a solicitor or conveyancer to check the contract this is no excuse for not reading it yourself. Purchasing land can involve a maze of covenants, easements, zonings, restrictions on the user and other legal impediments to its use. You may not even be able to build on it. Recently a young family bought a block of land in a fairly expensive regional area on which they intended to put a weatherboard house moved from another site. After they bought the house in the nearby capital city and it was loaded on the truck they discovered the contract for the purchase of their land did not permit ‘relocatable’ houses. The couple had not told the agent or their solicitor of their plans and they had no recourse at law. Getting the right loan, and one you can afford, can also make or break a family. Did you know, for instance, that if you borrow more than 105


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80 per cent of the value of a property you are up for an extra charge of thousands of dollars? Or that paying your loan off fortnightly rather than monthly can take years off the loan? Or that one particular type of loan does not have to be repaid while you are alive? First home buyers are eligible for a $7000 handout from the government which can be a big help in scraping together a deposit, but there are conditions. If you are living in a de facto relationship with someone who has previously owned a property in Australia you are not eligible. But if it was overseas you are okay. Are you eligible for such assistance? What are the hidden costs of buying real estate? How much do you have to pay in stamp duty? And will you have to pay GST or land tax? It’s not hard to spend $50 000 in ‘dead money’ changing from one property to another. Find out why in this section. Then there is the issue of insurance. If you are not insured or are under-insured your asset can literally go up in smoke, as some residents of Canberra have discovered. What types of insurance are there and how much is enough?

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CHAPTER 10 LEGALS Legals

Should you use a solicitor or conveyancer to handle your purchase or sale or can you do it yourself? You can save money by buying a DIY conveyancing kit and handling the legal processes of transferring the ownership of land yourself but is it worth it? What extra protection does using a solicitor or conveyancer provide? There are many other legal issues surrounding the ownership and transfer of land. Can a foreigner buy property? What sort of title is it? Who pays for the fence?

WHAT IS A CONVEYANCE AND SHOULD YOU HANDLE IT YOURSELF?

The legal process of transferring the ownership of property is called a conveyance and is achieved by ‘exchanging contracts’. The sales contract sets out the terms and conditions of the sale, including fittings 107


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LEGALS, FINANCE AND INSURANCE

such as blinds, curtains and so on, and any items excluded from the sale. There are two copies of the contract—one for you and one for the other party. You sign your copy and only when it is ‘exchanged’ for the other copy signed by the other party is the sale legally binding— not before. A ‘holding’ deposit paid by the buyer to the agent has no legal force whatsoever and is fully refundable if the buyer changes their mind. There is normally a cooling-off period of several days during which the buyer (but not the seller) can pull out of the contract for a fee. This cooling-off period can be waived by the buyer’s solicitor. A buyer should not waive the cooling-off period without legal advice. There is no cooling-off period for the buyer at an auction. The sale is finalised and the buyer takes possession of the property at ‘settlement’ or ‘completion’ when the balance of the selling price is paid to the vendor. The period between the exchange of contracts and settlement is usually four to six weeks although this is subject to negotiation between the parties prior to exchange. Lawyers used to have a monopoly on providing conveyancing services. There are now also licensed conveyancers who are not lawyers but who must carry the same insurance as lawyers to cover their work if they make a mistake. This has led to price competition so today a lot of lawyers will handle a conveyance for the same fixed price as a conveyancer—from around $500 for a sale and $600 for a purchase, plus ‘disbursements’—that means the fees charged by government departments for the necessary searches plus a usually exorbitant allowance for phone calls and faxes. Do you really need a lawyer to buy or sell your home? There are DIY conveyancing kits available from people like the Law Consumers Association and you certainly don’t need to be a brain surgeon to do your own conveyancing. A conveyancing kit costs a couple of hundred dollars—but it involves you spending a lot of time running around performing tasks with which you are not familiar. Also, you forgo the protection offered by a lawyer or conveyancer if you get it wrong and end up with a serious problem—if a lawyer or conveyancer makes a mistake you can sue them and they are insured for this eventuality. 108


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LEGALS

If you act for yourself, you are on your own. Saving a few dollars is not much consolation if you buy a property oblivious to the railway line planned through your lounge room. So the difference between the $200 you pay for a conveyancing kit and the $500 or $600 you pay a lawyer saves you a lot of valuable time and gives you protection in the event of a legal disaster. A DIY kit makes more sense when selling than when buying. It’s the buyer who is taking most of the risks, not the seller. If it is a complicated or tricky transaction, get a good conveyancing lawyer, even if this person charges by time or by a scale of fees and does not offer a fixed fee. It may cost twice as much as a fixed fee but sometimes it’s worth it.

PURCHASE CONTRACTS: WHAT DO YOU LOOK FOR?

If a property looks promising it is always useful to ask for a contract and look for certain things yourself, but always get a legal practitioner to check a contract before you sign it. The first place to look is the ‘special conditions’, for this is where you will find any departures from a standard contract. The other obvious things to look for are the price (on the front page), the zoning (in the council certificate) which shows what you can build or use the land for, the survey (if included) which shows if the buildings are fully within the boundaries of the land for sale, and the sewerage and drainage diagram (or helio) which will give you a clue as to any illegal plumbing connections. You should always check that the contract clearly identifies the property. The address shown on the contract should be identical to the address on the title particulars, the zoning certificate and the sewerage diagram (helio). The helio will often not reflect recent changes to the property such as alterations and additions, either because water authorities can take some years to update changes or because the owner has failed to notify them. What the helio can show is whether a mains sewer is running under the house, where you may be able to 109


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extend or put a pool and whether you share a sewer service with adjoining neighbours. The zoning certificate is important as it specifies the permitted uses of the property such as residential, flats, commercial or industrial. It should also disclose whether the property is affected by future road widening or is in a heritage area. If not all the documents prescribed by law are attached to the contract it can be declared void by the buyer after exchange of contracts. Clearly identify what is included in the sale (‘schedule of inclusions’), as there are often disputes about items the vendor thinks they can take and the purchaser believes should stay. The general law is that fixtures are included but chattels and moveable items are not. But what is a fixture? If it’s not in the contract it is best to assume that it does not have to stay. The ‘schedule of exclusions’ identifies those items that are not included in the sale but it may not be exhaustive.

Case study

David purchased a house where the vendor removed the built-in dishwasher and the one and only tree in the backyard, leaving him to fill in a 2-metre hole. Vendors have been known to remove built-in fireplaces, airconditioning systems, TV aerials, garden plants, light fittings and water features. Period light fittings are typical of exclusions by vendors and are expensive to replace.

In New South Wales, Queensland and Victoria at least, vendors of residential properties that have been renovated by owner-builders and sold within six years must attach to the contract a certificate of home warranty insurance and a conspicuous note advising that the property was renovated by themselves (see page 74). The contract will often contain special conditions relating to time for completion and penalties for late completion, or clauses denying the right of a purchaser to object to certain items. A typical clause makes the purchaser liable for any latent or patent defects in the 110


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LEGALS

property. For example, it may protect the vendor against any objection to illegal building work—and your pre-purchase inspection may not have picked up such work. Try to ascertain when alterations were last made to the property and ask the local council if they were approved. Also ask the vendor whether they have a certificate of occupancy or classification (which shows that the dwelling has been inspected and approved by council) and a certificate of home warranty insurance. Of course, if the property has changed hands once or twice within the 6–7 year home warranty insurance period the current vendor may never have received the insurance certificate.

WHY SHOULD YOU GET A LAWYER TO REVIEW A RESIDENTIAL SALE CONTRACT?

The commonly used Latin legal term caveat emptor (‘buyer beware’) applies to most residential sale contracts. Many owners sell their property knowing it has numerous hidden or visible defects, sometimes ‘actively concealed’, safe in the knowledge that their contract will most likely protect them against future action by an unwitting purchaser. There is now a trend to require greater disclosure of known faults by vendors and dissatisfied purchasers are more likely to take civil action seeking to prove negligence or fraud.

Case study

Harry, a property developer, purchased a small parcel of rural land on which stood a small shed for $80 000. He successfully applied to the local council to rezone the property ‘residential’ and then undertook some ‘renovations’ to the shed which included a single tap outlet, making it more acceptable as a residence. Harry then sold the property for $400 000. John purchased the property (without a pre-purchase

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inspection) and discovered that the water supply to the tap was connected to his neighbour’s water service. He investigated the cost of installing his own water supply and to his horror found that it would cost $150 000. John sought legal advice and decided to sue Harry for fraudulent conduct. Because Harry did not want any bad publicity he decided to settle the matter.

A good solicitor will always request a survey from the vendor; however, they are not always available or are outdated. When the property is new you should ask for a certificate of occupancy or classification. If there is any evidence of renovations the solicitor should also ask for a final council building certificate. Keep in mind that lawyers do not normally see the property and either you or your building consultant should alert them to any obvious signs of renovation work, building problems or suspected illegal construction so that they may follow them up. Other matters on which a solicitor may advise are finance, coolingoff rights and building, pest and strata inspections. They can also advise on the tax implications of a purchase or sale such as land tax, capital gains tax and GST. If a solicitor makes a mistake he or she is covered by professional indemnity insurance and the purchaser can seek redress by commencing proceedings for negligent conduct. While the solicitor is covered by the insurance against such claims he or she has to pay a substantial ‘excess’ on a successful claim.

WHAT ARE THE VARIOUS TYPES OF PROPERTY OWNERSHIP OR ‘TITLE’?

When you buy a property, in legal terms you obtain ‘title’ to that property and your title or ownership is registered with the Land Titles 112


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Office, as are any encumbrances such as an easement or a mortgage. There are at least six different types of title: •

Torrens title This is the most common form of freehold title, and is most easily explained as government-guaranteed ownership of land. Every time such land changes hands the government supports the change of ownership by a system of immaculate record-keeping. If you are buying a Torrens title property the Land Titles Office in your state will have a record of a ‘deposited plan’ showing the precise boundaries of the land. • Old system title This is also freehold ownership of land but without the government guarantee. Your solicitor must check every change of ownership back to the original grant to make sure that all is in order, and the legal fees will be higher than for Torrens title. There’s not much old system land left as most has been converted to Torrens title. When purchasing old system title properties you should consider transferring it into the simpler Torrens title. To do this seek advice from a conveyancing solicitor. • Strata title This is freehold ownership of an apartment. In layman’s terms you have title to the internal space of your unit and car or storage space (if there is one) but you share ownership of the structure and ‘common’ areas such as the walls and floors, lobbies, lifts and grounds with other unit owners. • Company title This is an older form of ownership of flats; there are still quite a number not converted to strata title. You do not own your unit but you own shares in a company which owns the whole block. Under company title you need the agreement of the other owners or shareholders to sell or lease the unit and to do lots of other things. It is more difficult to borrow money on a company title. • Leasehold Many of the flash new apartments being built around Sydney Harbour do not sit on freehold land but on land leased by the government, usually for 99 years. It is similar to the system applying in Canberra except there is no guarantee of a renewal 113


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•

of the lease. Ninety-nine years is a long time, but it’s still not as good as freehold. Community title This is the newest form of title and applies to larger properties on which a number of dwellings are built. You have freehold Torrens or strata title to your own dwelling and shared or community title to common areas, which may be open space, a pool, tennis courts or even bushland. The new suburbs of Newington and Liberty Grove in Sydney are community title, and country properties can also be divided in this way.

WHAT IS A PRIVATE TREATY SALE?

There’s more than one way to buy and sell a house, but by far the most common are auction and private treaty. The latter is simply the legal process of offering a property for sale at a certain price which is often varied by negotiation. The term should not be confused with ‘private sale’, which is where the owner does not use an agent. Other ways of selling property are by tender where bids are invited by a certain date and normally the highest bid is accepted, and ‘expressions of interest’ where a buyer indicates his or her interest in the purchase of the subject property.

CAN FOREIGNERS BUY PROPERTY IN AUSTRALIA?

Foreign purchasers intending to acquire property in Australia must seek approval from the Foreign Investment Review Board unless specifically exempted. Exemptions are: • •

•

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acquisitions by Australian citizens resident abroad acquisitions of residential-zoned property by foreign nationals who hold permanent resident visas or hold, or are eligible to hold, a ‘special category visa’ (for example, a New Zealand citizen) foreign persons purchasing, as joint tenants with their Australian citizen spouse, property that is zoned residential.


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Government policy is to approve foreign investment in new property which increases the housing stock for Australians, but not to allow acquisition of established housing as this would force up prices. Foreign persons and corporations are usually given approval to buy vacant residential land on condition that construction of a dwelling starts within 12 months. Approval is also usually granted to buy home units and townhouses off the plan, under construction or newly constructed (but never occupied), as long as no more than half of the units in any one development are sold to foreign interests. Approval is also usually given to foreign companies buying residences for their senior executives, and to foreigners (including students) temporarily resident in Australia for more than 12 months buying a home for their own use, provided it is sold when they leave Australia or cease to live in the property. Full details of the policy and application forms can be found on <www.firb.gov.au>.

DO YOU NEED A SURVEY?

A land survey identifies precisely the area and dimensions of the land, whether or not there are any encroachments by or upon the property, and whether any covenants and council setbacks have been complied with. In simple terms, what a survey tells you is whether buildings and fences are in the right place and where the sewer main or power easements are. If the house you are buying encroaches upon a neighbour’s land you’d better sort out the problem before you buy it, as it could become expensive later. The searches on title attached to the contract will also give details of all easements or covenants (restrictions on what you can build or do with the land) affecting the land. If a survey is not provided with the contract you should ask that the vendor provide one. If they will not, sometimes it is advisable to get one done yourself; the cost can be $700–$1800. Many councils now require a new survey upon completion of any extensions so that any illegal setbacks and/or encroachments can be discovered prior to their issuing a final building certificate. 115


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WHAT IS A FINAL BUILDING CERTIFICATE/CERTIFICATE OF OCCUPANCY?

In all states a final building certificate or certificate of occupancy or certificate of classification is issued by the local authority on the completion of a new building or a renovation or extension as evidence that Building Code of Australia regulations have been complied with and that the building is safe to occupy. These are not in any way a guarantee of quality but they do protect a future buyer from the council issuing any orders against the building providing further, unauthorised work is not done. You can check with your local council as to whether such requirements exist. Usually it is not mandatory for a home owner to obtain a final building certificate upon completion of renovations or before they sell their house, but it is advisable because of the de facto guarantee it provides that the building meets council standards. Where applicable, vendors should obtain a building certificate or certificate of occupancy from the council prior to selling to ensure a smooth transition when a buyer is found. A prudent buyer will demand such certificates. If none are available it may take several weeks for the council to issue them, during which time the sale can be lost. A contract may of course be made conditional upon the vendor being responsible for any non-compliance the council may find.

WHAT DOES THE LAW SAY ON DIVIDING FENCES AND WHO PAYS FOR THE FENCE?

The dividing fences acts outline who pays for constructing and repairing dividing fences between properties. Disputes over dividing fences are extremely common and local councils generally do not want to get involved so it rests with you and your neighbours to reach a satisfactory outcome. The legislation varies considerably from state to state and you should get specific advice from your relevant government authority. 116


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Contacts for dividing fences

Qld: <www.legislation.qld.gov.au/LEGISLTN/CURRENT/ D/DividFenA53_02_.pdf> WA: <www.dlg.wa.gov.au> NSW: <www.dlwc.nsw.gov.au/care/land/llb/about_fences.html> Vic: <www.dms.dpc.vic.gov.au> SA: <www.parliament.sa.gov.au/leg/index/update.pdf> NT: <www.darcity.nt.gov.au> Tas: <www.thelaw.tas.gov.au> ACT: <www.legislation.act.gov.au>

There are, however, a number of common principles and the New South Wales legislation is a good general guide. This defines a dividing fence as anything ‘enclosing or bounding the land of adjoining owners’ and it can be metal, wood, brick, timber, fibre cement, hedge, earth, ditch, stream or embankment. Retaining walls and the external walls of buildings are not generally regarded as fences and are not covered by the Act. Specialist legal advice should be sought in relation to boundary retaining walls acting as fences. Often it is the owners of the property above the retaining wall who are responsible for its maintenance and repair, as it is they who are receiving the benefit. Generally the cost of building or repairing what is called a ‘sufficient dividing fence’ is to be equally shared between adjoining neighbours. Many consumers wrongly think that a sufficient dividing fence is a standard fence such as a timber paling or ‘colorbond’ fence. What constitutes a sufficient dividing fence depends on the particular circumstances, such as the existing fence type, what is normal in your area and the use of the land. This is a very common cause of dispute between neighbours and often needs to be resolved by a court. Generally it is not a tenant’s responsibility to maintain fences. Owners of a property with a swimming pool bounded by a dividing fence may have additional obligations. 117


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Neighbours who carelessly damage a fence are usually liable for the cost of repair and councils can issue owners with an order to rectify. To take action in such matters councils usually require a written application, preferably accompanied by photographs. When replacing or repairing a dividing fence the first step is to talk to your neighbour about the style, height and location and who is to obtain quotations. The key to successful fence negotiations is to be flexible. If you have more than one neighbour this may result in a variety of fence styles. If you have your heart set on a particular quality, style or height of fence and your neighbour/s do not agree because it is more than a sufficient fence or they don’t want the added expense, consider offering to pay more than half the cost or even the lot. In the overall scheme of home renovations, fences are a relatively small expenditure and a uniform quality fence can add considerably to the value of your property and to your privacy and security. Front fences, brick fences and fences higher than 1.8 metres usually require council approval. When a fence is non-structural (no footings), some councils simply require both neighbours to agree in writing to any additional height.

FENCE-BUILDING TIPS

•

•

When building a timber fence always ensure that the posts and rails are constructed of moisture and termite resistant timber, or galvanised metal, as these are the elements that go first. Many owners get over the council’s fence height limit by extending the fence posts above the top of the fence line and installing lattice panels or trellis wires between the extended posts.

If you cannot get agreement from your neighbour on the cost or the type of fence, you should send them a ‘fencing notice’ which must include the following information: • • 118

date and reasons why repairs or a new fence are required proposed position of the fence/s


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• • •

an estimate of the cost of the work which should include removal of the existing fence copies of any quotations the proposed cost contribution by each neighbour.

If after serving a fencing notice you still cannot obtain agreement you might need to consider civil court action but be warned this can be costly, time-consuming and will sour relations with the neighbour so make every attempt to obtain an amicable agreement. A cheaper alternative to court is a community justice centre. If your neighbour still refuses you can proceed with the fence work provided adequate formal notice has been given and then seek to recover costs through a local court. Under these circumstances it is best to obtain legal advice first. Before you start building a fence check the fine print of the contractor’s quote to ensure it reflects the agreed height and type, particularly if the quote was organised by your neighbour.

Case study

Moira’s house was on the low side of a fairly steep slope and the 1.6 metre high timber boundary fence was dilapidated. The new neighbours had repositioned a large clothes line right next to this fence and it was almost always fully laden with washing which Moira didn’t like looking at. She obtained the neighbours’ agreement to replace the fence with a 1.8 metre colorbond type for which she obtained a quotation. The neighbours said they could get a cheaper quote, which they did. Moira didn’t bother to read the quote’s fine print, which said (in very small print) it was for a 1.5 metre high fence, and accepted it. When the new fence was built Moira could see even more of the clothes. The neighbours denied any knowledge of a discrepancy and Moira ended up

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footing the bill to install lattice panels above the fence which was more than the cost of fence itself.

A new fence should be correctly positioned on the boundary and should ideally be pegged out by a surveyor engaged by both neighbours. But this is costly and you may be able to find the survey pegs yourself. Sometimes to reach agreement about an off-boundary fence it might be appropriate to compensate the neighbour for any loss of land they have suffered. A significant fence encroachment along a boundary will be a negative factor when you sell the property and it is often better to resolve any such issue first.

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CHAPTER 11 ORGANISING YOUR FINANCE

Organising your finance A home loan is not just a home loan. There are literally hundreds of loan ‘products’ in the marketplace and no two are the same. Lenders are competing for your business as never before and it has never been easier to borrow money. Interest rates are historically low but you must look beyond just the interest rate to the many features that differentiate one loan product from another. How about free banking, a flexible repayment schedule, loan portability or an all-in-one loan account? They can all be yours if you shop carefully. How do you choose the best loan for you and what is the ‘true’ interest rate? In the past it has been difficult to calculate the true cost of a loan because of the up-front and ongoing fees and charges on top of the interest payments, and the so-called ‘honeymoon’ rates for the first six or 12 months. An advertised rate of 6 per cent may be nearly 7.5 per cent when all the charges are included. 121


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Federal legislation introduced on 1 July 2003 now requires banks and other lenders to include all ‘foreseeable’ fees and charges in a single interest rate, called the ‘comparison rate’, in their advertising. In addition, consumers must be provided with comparison rate schedules which list comparison rates for a range of sample loan amounts and terms (but not for every loan amount). The comparison rate does not include government charges such as stamp duty. See <www.creditcode.gov.au> for more information. But there is still a loophole. Valuations charges and so-called ‘contingent fees’ not known at the time of the loan approval, such as early repayment or redraw charges, are not included in the comparison rate. Look for loans which have no fees for early repayment or redrawing of funds. The comparison rate should be read with some caution. Fees become far less significant in determining the comparison rate as the loan amount gets larger. On any loan the primary cost will always be the interest rate. Comparison rates are not produced for discounted packages such as the ‘professionals’ package’, which are now very common. If there is little difference between the advertised rate and the comparison rate look closely at the other features of the loan as these may be more important.

SHOULD YOU TAKE OUT A VARIABLE RATE LOAN OR A FIXED RATE LOAN?

A big question facing borrowers is whether to take out a variable interest loan or a fixed interest loan. With a variable loan, which can be taken out for periods up to 30 years, the interest rate varies with the market—if interest rates are going up so does yours, if they are going down you pay less interest. In a fixed loan the rate does not change for the period of the loan, which is usually only three to five years. The simple rule is that if rates are going down go variable, and if you think they may go up then go fixed. But trying to predict interest 122


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ORGANISING YOUR FINANCE

rates is a dangerous business so a better rule is to go variable if you think rates are going down and you can afford a bit of a risk, but choose a fixed rate if you simply cannot afford a rate rise and certainty is your main priority. If it’s a close decision you can take part of the loan as variable and part as fixed, often 60 per cent variable/40 per cent fixed. The main advantage of the variable rate is that you can make unrestricted additional payments. The main disadvantage is that it can go up. The main advantage with a fixed rate is that the repayments are set in concrete for the period you elect. The main disadvantage is that you cannot pay extra or, for the few fixed rates that allow some capital reduction, you are severely restricted in how much extra you can pay. There can also be large ‘break’ (changeover) fees associated with fixed rates if variable rates have gone down and you want to change to a variable loan. When determining the proportion between fixed and variable, first establish how long you want to fix for. The periods most often chosen are one, three and five years. You should consider the pricing of each rate and how long you intend to keep the property. For example, you wouldn’t fix for five years if you thought you might sell in three years, as you might then incur unnecessary break costs. Once you establish the fixed period, then establish the maximum amount you may be able to pay off the variable each year. Multiply that by the fixed term and that should tell you how much to leave variable. Make certain you leave enough variable, as it would be frustrating to pay off the variable portion halfway through your fixed period and then find you cannot pay extra money off the loan. For people who have two loans, where one is for an owner-occupied property and the other for investment, always fix the loan for the investment in preference to the owner-occupied property. That is because the interest on the investment property is tax deductible and there is therefore no incentive to pay off this loan faster. Any extra money should go onto the variable home loan as it provides no tax 123


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benefits. Only when this is repaid in full should you look to paying principal on the investment property. Remember your decision need not be forever—you can always refinance, that is, change to a different sort of loan. However, check for early loan termination fees which can be high even if you stay with the same lender.

WHAT ARE THE OTHER FEATURES OF A HOME LOAN, SUCH AS AN ‘OFFSET FACILITY’?

While the interest rate is the first thing you look at when choosing a loan, there are other features to consider before making a decision. The best ‘standard’ variable home loans are those with the features listed below. If you do not need all these features you may opt for a ‘basic’ variable loan at a lower interest rate. Consider which of the following you need and then shop around for the best interest rate with those features: • •

• •

• •

Offset facility This reduces your interest if you have extra money such as wages deposited in your account even for just a few days. Redraw facility If you make higher payments off your loan you can withdraw these extra funds later if you need them. Even though you are redrawing this money you have reduced your interest for the time the extra money was in the loan account. No charge for early repayment If you pay off your home loan early there is no fee for such early repayment. No switching penalty This means no charge for switching from a variable to a fixed loan. Most banks charge a fee of $150–$300 for this and you are only ever likely to do it once, so it’s not a big deal. It’s more important to be able to fix your loan if you wish to, and some basic variable loans don’t allow this. Loan portability This is the ability to take your loan with you for a reasonable fee if you change properties. Mortgage insurance Most lenders require mortgage insurance for loans of 80 per cent or more of the property valuation but a few

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• •

will lend more than 80 per cent without such insurance. With the rapid escalation of property prices it is probably better to pay $3000 in mortgage insurance than to delay your purchase until you have saved another $30 000 from after-tax earnings for a deposit. How much would the property have risen in value by then? No penalty for splitting a loan into part-variable and part-fixed. Again, not a big deal. All-in-one loan This enables you to pay all your income into the loan account and withdraw whatever funds you need as you need them. For many people the offset facility is a better solution—it is easier to keep track of the money flow because it is a segregated account.

A good way of finding the best loan is to let someone who knows more than you do, such as a mortgage broker, handle the homework. The bigger brokers can organise loans from most of the major banks and non-bank lenders. They use a software program to enter your details and your personal priorities and the computer spits out the cheapest loan with all the features you want. Specialist magazines such as Your Mortgage give awards each year for the best mortgage products in a number of categories and these are an excellent guide. Often little-known lenders such as a building society or credit union win these awards. For current loan rates go to <www.apimagazine.com.au/rates/ index.html>.

SETTING A BUDGET: HOW MUCH CAN YOU SPEND?

Many lenders will lend up to 95 per cent of a property’s valuation but it’s a big mistake to think you can buy a property once you have a 5 per cent deposit. You will need another 5 per cent to cover such things as stamp duty (the big one!), conveyancing, bank fees, building and pest inspections and the removalist. If you are borrowing over 80 per cent of the property valuation you will also have to pay 125


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mortgage insurance (approximately 1 per cent of the loan amount), but sometimes this can be made part of the loan. However, the biggest hurdle you face in deciding how much you can pay for a home is your capacity to repay the loan. Lenders will look at how much you earn, deduct any other regular financial commitments, then figure out how much you can afford to repay each month. This will determine the size of the loan they will approve. The easiest way to calculate the size of the loan likely to be approved is to go to one of the major banks’ websites, all of which have a calculator for this very purpose. One such site is <www.anz.com.au>: go to ‘financial calculators’ then ‘how much can I borrow’ and fill in the details of your income, living expenses, debts, desired loan term, etc. and you will be told how much the bank will lend. There is another calculator on the site which works out statutory fees and bank charges on the loan. When deciding how much to borrow also give some thought to whether interest rates are likely to rise, thus increasing your repayments, and, if you are building, the money you will need to spend on furnishings, driveway, fences and landscaping.

WHAT IS A ‘HONEYMOON’ INTEREST RATE AND WHY SHOULD YOU BE CAUTIOUS?

Many of the low interest rates you see advertised for home loans are so-called ‘honeymoon’ rates. You get a discounted interest rate for the first six or 12 months—as low as 5.75 per cent at the moment— but after that you are paying the standard variable rate, which is higher—and sometimes much higher. Does a honeymoon rate really save you money? Yes it does—in the first year. After that it depends on what the lender’s variable rate is, and the major banks rarely have the lowest variable rate. Calculated over the first five years of a loan, it is often better to forget about honeymoon rates and go for the lowest ‘true’ variable rate that is offering, and usually that’s from a non-bank lender. 126


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Honeymoon rates can be a trap for the unwary. You have extra money in your pocket for the first few months and you might go out and splurge on a new car or an overseas trip. However, when the honeymoon is over and the monthly repayments shoot up you could find yourself in serious trouble. Fortunately, recent federal legislation now compels lenders to advertise the true or comparison interest rate, including most charges, and this may spell the end of honeymoon deals. Nevertheless, a honeymoon rate can be a good move if and only if you can roll onto a cheaper rate after the honeymoon period expires. Most lenders will roll you onto their standard variable rate, which is usually more expensive than other loans that are available. Some honeymoon rates also have high discharge costs within a set period after the honeymoon (usually up to three years), but others have lower cost discharge fees or switch fees. It may actually prove beneficial to take the cheap introductory rate, then pay the fee to move onto a cheaper variable rate after the introductory period has expired, depending on the fees and terms of each lender. Check before you take out the loan what it would cost to change after the honeymoon period and compare that to your potential savings during the introductory period. In many cases you could end up a long way in front. But you must remember to change over.

WHAT GOVERNMENT ASSISTANCE IS AVAILABLE FOR THE FIRST HOME BUYER?

A grant of $7000 for first home buyers was introduced by the federal government on 1 July 2000 to offset the effects of the GST; it is administered by the state and territory governments, usually the Office of State Revenue. An additional grant of $7000 for buyers or builders of brand-new homes was introduced from 9 March 2001; it ended on June 30, 2002 and no longer applies. For the original and continuing $7000 grant there are a number of conditions. To be eligible you must satisfy these requirements: 127


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• •

• • • • •

This is the first time you or your spouse/de facto will receive a grant under the First Home Owner Grant Act 2000. You and your spouse/de facto have not previously owned a residential property jointly, separately or with some other person in Australia. Each applicant is a natural person and not a company or trust. Each applicant for the grant must be at least 16 years of age although there can be exemptions to this. At least one applicant is a permanent resident or Australian citizen. Application for the grant must be made within 12 months of completion of construction or settlement of the home. At least one applicant will occupy the home as their principal place of residence within 12 months of settlement or construction.

The grant is not means tested and not taxed. You can apply for the grant through your bank or other lending institution or through your local Office of State Revenue and you will have to provide certain documents to support your application, such as copies of birth and marriage certificates and proof of purchase or ownership of the property. Full details of eligibility and conditions can be found on <www.firsthome.gov.au>. Some states provide additional benefits by way of concessions on the stamp (or transfer) duty, which is a state tax on the purchase of property, but very low price ceilings apply to any assistance. In New South Wales, eligible first home buyers do not pay duty on homes costing up to $200 000 in the metropolitan area or up to $175 000 in other parts of the state, with reduced concessions on homes up to $300 000 and $250 000 respectively. For vacant land the limits are even more unrealistic—no duty up to $95 000 and reduced duty up to $140 000 in the metropolitan area and no duty up to $80 000 and reduced duty up to $110 000 in other parts of the state. In Victoria there are stamp duty concessions for families with at least one dependent child and for concession card holders on homes up to $200 000. In Queensland first home buyers get a total rebate 128


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of stamp duty on properties costing up to $80 000, reducing down to a rebate of just $200 on a $160 000 property. There are also some concessions on mortgage duty in some states— that is, a tax on borrowing money. For details of the duty concessions in your state go to <www .firsthome.gov.au> and click on your own state government office.

IS IT BETTER TO WAIT LONGER AND SAVE A HIGHER DEPOSIT BEFORE BUYING?

If the market is rising obviously you need to get in as quickly as possible, but if it is falling you might pay a lower price if you wait as well as being able to save a higher deposit. The problem is that even the experts get it wrong when trying to predict where the market is going. The best approach is to go back to the fundamentals of buying property and borrowing money. You need at least 10 per cent of the purchase price and the capacity to make the repayments, whatever they are, before you can contemplate entering the market. The usual minimum deposit a lending institution will require is 5 per cent and you need another 5 per cent to cover stamp duty, legal expenses and the other costs of the transaction. But if you buy on just 5 per cent deposit you are really straining the weekly budget because your loan and your repayments will be significantly higher than if you buy on, say, a 20 per cent deposit. If you can put down 20 per cent deposit you will also save the cost of mortgage insurance (about 1 per cent of the purchase price). It could be more difficult to find a loan on a minimum deposit unless you have a high income and you may not get the best deal in terms of the interest rate and other features of the loan. Let’s say you are buying a unit for $360 000 on 5 per cent deposit ($18 000). Your loan will then be $342 000 which will require a weekly repayment of $561.51 at 7.12 per cent over 25 years. But if you have 20 per cent in the kitty ($72 000) your loan is $288 000 and your weekly repayment only $472.85, or nearly $90 a week less 129


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for 1300 weeks! On top of this you save a one-off payment of over $3000 for mortgage insurance. Buying on a low deposit is more realistic if you are short on savings but have a high income and can handle high repayments fairly easily. In some ways it is better to get a foothold in the real estate market as soon as possible because it is a way of forced saving and you never know when the market might take off again. But the question must be asked: If you have such a high income why can’t you save a decent deposit?

SHOULD YOU USE A MORTGAGE BROKER AND WILL IT COST MORE?

Yes and no. The main benefit of using a mortgage broker is that they have access to loans from usually 20 to 30 banks and non-bank lenders, so it saves you time and shoe leather in shopping around. Virtually all the big banks and other lenders now use brokers to ‘distribute their products’. A broker’s representative will normally come to your home or office armed with a laptop computer and special software designed to pick the best loan for the customer. You tell them what features you want in a loan, your employment and financial circumstances, your family situation and a few other details and the computer will spit out the loan with the lowest interest rate which meets your criteria. Using a mortgage broker costs no more than going direct to a bank because the lender pays their commission. But won’t this be passed on? No, because the broker is a very efficient distributor of the bank’s products and saves the bank employing more of its own staff and renting more shopfront premises to house those staff. But won’t the broker recommend those loans which pay a higher commission? Although most lenders pay very similar rates of commission there is some risk of this. Perhaps the commission from one lender is identical to another but one pays quicker than the other. There are some brokers which operate entirely on the Internet and which offer discount commission rates so it is worth surfing the web 130


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to see what deals you can find—but be aware that you may not get the same level of service. By meeting with the broker you may well get a better understanding of the products and particularly the features. And don’t give up on your bank altogether if you have a good relationship there. Compare the best deal from a broker with what your own bank will offer before taking the plunge. One word of warning: like some banks and other lenders, a few brokers use very hard-sell tactics on you to sign up. They should be shown the door immediately. Also there have been cases of brokers charging their clients fees. Brokers are paid a commission by the lender and you should exit immediately if they try to charge for their services.

WHERE DO YOU GO IF THE BANK SAYS NO? THE SECRETS OF THE NON-CONFORMING LOAN

People with a poor credit record are used to being knocked back by the banks for a loan, or being forced to pay outrageous interest rates. Or people who are self-employed simply may not have the documentation to show what they are really earning due to uneven cash flows, a late tax return or because their personal and business incomes are intertwined. The answer for such people is the ‘non-conforming’ loan (that is, the borrower does not conform to the normal rules) which is now a lot easier and cheaper to obtain as more lenders enter this market. There are two types of non-conforming loan—one for people with an impaired credit history and the other a ‘low doc’ loan for those who do not have the normal documentation required by a lender but who have a clean credit record. The interest rate for non-conforming loans used to be anywhere between 10 and 20 per cent, usually through a solicitor. Now they range from the standard variable interest rate for low-doc loans and 8–10 per cent for those with a problem credit history. As a general rule the greater the loan the higher percentage deposit required. Some non-conforming lenders will lend 90 per cent of valuation but generally it is a maximum of 80 per cent. 131


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Non-conforming loans, once limited to around $500 000, can now be obtained up to $1.5 million with a 40 per cent deposit. If you do get a non-conforming loan at a higher rate and establish a good record in paying it off, later on you can refinance with a traditional loan at a lower interest rate. St George Bank offers low-doc loans up to $750 000 at the standard variable interest rate for up to 30 years; the bank does not require applicants to provide evidence of income but they must self-certify their ability to pay and provide details of other debts. You can borrow up to 65 per cent of the value of the property with St George. The best place to find non-conforming loans is a good mortgage broker. One which specialises in this type of loan is ‘The Mortgage Store’ at <www.mortgagestore.com.au>.

HOW CAN YOU PAY OFF YOUR HOME LOAN FASTER?

As the family home is for most people the largest single debt they will ever incur it makes sense to pay the mortgage off as quickly as possible and minimise the interest. The following are some well-tested methods of reducing your mortgage faster: •

•

Increase the minimum repayments If the loan is a variable type you should try to make more than the minimum monthly repayment as this can have a dramatic effect in reducing the amount of interest paid over the loan period. For example, if you pay an additional $10 per week on a $200 000, 30-year loan you could save $48 000 in interest and pay off the loan two years and nine months earlier. It is not always possible to do this with fixed interest loans but it’s worth checking with the lender. Change from monthly to fortnightly repayments If the fortnightly payment is half the monthly payment this effectively provides one additional payment per year. On a $200 000 loan over 30 years this will save about $58 000 in interest and reduce

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•

•

•

•

•

the loan period to 24 years. This is less important with an offset account as the daily bank balance works against the loan anyway. Deposit your salary direct into your loan account This is a ‘must do’ and is particularly beneficial if your loan account incorporates an offset facility where the interest is calculated daily and your loan account is credited with any payment the day it arrives. So if your salary arrives one day early you save one day’s interest on the amount deposited. This will save many thousands of dollars over the period of the loan. Make lump sum repayments For much the same reason it makes good mortgage sense putting any cash windfalls such as bonuses, tax returns, inheritances and child care allowance rebates against your mortgage loan rather than into a savings account, especially if you have that offset facility. Maintain minimum repayments when interest rates fall When interest rates fall you are able to reduce your repayments but it makes much better sense to maintain the same repayments and pay off your loan quicker. Remember, interest rates can also go up and if you have been making bigger payments than necessary you have a buffer to call on if rates increase. Use your credit card wisely Get a credit card with the longest interest-free repayment period and the lowest interest rate and use it for daily expenditure such as food, fuel, power bills and entertainment. When you get your credit card bill pay it just before it is due. In this way, if you are paying your salary into your loan account, the loan account is holding that money for household expenditure a few weeks longer and your interest is reduced. In effect the credit card company is lending you money interest free. But make sure you pay their bills on time, preferably electronically or by direct debit, or you will be paying interest at a higher rate than the mortgage. Use Internet banking If you are Internet-savvy you should set up your mortgage loan and any other accounts via the Internet with your lender. This lowers the cost of bank fees and speeds up 133


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•

•

transactions, including credit card payments, meaning that funds can remain in your bank account longer. Borrow for other debts against your home loan There can come a time when you are unable to pay off all your debts when they fall due. Because your home loan interest rate will be lower than credit card or personal interest rates, it is prudent to extend your home loan by using what is called a ‘draw down’ facility to pay these off. Then, when you can, increase your loan repayments to get your home loan back to where it was. Refinance Check your loan every 12 months to see if you’re getting the best deal. If you’re not, change your lender. The banks make a lot of money because most people don’t want to face the hassle of changing lenders, but doing this can save tens of thousands of dollars. The banks have numerous old customers who are paying 1 per cent above the market rate because they have ignored their bank’s advice to move to a cheaper loan. Share investors check the paper daily but some home owners never check their ‘investment’.

These steps require persistence and discipline so make your first move towards paying off your home loan faster by taking on just one or two of the above tips, then work your way through the remainder.

WHAT IS A REVERSE MORTGAGE?

This is a type of loan aimed at retirees with a substantial asset in their home but not a lot of cash income to live on. It enables them to borrow against their home to help fund their retirement. No repayments are required during the borrower’s lifetime. What happens is that when the borrowers pass away the property is sold and the accumulated interest and bank charges are recovered by the lender from the sale proceeds. At the time of writing, St George Bank and the Commonwealth Bank were the only major lenders to offer a reverse mortgage in Australia. With St George, customers aged 65–69 can borrow up to $80 000 and those over 70 can borrow up to $100 000. 134


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WHAT IS MORTGAGE INSURANCE AND WHAT DOES IT COVER?

Mortgage insurance is usually required by the lending authority when you wish to borrow more than 80 per cent of the property valuation, and it is expensive. Be aware the lender’s valuation of the property is usually conservative and may be less than what you have paid, so you may need mortgage insurance if you are borrowing, say, 75 per cent of the purchase price. Mortgage insurance is a one-off payment which can be included in the loan. It ranges from 0.5 per cent of the loan amount up to 3 per cent, the rate increasing with the amount of the loan and the percentage of the value. To borrow 90 per cent of the value of a property up to a $300 000 loan expect to pay around 1.3 per cent in mortgage insurance. Many property owners mistakenly believe that mortgage insurance protects them—it does not. It protects the lender in case the borrower defaults on their loan. If the lender forecloses on the loan the insurer pays the lender the difference between the price achieved for re-selling the property and the amount required to fully pay out the loan. The insurer will then pursue you, the borrower, for that amount with great vigour. In the past it has been difficult to find mortgage insurance on large loans but this is changing. One company, PMI Mortgage Insurance, has introduced a special mortgage insurance product for homes up to $1 million. It can also be difficult to borrow more than 70 per cent on company title units but St George Bank will now lend 85 per cent. Some lending authorities require mortgage insurance on some inner-city apartments as they consider them a higher risk due to oversupply. Another form of insurance can apply on strata title or body corporate units where you insure against accidental damage or loss of income up to the amount you owe on your mortgage. Because this type of insurance is complex seek advice from a good insurance broker. 135


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WHAT ARE THE HIDDEN COSTS OF BUYING REAL ESTATE?

The agent, the stamp duty, the removalist, the lawyer, the bank, all involve you in ‘hidden’ costs. The biggest cost of buying a home, apart from the sale price, is the stamp duty payable to the state government on the purchase of a dwelling or vacant land. This varies from state to state; in New South Wales, for example, it is around 3.5 per cent on an average home with the percentage rising with the price (see Section 4). Ask your local real estate agent or the Office of State Revenue (Treasury) in your state. Legal expenses for buying a typical house are your solicitor’s fee (negotiable, but say $600–$2000), survey and council building certificate if required and not provided by the vendor ($800), disbursements for documents ($300 up) and building inspection and pest report ($500–$700). These are average figures. If you are borrowing money, there will be the loan application fee ($600–$1000, sometimes waived), stamp duty on the mortgage (0.4 per cent above $16 000 in New South Wales), other mortgage costs ($400) and mortgage insurance (around 1 per cent of the price, payable once only) if you’re borrowing more than 75–80 per cent of the valuation. The other major cost of moving house is the removalist. The average cost for a professional removalist moving a 3–4 bedroom home within a major city including packing is about $1700, plus 1 per cent of the value of the contents for insurance. A move from Sydney to Melbourne or Brisbane would cost about $2500 and to Perth up to $4500, plus 2 per cent insurance. There are cheaper small operators, but they may not be able to help you in busy periods. Finally there are minor costs such as the connection of power and phone, adjustment of council and water rates, insurance and redirection of mail. If you are selling a house there is also the other big cost—the agent’s commission. 136


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DEAD MONEY: Moving costs from a $450 000 to a $680 000 home in Sydney, assuming a $560 000 mortgage. Selling Agent’s fees Survey Advertising Removalists Solicitor Cleaning Mail redirection (3 months) Subtotal (min.) Buying Stamp duty Solicitor Building and pest inspections Cleaning Phone connection Council and water rates (if purchased mid-year) Subtotal (min.) Loan Existing loan payout (if not portable) Valuation fee Loan application fee Stamp duty on mortgage Mortgage insurance Subtotal (min.) Grand total

$13 500 $800–$1700 $2500–$6000 $2000–$3000 $600–$2000 $300–$550 $25 $19 725 $26 090 $600–$2000 $500–$650 $300–$550 $60 $400 $27 950 $1000 $240 $600 $2181 $6888 $10 909 $58 584

WHAT ARE THE RATES OF STAMP DUTY IN DIFFERENT STATES?

Stamp duty is a state tax you must pay when buying land and on taking out a mortgage. If you buy a house and land you pay stamp duty on the lot. If you buy just land and build a house you pay stamp duty only on the land. In New South Wales the rate of stamp duty on transferring land escalates with price. It is $1290 on an $80 000 property, $8990 on 137


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a $300 000 property and $40 490 on a $1 million property. Stamp duty on mortgages (which is quite separate from stamp duty on land) is 0.4 per cent of the loan amount above $16 000 in New South Wales—that’s $541 on a $150 000 mortgage. Examples of stamp duty

State

Stamp duty on $700 000 property purchase

NSW VIC QLD ACT SA WA TAS NT

$26 990 $37 660 $18 750 $32 000 $32 330 $37 005 $25 550 $37 800

Stamp duty on $500 000 mortgage Transfer fee $1941 $1964 $1720 nil $1740 $1947 $1740 nil

$64 $1320 $1247 $160 $3548 $207 $131 $90

Total $28 995 $40 944 $21 717 $32 160 $37 618 $39 159 $27 421 $37 890

Source: <www.ymm.com.au/calculators>

WHAT IS LAND TAX AND HOW DOES IT APPLY IN THE VARIOUS STATES?

Land tax is a tax on the ownership of freehold land and is levied every year based on the unimproved land (that is, without buildings) value. Some economists consider this tax to be one of the greatest disincentives to investing in property. While the rate of tax varies from state to state it is usually applied in the following circumstances: • • •

when the land in question is not a principal place of residence where the unimproved capital value of the land is above a certain minimum dollar threshold the tax applies when the total unimproved value reaches the threshold. In some states the rate increases as a higher threshold is reached

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•

farming land and certain other lands may be exempt.

Land valuations are also used as the basis for council and water rates. If your land value increases significantly, often your rates do too and therefore it is a double-edged tax sword. It’s usually the taxpayer’s responsibility to determine if they are liable for land tax and interest penalties can apply for late payment. You should review your situation every year and keep up to date with the rates and thresholds, as land valuations are conducted every three years by most land titles offices. While land tax does not normally apply to land which is a principal place of residence, the residents of New South Wales have been blessed with a premium land tax (sometimes called the millionaire’s tax) which applies to properties with an unimproved land value above $1.68 million irrespective of whether it is a principal place of residence or not. Land tax applies to all land owners including unit owners; however, unit owners rarely pay it because the land value is divided by the number of units and the value per unit rarely exceeds the taxable threshold. Land tax has been the source of many objections by disgruntled taxpayers, most arguing that their properties have been overvalued. A number of cash-poor older residents with inherited family properties close to the water have been unfairly caught by this tax. It is possible to lodge an objection with the appropriate authority, but it must be lodged within a certain time of receipt of the latest valuation and must state the nature of the objection and offer supporting evidence—for example, recent nearby sales, lack of water views, steeply sloping site subject to building restrictions, etc. If your objection is overruled you can appeal the decision in court. Listed below are the approximate land tax rates across the country but you should contact your state Treasury for precise advice on rates and exemptions. •

New South Wales The tax-free threshold for 2004 is $317 000. Land tax of 1.7 per cent applies on the land value above this figure 139


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on any land you own apart from your principal place of residence (it also applies to the principal residence if the land value exceeds $1.97 million). •

Queensland The tax-free threshold is $275 997 for natural persons and $170 000 for companies. The rate of land tax is an increasing scale starting from 0.36 per cent at $4000 and climbing to 3.3 per cent by $1.5 million, then falling to 1.8 per cent above that.

•

Tasmania The rate of land tax is 0.55 per cent above $15 000, 1.25 per cent above $100 000, 2.25 per cent above $200 000 and 2.5 per cent above $500 000.

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South Australia The rate is 0.35 per cent over $50 000, 1.65 per cent over $300 000 and 3.7 per cent over $1 million.

•

Northern Territory No land tax applies.

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Victoria A climbing scale from 0.1 per cent above $150 000 to 5 per cent above $2.7 million.

•

ACT The residential rate is 1 per cent up to $100 000, 1.25 per cent above $100 000 and 1.5 per cent above $200 001. The commercial rate is 1 per cent to $100 000, 1.4 per cent above $100 000 and 1.7 per cent above $200 000.

•

Western Australia A climbing rate starting at 0.15 per cent above $50 000, running up to 2.5 per cent over $5 million. Between $550 000 and $2 million it is 1.76 per cent.

State Treasury websites

(look for ‘Land Tax’) NSW: <www.osr.nsw.gov.au> Qld: <www.osr.qld.gov.au> Tas: <www.sro.tas.gov.au> WA: <www.dtf.wa.gov.au> ACT: <www.revenue.act.gov.au>

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NT: <www.treasury.nt.gov.au> Vic: <www.sro.vic.gov.au> SA: <www.revenuesa.sa.gov.au>

HOW DOES GST AFFECT PROPERTY? WHEN DOES IT APPLY, AND WHEN DOES IT NOT?

As with all tax-related matters you should seek specialist advice from an accountant, particularly in relation to GST on property transactions as the regulations are quite complex. As a guide, GST is applicable to: • •

• •

• •

• •

the sale price of new residential dwellings and land the sale price of all commercial property sold by a GST-registered vendor, to most commercial leases and possibly to repairs, maintenance, insurance costs, etc. where the landlord seeks to recover such costs from the tenant long-term leases strata unit revenue exceeding $50 000 a year for registered strata corporations inclusive of all levies for sinking or administration funds and management expenses real estate agent fees for sales and leasing expenses associated with owning a residential investment property such as maintenance, advertising, repairs and management fees (refer to the ATO Rental Properties booklet referred to on page 25) freehold interest in land if the owner is registered for GST and trades the land in the course of its enterprise all building materials and labour, inclusive of consultants such as architects and engineers.

GST does not apply to residential rents. Longer term residential holiday lettings for the most part do not attract GST. However, if they are deemed ‘substantially similar’ to short-term residential property 141


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like hotels and motels, which have a special commercial residential classification, GST will apply. GST is always paid by the vendor (or landlord), not the purchaser; the purchase price includes GST (if it applies) unless the contract provides otherwise. While a registered investor or business must pay 10 per cent GST on the goods or services they supply they can claim back the GST paid on their ‘inputs’. So if you build a block of units and you sell them for $300 000 each excluding GST you pay $30 000 GST on each unit. But you can deduct from this the GST you paid on land, materials and labour to create those units. This credit is deducted from the GST you collect on sales when calculating the net amount to pay the Tax Office. If your turnover is less than $50 000 a year you are not required to register for GST but you can’t claim back those input credits. When GST is applied to the sale of a property it is 10 per cent of the contract value unless you use the ‘margin’ scheme. Under the margin scheme you can pay GST at 10 per cent of the difference between the sale price and the original purchase price or the difference between the sale price and the value of the property as at 1 July 2000. Generally, GST is not applicable on: • • • • • • • • •

the sale of the family home or second-hand property provided that it is predominantly used for residential accommodation state taxes, such as land tax and stamp duty planning and building application fees farming land where used as a farm five years prior to sale and it continues to be used as a farm after sale investment land owned by an a non-registered vendor council rates and water and sewerage charges an ongoing concern residential rent, irrespective of whether the landlord is registered or how many rental properties they own interest on residential and investment finance and mortgage repayments although loan application fees might attract GST.

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GST contacts

Go to <www.taxreform.ato.gov.au> and click on Property & Building Related Issues and Rulings. To apply for a private GST ruling go to <www.ato.gov.au/ content.asp?doc=/content/forms/4664.htm>. For the most frequently asked GST questions see <www.ato.gov.au/content.asp?doc=/content/Businesses /6912.htm&page=13#H12>.

You can email the Tax Office with GST queries at: .

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CHAPTER 12 INSURANCE Insurance Of the 500 houses destroyed in the firestorms in Canberra in January 2003, one in four were not insured, a tragic example of the dangers of not insuring or under-insuring your home and its contents. A survey by Cordell Building Information Services in 2001 found that 87 per cent of home owners were under-insured. On average properties were insured for 39.7 per cent less than replacement value. Western Australia had the highest rate of under-insurance at 58 per cent and Victoria the lowest at 30.6 per cent. But what sort of insurance do you need and how much do you need? And if you are a landlord can you insure yourself against bad tenants?

WHY DO YOU NEED HOME AND CONTENTS INSURANCE?

A 2001 NRMA national survey of 1212 households found that one in six households do not carry home and contents insurance. That 144


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equates to 1.28 million uninsured homes in Australia—or the entire population of Perth. While the majority of these were tenants or low income earners, at least 15 per cent of high income households ($150 000 p.a. or more) were not insured. The reasons given included they couldn’t be bothered or it was unnecessary. A 1996–97 national study by the New South Wales Fire Brigades found that over that one year 11 000 homes suffered a fire, most of which started inside the house.

Tip

The greatest risk of a fire might be when you are away and unable to do anything about it. Consider installing hard-wired smoke detectors which can be linked to security alarms and monitored by a security firm. The monitoring service can detect whether the smoke detector or security alarm has been triggered and contact the fire brigade.

Theft is another risk. Household break-ins are on the increase as many of us come to terms with the fact that areas once considered safe are now targets for opportunistic thieves. The greatest period of risk is the Christmas holidays, which also tends to be the peak for natural disasters. It is surprising how many new apartments are not fitted with deadlocks or have trendy louvred windows without security bars. Don’t think because you are five storeys up that you will never be robbed. Cat burglars find it quite easy to scale their way up balconies and then exit, stolen goods in hand, through the front door.

Tip

When installing door deadlocks always install the ‘safety release’ type which will not lock you inside in the event

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of a fire. If you are installing louvred windows always have security bars fitted as well; these can also be retrofitted to existing louvres.

If you fail to insure your property (whether owner-occupied or investment) you are also denying yourself public liability insurance, which covers you against people injuring themselves on your premises and against damage to neighbouring properties. While the claimant has to prove you were negligent this might be as simple as having loose floorboards. Public liability cover is absolutely essential, especially for rental properties. Without it you may lose every cent you have. Public liability insurance is provided by both the building and the contents sections of a home insurance policy. The cover provided by the building replacement section protects the owner against liability arising from the ownership of the building, for example trees falling into neighbouring properties, broken paths causing falls, etc. The contents cover usually protects the policyholder against their liability as occupiers of the property, and for their personal liability anywhere in Australia. Your golf ball hitting a bystander, an injury caused to others while acting in a volunteer capacity and dog bites would come within the ambit of this type of cover.

Case study

Visiting his aunt, John stepped to the side of the path around builders’ barrows onto a slurry-covered embankment where he slipped and broke his leg in three places. The cost of his leg reconstruction will be in excess of $40 000. While he has private health insurance he will have to pay a gap of $7000 while making no salary over the months of recuperation. If negligence by his aunt can be proved John intends to sue her through her home contents insurance public liability cover.

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About 70 per cent of rented households have no contents insurance. As well as liability cover this insurance provides tenants with cover on their belongings while on holidays in Australia and the cost of temporary accommodation if their rented home becomes uninhabitable as the result of a storm or fire. When choosing an insurance policy you should seek professional advice from a qualified insurance broker. This is especially true for holiday rental properties because of the need to cover any casual staff (such as gardeners and cleaners) for workers’ compensation and public liability if they do not carry it themselves. Most insurance policies do not cover flood damage, which is an ‘optional extra’. In 1998 thousands of Wollongong home owners discovered this to their horror when 3000 homes were inundated by overflowing creeks after protracted rainfall. Flood is usually defined as when water from a river, creek, lake, reservoir, dam or navigable canal overflows onto normally dry land. You should check with your local authority (such as the council) whether you are living in a flood-prone area. If your home is high on a hill there may be little point in spending the extra money on flood cover but it’s a different story if you live on a flood plain.

HOW MUCH SHOULD YOU INSURE YOUR HOME FOR?

There are two basic types of building and contents insurance policies. ‘Accidental damage’ policies provide more cover (for more premium) than ‘defined events’ policies. The majority of householders take the defined events type which is cheaper. Many consumers, however, do not understand that events outside of those described in the policy document are not covered. Accidental damage policies are more expensive, but you get what you pay for. Insurance companies are not benevolent societies and the insurance contract defines their obligations. Despite this many insurers have traditionally exercised generosity when owners have under-insured. The recent spate of large-scale natural disasters exposing many insurers to huge claims has led to some companies adopting a 147


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tougher stance. This can leave home owners, some of whom have lost everything, to fund tens or hundreds of thousands of dollars for their replacement home and temporary accommodation. Many policies do include alternative emergency accommodation if your home becomes uninhabitable, but only for 12 months or 10 per cent of the sum insured, whichever is the lesser amount. Many Canberra victims were shocked at how much the cost of building had escalated in the previous two years. Most policies are replacement types and the onus is on the policyholder to update the cover to the current cost of replacement. This may include demolition, architect’s fees, construction of the house and outbuildings and landscaping, so always check what your policy covers.

HOW DO YOU ESTIMATE THE CURRENT COSTS OF REPLACING YOUR HOUSE?

Home replacement insurance is normally cheaper than contents insurance but it’s more difficult to estimate. When calculating replacement value do not include the land value. Installing hardwired monitored smoke detectors can attract a discount so is worth considering. Many insurance companies have calculator tools on the web to assist you in calculating your home replacement cost, for example <www.nrma.com>, <www.amp.com.au> and <www.aami.com.au>. It is important to note that the replacement rates used by these firms are, at best, only a guide for standard houses with standard fittings. The insurers do not accept any liability for inaccuracies in the figures. It’s better to do your own calculation along the following lines: Step 1 Draw up a basic plan showing the main house structure, balconies, pool, garage, etc. Measure the footprint of the building on the outside face of external walls in square metres, noting the approximate age and type of construction (for example, cavity brick, brick veneer or timber). Note that ‘one square’ (10 feet by 10 feet) equals 9.3 square metres. 148


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Step 2 Separately measure verandas, outbuildings, garages and other structures as their replacement cost is lower. Step 3 Quoting the type of construction and its size in square metres plus any structures as measured under Step 2, ring a few local builders or building consultants and ask them to provide a replacement cost per square metre. For example: 220 m2 brick veneer house at $1150 m2 $253 000 Plus 25 m2 timber garage at $750 m2 $18 750 Total replacement $271 750 Step 4 Allow an additional 10 per cent of the builder’s quote for architectural fees if you would need an architect (if not already included in your policy). Step 5 Most builders’ quotes will not include demolition so allow $10 000–$15 000 for this (if not included in your policy). Step 6 Make a list of any landscaping works including pool, driveways and paved areas, noting the type of construction (for example, inground concrete pool, stencilled concrete driveway) and area. Measure the boundary fences (possibly using the site survey) in linear metres, also noting the type of material. Then contact suppliers of these items for an indicative cost of replacement, including demolition and removal. Step 7 Finally, add together all the costs of Steps 3 to 6; this is your sum to be insured. Example summary of house replacement sum: Brick veneer house $253 000 Timber garage $ 18 750 Architect fees $ 27 175 Demolition $ 10 000 Landscaping $ 13 750 Sum insured $322 675 This may seem like a lot of work but you are insuring what is probably your biggest investment. It is worth putting in the effort so you are covered financially if the worst happens. You should update your calculations annually and if you renovate you should adjust your 149


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insured sum accordingly. If you don’t you risk becoming one of the 40 per cent of Australians who are under-insured. There is an easier way of calculating replacement value using software developed by building cost analyst Cordell Building Information Services, which has developed a simple yet sophisticated electronic building cost calculator, the Valuer. For a relatively small fee this enables users to quickly estimate the replacement cost of their home on the web inclusive of demolition and architectural fees. Cordell will also contact you at insurance renewal time and offer to provide an updated valuation for a small cost. See <www.reedconstructiondata.com.au> and click on ‘Valuer’. The company takes no legal responsibility for the accuracy of their costings.

AND WHAT ABOUT CONTENTS?

Contents insurance costs significantly more than home replacement insurance because of the higher risks of theft and damage. Your insurer can advise if you are in a high-risk area. If so, consider installing a security alarm and having it monitored back to base, as approved security alarms usually attract a discount. If you have a home office, part of the cost of installation and monitoring may be tax deductible. Check with your accountant. Insurance companies normally require keyed window locks and deadlocks on all external doors. Failure to comply with this requirement could void any claim. It is a good idea to keep the receipts for all significant purchases of items which could be stolen as they can act as substantiation for a claim and are also required for any warranty claim. Follow these simple steps to work out your sum insured: Step 1 Take a pad and go through your home room by room, doing a stocktake of everything you own by writing down each item separately. If you are doing your stocktake after Christmas or a wedding or birthday make sure any valuable presents are included. Many people photograph each entire room so they don’t forget 150


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anything. Using a computer spreadsheet program such as MS Excel can make this task a lot easier, as the costs are automatically added up and can be easily updated at any time. Step 2 Make estimates against each item of what you think would be their replacement value. Again, sale receipts can be very helpful. You should list new replacement cost even for items such as books or furniture you may have purchased second-hand. Step 3 Valuable items such as jewellery or artworks are generally required to be listed and valued separately on your policy and you should photograph them as a record. This makes them easier for police to identify if they are stolen and later recovered. You now have a total amount for contents insurance of which you can be confident. You should keep the list in a safe place with the insurance policy and update it every year about three weeks before the renewal date so you can notify your insurer in time for the sum insured to be adjusted. Don’t forget any new purchases.

WHAT IS LANDLORD’S PROTECTION INSURANCE?

Investors who negatively gear residential investment or rental properties face considerable risks. They take a punt that the capital gain will exceed the net loss on the rental having regard to running expenses, occupancy, etc. With a highly geared loan even the most affluent investor cannot easily afford fluctuations in the net loss over a protracted period. This can occur if the tenant stops paying rent or won’t leave and refuses to pay rent, or if the property is vacant for a prolonged period. If you have problem tenants it may take months to get the court to evict them. Smart investors protect themselves with what is called landlord’s protection insurance; this usually has a maximum cover of $1000 a week but does not cover holiday lettings. Landlord’s insurance normally covers: 151


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• • • • • •

contents up to $50 000 including burglary and malicious damage by tenants undue departure of the tenant without notice for up to six weeks; default in payment of rent for up to 15 weeks failure to leave by tenant for up to 26 weeks prevention of access for up to 52 weeks untenantable premises following tenant-related and other damage for up to 52 weeks.

Optional cover can include malicious damage or theft to the building and legal liability up to $10 million. For this type of insurance the excess is $100 to $500 (New South Wales and Queensland are at the higher end of scale) and typical premiums are $300 to $450 p.a. Usual conditions are that rent is not in arrears in the four weeks prior to the inception of the policy, a bond equal to four weeks rent is in place and there is a written rental agreement of three months at the beginning of each tenancy.

Security checklist

•

Ensure your building replacement value is adequate and includes architect’s fees, demolition and landscaping costs. Do not include land value. Update the replacement value every two years and check if flood cover is included if the house is in a flood-prone area.

•

Go through your home with a notepad and camera and do a stocktake for contents insurance. Update yearly, including Christmas and birthday presents of value. Keep the receipts for all significant purchases and use a scriber to put your driver’s licence number on appliances like the DVD, computer and television.

•

Install back-to-base alarm and smoke detector systems, which may attract discounts on your insurance premium. An approved lock on your switchboard

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will prevent thieves turning off the power supply and wearing down the back-up battery of the alarm. There are pet-sensitive movement detectors so don’t put off installing an alarm because you have a cat inside. •

Cancel newspaper and mail deliveries when away.

•

Fit safety release deadlocks on external doors and keyed locks with a common key on all windows. Also fit security bars to low-security louvre type windows. Security bars on keyed windows can hamper escape in the event of fire and should preferably not be used.

•

For a highly geared investment property obtain landlord’s protection insurance which covers loss of rent and many other items.

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SECTION 4 SELLING YOUR PROPERTY

Selling a home or an investment property, while almost as traumatic as buying, involves making quite different decisions. For a start you get to choose the agent you will use and this is the most important step. When buying you want an agent who is, above all, honest and will tell you the truth. The same is true when you are selling. You also want a good promoter and a good salesperson. The first question you must ask is: Who sells the most properties in this area? Unfortunately there is no easy source for this information as many agents will claim to be the best. The second big decision is how much to ask for your property. Some agents will give you a high figure to get your listing (this is very common in a rising market) while others may give a low figure to make their job easier. A wise vendor will get appraisals from several agents and also do their own research. Competition for listings has become very fierce in recent years and unfortunately some agents adopt questionable practices to get your 155


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business. We take you through these practices and tell you how to recognise and avoid them. Agents’ fees amount to a lot of money, and it is tempting to bargain over the rate of commission or even to try to sell your home privately and pay no commission at all. Paying a high rate of commission is no guarantee of a high price but paying too little can be a trap as well. What sort of agency agreement should you sign? Should you give your home exclusively to one agent or to as many as possible? As we point out, it boils down to what the agent is offering in return. Then there is the question of how far do you go in presenting your home for sale. Do you get the painters in and replace all the carpet? Do you go the whole hog and hire designer furniture to make the place look like a spread in a glossy magazine? Let’s start at the beginning.

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CHAPTER 13 AUCTION OR PRIVATE TREATY?

Auction or private treaty? There are two types of contract for selling a property—auction and private treaty. A private treaty sale can be through an agent or a private sale by the vendor. Should you try to sell your house without an agent and save $10 000–50 000? Not many people do it but there are resources available to help you. Which is the best method for you? How much do you ask anyway? Find out how to place the correct value on your biggest asset.

SHOULD YOU AUCTION YOUR HOME?

Love them or hate them, auctions are taking over as the way we buy and sell our homes. While it’s true they work very much in favour of the agent, as the agent gets an exclusive listing and the owner pays for all the marketing costs on top of the commission, they are a successful way of marketing a home in the right circumstances. In 157


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good times the auction clearance rate (the percentage of properties offered which are sold at or before the auction) is 70 per cent or higher, in bad times it can be as low as 40–50 per cent. No longer is the choice just to auction on-site or in the city. New auction rooms have sprung up in the suburbs and auctions are even spreading to the Internet. There have been cases where overseas buyers, usually expatriates being paid in US dollars, have bought properties sight unseen through Internet inspections and auctions. But is auction the best way to sell your home? In a boom market it’s still a good way to get the best price but if the market goes off the boil or you’re not in a popular area you could be left with a big advertising bill and no sale. If you do decide to auction your property, don’t try to do it on the cheap. Auctions depend on two things to produce a result—good promotion and a deadline which forces buyers to make up their mind. Better to do a deal with the agent to share the marketing costs or cut the commission than to spend too little on advertising. Auctions work best if the property is different or special or outstanding in some way, as such properties lend themselves to enticing advertising and promotion, or if an urgent sale is required. They are not to be recommended for cheaper properties because the fixed costs of a good advertising campaign are high. It’s okay to spend $10 000 advertising a $1million house but not a $200 000 unit. A good rule of thumb is not to auction properties under $400 000. A very common technique is to talk a vendor into an auction by promising an unrealistically high price. If an agent quotes a price range on the agency agreement it is the lower figure you should take notice of, not the optimistic one. Often the lower figure is never mentioned in verbal discussions but it is there so the agent can point to it later—in the ‘vendor-bashing’ phase. This is the process of talking the price down after a listing has been signed. If you do sign an exclusive or sole or auction agency instead of an open (non-exclusive) listing, ask what’s in it for you. Will the agent pay some of the advertising? Always read the agreement thoroughly before signing. 158


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HOW WILL YOU KNOW WHAT A PLACE IS REALLY WORTH?

There are a number of sources of information about what prices are being paid for properties in each suburb. The most obvious is to attend a few auctions of properties in your area and get a feel for the prices being obtained. The easiest source is the agent who usually has access to an Internet service called RP Data which provides details on all sales in the area. If the agent is unwilling to do this there are several alternatives which provide independent research on recent sale prices. The best known is Home Price Guide, which collects information on most auction and private treaty sales in all states. For a fee of $49.95 it will supply by email or fax details of recent sales in a postcode area or for $99.95 the complete sales history of a whole street. This information includes the median and average prices for houses and units in the area. Visit <www.homepriceguide.com.au> or phone (02) 9399 8200. You can also ask for a free email newsletter on property trends and prices. Another source of information is Residex, which provides historical information on prices in each suburb and also forecasts capital growth and rent returns for each area over the next three to 10 years. They offer a simple Home Buyer’s Kit at $22, sale prices per postcode at $38.50 or a list of comparable sales for a particular property for $55. Visit <www.residex.com.au>. The Commonwealth Bank operates the website <www.homepath .com.au> where you can get sale prices online by suburb or by postcode for the past 12 months for a fee of $22. Some real estate websites like <www.domain.com.au> and <www.realestate.com.au> offer some information on recent local sales in their listings. Another useful website is <www.whatpricemyhouse.com.au>, which is a free service. A relatively new service is <www.pricewizard.com.au>, which provides an instant price range on your mobile phone for any property. You simply SMS a house or unit address to 188 7424 and within 159


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10 seconds you get an answer. The cost of $3.95 per property is added to your mobile phone bill. The Real Estate Institute in each state also publishes quarterly figures on median prices in each local government area.

SHOULD YOU TRY TO SELL PRIVATELY TO SAVE THE AGENT’S COMMISSION?

There is little doubt that agents are paid too much for the service they provide. Proof of this is that many agencies survive on as few as 10 sales a year—which is why there are so many of them. The other reality is that very few homes are sold privately and there are good reasons for this. Most vendors are reluctant or uncertain about advertising and promoting their own home although it is a simple enough process. And many buyers are reluctant to deal direct with owners. Because they are doing it every day an agent knows how to advertise, where to advertise and how much it is worth spending on advertising. They have shop windows and websites which are important forms of promotion not generally available to vendors, and they are skilled at identifying time wasters or ‘tyre kickers’. The real value of an agent is that a third party is often better at conducting a negotiation. A good agent will keep the deal going when parties in a direct negotiation have reached an impasse. When the buyer says ‘I won’t pay a penny more’ and the vendor says ‘I won’t take a penny less’, a skilled agent will keep the dialogue going until a compromise is reached. Private sales work better in a strong market where buyers will follow up any lead to find the property of their dreams. The secret of a private sale, like any sale, is good advertising in the right place. Here you can learn from your local agents by researching which newspapers they advertise in. Do you need to advertise in a big paper like The Sydney Morning Herald, The Age, The Advertiser or the Courier-Mail, which are quite expensive, or will the local paper do? It really depends on where you live; what the local agent does is a good guide. 160


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If you do decide to advertise privately, do it properly. Good promotion does not normally come cheap. The bigger and better the ad the more attention it will attract. If it is a display ad in a newspaper or an Internet ad make sure the photo(s) are of high quality even if you have to engage a professional photographer. There are magazines devoted to advertising private sales such as Owners Own, published by ACP, which caters mainly for rural and regional properties in New South Wales and Queensland. It is also possible for private sellers to advertise on the Internet. This can cost anything from a flat fee of $20 on a small, little-known private sales website to $165 per month on a megasite like <www .domain.com.au>. The rule here is simple—advertise on the site with the largest traffic unless there is a good site specialising in a particular area (this is likely to be an agent site). You can also get a signboard professionally done but signboards are only really effective on fairly busy roads. There are Internet sites for private sellers and companies which offer a package service. For Sale By Owner at <www.fsbo.com.au> charges a flat fee of $1395 for a kit which includes details of recent sales in your suburb and tips on classified advertising, property presentation, marketing, conducting inspections and negotiating. The kit includes a signboard with photos erected on the property, 500 colour brochures, 50 fact sheets and a listing on FSBO’s website. <www.housesonline.com.au> offers a menu of different services at fixed prices. The cheapest package is a signboard and an Internet listing for $495; the dearest is a better signboard, a bigger Internet listing, three weeks of classified advertising, a personal visit and a sales kit for $995. Virtual tours can be added to the Internet listing for $255 to $395. Yet another private sale website is <www.australiarealty.com> which offers Internet listing and signboard packages from $125 to $395. While all these resources are available, many are small operations with few listings and little traffic. The best places to advertise are still the major metropolitan newspapers or the local paper and the real estate megasites on the Internet. 161


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CHAPTER 14 CHOOSING AN AGENT

Choosing an agent

Now comes the hard part. Picking the right agent is a real lottery because you must make judgments about people and their professionalism and integrity on very little contact. Real estate agents are engaging in this interaction every day and are very practised at making the right impression. Beware of the agent who gives the highest estimate and beware of the agent who wants to be your best friend. And don’t tell them the price you want, let them tell you what it’s worth. That’s their job after all.

HOW DO YOU PICK THE RIGHT AGENT TO SELL YOUR HOME?

In a strong real estate market agents are not competing for buyers but for new listings. That nice young salesperson sitting in your lounge room has been told by the boss not to come back to the office without 162


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your signature on an exclusive listing agreement. You will be promised the world—ready buyers, top price and professional service—but that is rarely the reality. The first thing to do is obtain market appraisals (what agents think your house is worth) from at least three agents and average them. Do not under any circumstances tell them what figure you want, although they will try very hard to find out before committing themselves for fear of losing the listing if they come in too low. Be suspicious of any figure well above the average: this is the practice of ‘high-balling’ to get your listing. The process of vendorbashing—that is, getting you to lower your price—begins soon after you sign the listing. Do your own homework about what your place is worth (see page 159).

Tip

One way to judge an agency is by its phone manner. If the receptionist treats your call casually or the agent does not return your call for two days, it is fair to assume that buyers will be treated the same way. Another is to attend open houses by all the agents in your area before you announce yourself as a vendor and see what sort of a job they are doing for other vendors.

Beware of the ‘big promisers’ and the ‘knockers’. The first will try to appeal to your greed and the latter will criticise their opposition in sometimes very subtle ways. Good agents do exist and often the best way to find one is through the personal experience of friends. Personal chemistry is important. Who do you feel most comfortable with? Remember you will have an intense relationship with this person for the next six weeks or six months. Look for the agent with the most honest and professional manner, not the one promising the highest price. Find answers to some key questions. Which agent sells the most houses in your suburb? Who has the best reputation for fair and 163


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honest dealing? Who spends the most on promotion and who does the most professional job of it? Look in your local paper and judge for yourself who does the most enticing ads. Ask the agent whether he or she will be the agent you will be dealing with, or whether you will be passed down to a junior once the listing is tied up. Don’t be forced into open houses at the wrong time of day just to suit the agent’s timetable. Demand regular feedback— a good agent will ring or write to you every week to let you know what potential buyers are saying. Most unfortunately don’t. Agents should be present during building inspections so they get valuable feedback on what buyers think of your property. Being forewarned is being forearmed.

Five key questions for sellers

•

Can you provide me with references for recent sales?

•

Why should I list with you rather than another agent?

•

What will you actually do to get me a better price?

•

Will you personally be handling all inspections?

•

Will you provide me with regular feedback?

WHAT ARE THE QUESTIONABLE PRACTICES AGENTS CAN GET UP TO?

While many agents are professional and diligent, their base salary is relatively small, typically around $30 000 to $35 000, and their working week is exceptionally long. To make a decent living there is a lot of pressure to get property listings, sell them and thus earn a commission. A sole listing usually means a commission, and some agents will employ some or all of the following questionable practices to get that listing: •

Agents know that vendors want to hear that they can sell their property for a motza more than anyone else. Some agents will provide a high appraisal or estimate of what they can sell the

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•

•

•

•

•

property for, often 10–20 per cent more than its real value. This is called ‘high-balling’ in the trade. There are new laws in New South Wales and the ACT prohibiting misleading advertisements and unsubstantiated claims as to the expected selling price. Many agents try to convince potential vendors that they should sell their property at auction rather than by private treaty. This is to give them an exclusive listing rather than maybe having to sell in conjunction or in competition with another agent and share or miss the commission. Whether a property is auctioned or not should depend on whether that is the appropriate marketing approach for that particular property and the state of the market, not on whether the agent gets an exclusive listing. Having won a listing for auction, the agent may quote an estimated sale price to prospective buyers considerably lower than what they told the vendor, or even lower than what they really think it might sell for. This is called ‘low-balling’ and is used to give buyers a false sense of hope and so persuade them to attend the auction. Some agents ask for the exclusive agency agreement to extend well beyond the auction date (a ‘continuing agency agreement’), which can be an indication they don’t believe they can achieve the price they indicated on auction day. By then the property has become ‘stale’ and they can exert pressure on the vendor to sell for a much lesser amount; this is appropriately called ‘vendor bashing’. Under a continuing agency agreement the vendor is not able to give the property to another agent no matter how unhappy they are with the service unless the original agent gives express approval. As the auction date draws near the agent may offer to ‘work with’ the vendor to establish the reserve price (the minimum the vendor will accept). This can be code for ‘we have very little interest in the property and I need to get the price down so I can make a sale’. If the agent thinks there are not enough interested parties or that the estimate or reserve might not be reached, they might consider using dummy bidders to artificially push the price up closer to the vendor’s expectations. This practice is highly unethical and, in New South Wales at least, illegal. 165


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•

If on auction day the bidding is not going well and the agent does not have a continuing agency agreement or is desperate for the commission and knows that you must sell, they may pressure you into accepting a much lower price. The typical reason given is that the market has ‘softened’ in the few weeks since you signed up and what has been offered is the best price you will get. They play on your worry that if you don’t accept you may have wasted thousands of dollars in advertising (which they persuaded you to spend in the first place).

HOW DO YOU AVOID QUESTIONABLE PRACTICES?

•

•

•

•

•

Don’t accept an agent simply on the basis that they have given you the highest appraisal. Get estimates from at least three local agents and ask for actual examples of similarly priced properties that have been sold recently in your area. You get what you pay for. An agent who offers a heavily discounted commission (commission is normally 2–3 per cent plus GST) is unlikely to work as hard as one on a full commission, so again do not choose on price alone. Do not automatically agree to a long continuing agency agreement beyond the auction date. You can easily extend it later if you are still happy with the agent. Be aware that a common condition of a continuing agency is that you must still pay the commission if you or another agent sell the property to a person introduced by the original agent. Insist that the agent market the property near their appraisal figure. (Buyers should add 15–20 per cent to an agent’s quoted sale price when figuring how much they may need to pay.) Many vendors have the mistaken belief that they must divulge their reserve to the agent before auction. This is not so. By all means discuss a range of reserve prices with your agent to help you decide on a realistic price but you need only divulge it to the auctioneer when he asks you for your instructions on auction day or when bidding stops.

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•

•

Instruct your agent not to use dummy bidders as it is fraudulent. The auction conditions may allow the vendor one bid and this should be declared to buyers. Don’t be pressured into accepting an unrealistically low sale price on auction day and give considerable thought to a suitable sale price if the property gets passed in. Most properties sell within six weeks of being passed in at auction.

Case study

Fay’s mother owned a two-storey historic sandstone home at Hunters Hill in Sydney and Fay needed to sell it because her mother had been placed in an aged care unit with substantial weekly care costs. One agent quoted a sale value of $1.5 million and recommended an auction and an advertising budget of $8000. The agent signed Fay up on an exclusive agency agreement which included a continuing agency agreement. On the eve of the auction the agent rang Fay and recommended that the auction be cancelled because he did not have any interested buyers, and that the property be put up for sale at a lesser amount. When Fay told her nephew Damian (who knew a bit about real estate) he insisted that the auction proceed. The property was passed in at $1.025 million and the agent wanted to put it up for sale. Damian then noted that the contract gave the agent continuing and exclusive rights to sell the property for another eight weeks and asked the agent to release Fay from this agreement. The agent refused and demanded payment for the advertising. Damian contacted three other local agents to appraise the property and was happy with a mid-range $1.255

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million estimate. Damian told the original agent that if they insisted on keeping the listing they must sell it for that amount. Over the remaining agency period the market fell off considerably. A new agent was appointed and was told to place only small newspaper ads. Some months later the property sold for $1.255 million to someone the original agent had initially written off as a tyre kicker.

WHAT ARE THE DIFFERENT TYPES OF AGENCY AGREEMENT?

There are five different forms of agreement you can sign with an agent to sell your property. They are auction, exclusive, multilist, sole and open. The first three are variations of an exclusive agency. An agent will usually suggest an auction agency or an exclusive agency, both of which give that agent the exclusive right to sell the property. If another agent sells it within the agency period without obtaining what is called a ‘conjunction agency’ from the listing agent you may have to pay two commissions. Ask agents before signing up if they give conjunctions to other agents. Many don’t and you are in real trouble if you have given an exclusive agency to one agent and sell through another. If you sign an exclusive agency agreement and sell the property yourself you still have to pay the agent the commission. You may still have to pay a commission even after the agency has expired if the buyer was introduced to the property during the agency period. Similar rules apply to a sole agency except you have the right to sell the property yourself without paying a commission. You should not agree to giving your agent more than two weeks continuing agency beyond an auction date but rather extend it later if you are still happy with them. Multilisting is where an agent signs you to an exclusive agency on 168


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behalf of a group of agents; under this arrangement the listing agent gets a share of the commission if another agent in the group sells the property. The advantage to the seller is that the property is promoted by more than one agent. An open agency may be given to as many agents as you like and you only pay commission to the one who sells it. If you sell privately there is no commission. In New South Wales there is now a cooling-off period of one day after signing any agency agreement which allows the client to change their mind. Agents generally work harder on an exclusive agency than an open agency because they do not risk spending time and possibly money on a property only to have another agent make the sale and get the commission. But ask: ‘What will you give me in return for an exclusive listing that I will not get from an open listing?’ Perhaps the agent will pay for all or part of the advertising in return for an exclusive listing. Whichever type of agency you finally select, always read the form carefully at your leisure before signing it, noting particularly the type of agency, the rate of commission, the period of the agency (or the period of the continuing agency agreement after an auction) and any marketing costs you may incur. If the agent’s opinion of the selling price is expressed as a wide range (say, $400 000 to $480 000) they are encouraging you to believe the highest figure while they may really mean the lowest. When they come up with an offer of $400 000 weeks or months later they say, ‘But that is what I told you when I listed the property.’ You have no automatic right to terminate an agency agreement if you are unhappy with the agent and you should always check what the agreement says about termination before you sign it. Terminating an agency may require legal action.

SHOULD YOU BARGAIN OVER THE RATE OF COMMISSION?

Everything is negotiable in real estate including the commission. But choosing the agent with the lowest commission may not yield the best 169


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result. ‘If I’m going to discount my money, what am I going to do with yours?’ says one canny agent. Make sure all the points you have agreed to are included in the agency agreement before you sign on the dotted line. It’s no good trying to negotiate a reduced rate of commission when you accept a price below what you expected if it has not been agreed in writing. The agent may have led you to expect a higher price but will demand the rate of commission in the agreement even though they did not achieve it. You may be able to negotiate a discounted commission if your indicated price is not achieved, but this must be done before you sign up. What is a fair commission? Commission rates vary between states and even within cities so it is difficult to generalise, but it can be said that the higher the value of the property the lower the percentage rate of commission you should be able to negotiate. In Melbourne and Sydney you might pay up to 3 per cent or more on a cheaper property but 1.5 per cent or less on a $2 million-plus property. Another approach is to use an agent who is prepared to work on a success-based commission rate. In a recent case in Sydney’s eastern suburbs a property was expected to bring $3.5 million. The agent and the owner came to a deal that if the property sold for around that price the commission would be 2.2 per cent. If it brought more the commission would be 3 per cent. It sold for $4.4 million; while this cost the owner an extra $35 000 in commission he still pocketed an additional $870 000. Perhaps the property was always worth the higher figure but perhaps the agent put in the extra effort which made the difference. WHAT ARE AN AGENT’S RESPONSIBILITIES?

An agent represents the vendor and is responsible for achieving the best price within a suitable time frame. The agent appraises the property and gives an opinion of the selling price and then, if engaged as your agent, is responsible for the management of advertising, inspections and negotiations. 170


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Laws governing agents vary between the states but generally agents must be licensed by the relevant state authority. When selling residential property they should have a copy of the contract, including all prescribed documents provided by you or your solicitor, before they offer the property for sale so they can show this contract to prospective purchasers. Agents should transmit all offers to the vendor whether they recommend acceptance or not.

HOW DO YOU MAKE A COMPLAINT AGAINST AN UNETHICAL AGENT?

If you are unhappy with the agent’s services or believe you have been charged an excessive fee, first check your copy of the selling agreement to clarify your rights and obligations. Then talk to the principal of the agency and attempt to sort out the problem. You are in a stronger position if you have given any instructions to the agent in writing as this removes any argument about what has been said. It is advisable to use an agent who is a member of the Real Estate Institute (REI), which has a code of conduct and an internal investigation unit. If you have a complaint you can initially lodge it with the REI where it is heard before a panel. If you are not happy with the decision you can then lodge your complaint with the government agency responsible for licensing agents in your state. If it cannot resolve the matter you should contact the Australian Consumer and Competition Commission, a solicitor or chamber magistrate to see if you have a case at law. If you feel that you are the victim of deceptive trade practices you can seek guidance from the ACCC or the Real Estate Consumer Association (RECA), PO Box 2041, North Carlisle WA 6101, <www.reca.com.au>. RECA is a voluntary consumer advocacy group which has representatives in most states. It advises consumers of the best ways to pursue complaints including those that have been improperly handled by the regulatory authorities.

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CHAPTER 15 ADVERTISING AND PRESENTATION

Advertising and presentation The key to achieving the best price for your home, particularly at auction, is promotion. You must get ‘traffic’ through your house or unit if you are to find buyers and this traffic can only be achieved by advertising. Without lookers the best property in the world and the best salesperson cannot achieve a result. Remember that the agent has a secondary interest in mind in recommending how much to spend and where you spend it. The advertising you pay for also promotes the agent—at no cost to them.

DO YOU GET GOOD VALUE FROM ADVERTISING YOUR PROPERTY?

Real estate agents have no legal responsibility for the effectiveness of their advertising for which their client usually pays. If you look at a range of ads in the newspapers you will notice that many are full of misspellings and could scarcely be called creative. Others are excellent. 172


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ADVERTISING AND PRESENTATION

Some industry experts argue that agents’ advertising decisions are not always based on the interests of their client. Many agents will tell you an expensive marketing campaign with large colour display advertisements is needed to attract the greatest number of buyers and without it your property might be overlooked. Even a local paper can cost $5000 a page. What they do not divulge are the kickbacks they receive from the media organisations for the advertising they place. These commissions of around 15 per cent have been common for years and are worth many thousands of dollars a year to an agent. Because of this financial incentive agents are tempted to over-advertise and the need for this must be questioned in a strong, overheated market when buyers are plentiful. New South Wales (in 2003) and the ACT (in 2004) legislated to require agents to declare to vendors any discounts or rebates from suppliers on such things as advertising. There is a Bill going before the Victorian parliament in 2004 which, if enacted, will outlaw agent kickbacks. Nor do agents offer to pay for that part of the ad which promotes the name of their business. You are paying for that too, and often it takes nearly a quarter of the space.

Kickback example

In a standard house advertising campaign worth, say, $4500 (for a $600 000 home) the advertising kickback might be $675. If a medium to large agency sells $5 million worth of property in six months, that is potentially $11 250 worth of kickbacks from newspapers.

In a depressed or oversupplied market it is probably true that some display advertising will help the property to stand out, but many agents privately admit that often all that is needed is a well-written ad in the classifieds section of one of the recognised property papers such as The Sydney Morning Herald, The Age or the West Australian, 173


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and the price may include an ad on their Internet site. Serious buyers looking in a particular area will look first at the classifieds. They may not live in your area and thus do not get the local newspaper. Most agency agreements state that the agent is entitled to deduct all fees, advertising expenses and charges from the buyer’s deposit. Think hard about how much you are prepared to spend on advertising, and where to spend it, before you sign the agreement.

WHAT ARE THE VARIOUS FORMS OF ADVERTISING AVAILABLE TO YOU?

A good advertising campaign is critical to a successful sale and it is quite common to spend 1 per cent of the value of the property on promotion. If you are auctioning your home offer to pay the advertising costs only when the property is sold—you will soon find out just how confident the agent is (or isn’t) of a successful sale. Some forms of advertising work better than others, but what works can vary with different areas and types of property. The most common forms of advertising for residential properties are: • • • • • •

signboards window displays newspaper advertising (city papers) newspaper advertising (local papers) brochures internet advertising.

A ‘for sale’ sign on the property is a very cost-effective form of promotion if it is on a well-used road where plenty of people will see it. It should include all the main features of the property such as the number of bedrooms and land size. Displays in agents’ windows can and do sell properties. Negotiate the biggest display area you can for your property. Most agents use both city and local papers to advertise. City papers such as The Sydney Morning Herald and The Age achieve very wide coverage both numerically and geographically. Local papers offer the 174


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opportunity to provide more detailed information and colour photographs at a lower cost per column centimetre than the big papers. Colour brochures are an attractive way of giving potential purchasers a record of the property details which they can keep for future reference. Agents can produce such a brochure for about $300 for 200 copies, but they can cost a lot more. The brochure should include a layout plan of the house as this is very helpful to buyers and building inspectors. But brochures are only as good as their distribution—they are useless sitting in a drawer. Good agents have mailing lists of buyers to whom they can post brochures. Ask the agent if they have a database (mailing list) and how many prospective buyers are on it. The Internet is the fastest growing advertising medium for property. It can offer the unique facility of an automated search for properties fitting a particular set of requirements such as price, number of bedrooms and locality. Good pictures make all forms of advertising work better. Make sure your agent is a good photographer or ask that a professional be used.

HOW FAR DO YOU NEED TO GO IN PRESENTING YOUR HOME FOR SALE?

First impressions are critical when a potential buyer inspects a house or unit. Do you repaint the whole place? Get in the landscapers? Replace the kitchen? First decide what sort of buyer you are targeting.There are buyers who want to give a home their own personality and tackle the major work themselves. There are buyers who want the whole job done by others, such as professional couples who simply don’t have the time. Get rid of all the junk. Hold that garage sale or go to the tip now rather than after you sell—an uncluttered house and yard looks more spacious and easier to maintain, both vital selling points. Tend the gardens, mow the lawns and clean the windows, paths, gutters and outside paintwork. These are all things seen from the street and you don’t want the buyer to dismiss the property before setting foot on it. 175


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Repair or replace leaking taps, sticking doors, broken light fittings, loose door handles, rotten veranda boards, leaky gutters and torn flyscreens. These are the little things that can put a buyer off. The cost of fixing them will be far less than the discount a buyer will demand off the price to accept them. If you do pull out the paintbrush, only paint those areas that really need it unless you plan on doing the lot. New paint may only make those areas left unpainted look even shabbier. Use light, neutral colours as strong colours may not be to the buyer’s taste. If paint is generally in good condition, touch up the scruffy bits. If you live in a noisy area arrange inspection times when the noise is at its lowest. Get rid of odours that you may not notice but buyers will. Don’t smoke in the house and keep pets outside. Open up the curtains and blinds to let the sun and the view inside. Nobody likes a dark house and the view will make the rooms feel bigger. Have the place clean and tidy and uncluttered at inspection times. Ovens, tiles and showers should sparkle. Consider steam-cleaning the carpet and furniture if you have had a pet in the house or they are stained—it’s not all that expensive. Don’t shove things out of the way in cupboards, you can guarantee they will fall out on potential buyers. Make the place smell enticing with flowers or freshly brewing coffee. Ensure the pool and its surrounds are sparkling clean—you want the buyer to think it is an asset, not a burden. If the filter or the pool need professional repairs it is better to cough up the dollars than put off buyers. Sometimes in trendy, expensive areas it pays to go the whole hog and bring in a ‘stylist’. Styling an apartment or house can cost $2000–$13 000; it involves a decorator bringing in rented furniture, pictures, mirrors, lamps, rugs, bed linen and whatever else it takes to dress the place up. One such exercise in a Rushcutters Bay apartment in Sydney was credited with adding $200 000 to the price achieved at auction. Styling is particularly effective if the property is empty and looks a bit tired and worn. Up to 40 per cent of properties listed with some inner-city agents are reported to be styled before sale. If 176


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you want to do it yourself some stylists will provide a consultation for around $100 an hour.

Seller’s checklist

•

Check recent sales in your suburb.

•

Talk to lenders about discharging your mortgage and financing your next home.

•

Obtain market appraisals from three agents. Ask their advice about presenting your home well.

•

Get your solicitor or conveyancer to prepare a contract including all prescribed documents.

•

Appoint an agent and give them a copy of the contract.

•

When you have a buyer, notify your solicitor.

•

Arrange removalist, disconnection of power, phone, gas and pay TV and redirection of mail.

•

Notify change of address to electoral roll, car insurer, medical fund, motor registry, bank, etc.

•

Cancel house and contents insurance.

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CONTACTS, WEBSITES AND FURTHER RESOURCES Resources Resources HELPFUL WEBSITES Domain property.com.au realestate.com.au Property Page Property Guide Houses Online Private Sales Australia Realty Residex HomePath Access Property Services

<www.domain.com.au> <www.property.com.au> <www.realestate.com.au> <www.propertypage.com.au> <www.propertyguide.com.au> <www.housesonline.com.au> <www.australiarealty.com> <www.residex.com.au> <www.homepath.com.au> <www.ownitbuildit.com.au>

OTHER CONTACTS/ RESOURCES Yellow Pages GreenSmart Villages iSecurity and Technology Smart Wired House Smart World Corporation Law Consumers Association For Sale By Owner Australian Towns

178

<www.yellowpages.com.au> <www.greensmart.com.au/villages> <www.isecurity.com.au> <www.smartwiredhouse.com.au> <www.smart.com.au> <www.lawconsumers.org> <www.fsbo.com.au> <www.australiantowns.com>


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RESOURCES

FINANCIAL INSTITUTIONS ANZ Bank Aussie Home Loans Commonwealth Bank The Mortgage Store National Australia Bank RAMS Home Loans St George Bank Westpac

<www.anz.com.au> <www.aussiehomeloans.com.au> <www.commbank.com.au> <www.mortgagestore.com.au> <www.national.com.au> <www.rams.com.au> <www.stgeorge.com.au> <www.westpac.com.au>

Australian Tax Office First Home Owners Grant Foreign Investment Review Board

<www.ato.gov.au> <www.firsthome.gov.au> <www.firb.gov.au>

Home Price Guide Suite 6, Level 2, 32a Oxford Street (PO Box 1300) Darlinghurst NSW 2010 Ph: 02 9339 8200 or 1800 817 616 Fax: 02 9360 1123 Email: <www.homepriceguide.com.au> Price Wizard Ph: SMS 188 7424 <www.pricewizard.com.au> whatpricemyhouse <www.whatpricemyhouse.com>

BUILDING/DESIGN & REAL ESTATE INSTITUTIONS Archicentre 479 Darling Street, Balmain NSW 2041 Ph: 1300 134 513 <www.archicentre.com.au> Royal Australian Institute of Architects (RAIA) <www.architecture.com.au> National Office 2a Mugga Way, Red Hill ACT 2603 (PO Box 3373, Manuka ACT 2603) Ph: 02 6273 1548 Fax: 02 6273 1953 Email: Practice Services 2nd Floor, 41 Exhibition Street, Melbourne VIC 3000 Ph: 03 9650 2477 Fax: 03 9650 3364 Email: <[email protected]>

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RESOURCES

Building Designers Association of Australia Ltd Suite 1.04, 10 Help Street, Chatswood NSW 2067 Ph: 02 9413 9352 Fax: 02 9413 9351 Email: <www.bdaa.com.au> Purchasers Strata Inspections Pty Ltd <www.strata.com.au> Real Estate Consumer Association (RECA) PO Box 2041, North Carlisle WA 6101 <www.reca.asn.au> Australian Consumer & Competition Commission Ph: 1300 302 502 <www.accc.gov.au> Real Estate Institute (REI) The Real Estate Institute of Australia 16 Thesiger Court, Deakin ACT 2600 (PO Box 234, Deakin West ACT 2600) Ph: 02 6282 4277 Fax: 02 6285 2444 Email: <www.reiaustralia.com.au> The Real Estate Institute of New South Wales 30-32 Wentworth Ave, Sydney South NSW 2000 (PO Box A624, Sydney South NSW 1235) Ph: 02 9264 2343 Fax: 02 9267 9190 Email: <www.reinsw.com.au> The Real Estate Institute of ACT 16 Thesiger Court, Deakin ACT 2600 (PO Box 9068, Deakin ACT 2600) Ph: 02 6282 4544 Fax: 02 6285 1960 Email: <www.reiact.com.au> The Real Estate Institute of Victoria 335 Camberwell Rd, Camberwell VIC 3124 (PO Box 443, Camberwell VIC 3124) Ph: 03 9205 6666 Fax: 03 9205 6699 Email: <www.reiv.com.au>

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RESOURCES

The Real Estate Institute of Queensland Real Estate House, 21 Turbo Drive, Coorparoo QLD 4151 (PO Box 1555, Coorparoo DC QLD 4151) Ph: 07 3249 7347 Fax: 07 3249 6211 <www.reiq.com.au> The Real Estate Institute of South Australia 249 Greenhill Road, Dulwich SA 5065 (PO Box 246, Glenside SA 5065) Ph: 08 8366 4300 Fax: 08 8366 4380 Email: <www.reisa.com.au> The Real Estate Institute of Western Australia REIWA House, 215 Hay Street, Subiaco WA 6008 Ph: 08 9380 8222 Fax: 08 9381 9260 Email: <www.reiwa.com.au> The Real Estate Institute of Tasmania REIT House, 33 Melville Street, Hobart TAS 7001 (GPO Box 868, Hobart TAS 7001) Ph: 03 6223 4769 Fax: 03 6223 7748 Email: <www.reit.com.au> The Real Estate Institute of Northern Territory Real Estate House, Unit 3, 6 Lindsay Street, Darwin NT 0800 Ph: 08 8981 8905 Fax: 08 8981 3683 <www.reint.com.au>

SPECIFIC OWNER-BUILDER AND BUILDING GOVERNMENT CONTACTS NSW: ACT: QLD: VIC: TAS:

Department of Fair Trading 13 32 20 <www.fairtrading.nsw.gov.au/building> Building Electrical and Plumbing Control Office (BEPCON) 02 6207 6262 <www.palm.act.gov.au/bepcon/> Building Services Authority 07 3225 2855 <www.bsa.qld.gov.au> Consumer Affairs Victoria 1300 558 181 <www.consumer.vic.gov.au> Service Tasmania 1300 654 499

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RESOURCES

WA: SA: NT:

Building Registration Board 08 9476 1200 <www.brb.org.au> Office of Consumer and Business Affairs 08 8204 9777 <www.ocba.sa.gov.au> Consumer Affairs 1800 019 319

OWNER-BUILDER INSURERS Building Industry Solutions Pty Ltd <www.buildinginsurance.com.au> ACI Insurance Brokers Australian Owner Builders HIA Insurance Pty Ltd Australian Home Warranty (Reward) Insurance Buildsafe Owner-Builder Warranty

1800 244 224 02 9806 0344 1800 822 220 02 9808 7222 03 9486 1500 1800 019 233

Insurance calculators NRMA <www.nrma.com> AMP <www.amp.com.au> AAMI <www.aami.com.au> Reed Construction Data (Cordell) New South Wales and Head Office Level 10, 10 Help Street, Chatswood NSW 2067 Ph: 02 9934 5555 Fax: 02 9934 5501 Email: <www.reedconstructiondata.com.au/home.php>

WEB BASED OWNER-BUILDER EDUCATION COURSES Access Building Education <www.ownitbuildit.com.au>

PROFESSIONAL ASSOCIATIONS Housing Industry Association 79 Constitution Avenue, Canberra ACT 2612 Ph: 02 6249 6366 Fax: 02 6257 5658 Email: <[email protected]> <www.hia.asn.au> The Australian Institute of Building GPO Box 1467, Canberra ACT 2601 Ph: 02 6247 7433 Fax: 02 6248 9030 Email: <www.aib.org.au>

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RESOURCES

Master Builders Association Level 3, Construction House, 217 Northbourne Avenue, Turner ACT 2612 Ph: 02 6249 1433 Fax: 02 6249 1373 Email: <[email protected]> <www.masterbuilders.com.au> Strata managers associations National Community Titles Institute Ph: 07 3257 3920 Fax: 07 3257 3932 PO Box 2477, Fortitude Valley BC QLD 4006 Email: <www.ncti.org.au> NSW Institute of Strata Title Mangement Ltd Suite 50, Level 3, 71–73 Archer Street, Chatswood 2067, NSW Australia Ph: 02 9904 8499 Fax: 02 9904 8409 Email: VIC Institute of Body Corporate Managers (Victoria) Inc. Ph: 03 9629 7373 QLD Community Titles Institute Queensland PO Box 1280, Spring Hill QLD, 4004 Ph: 07 3839 3011 Fax: 07 3832 4680 Email: <www.ctiq.org.au> SA Community and Strata Corporations Institute of South Australia Ph: 08 8414 0009. Email: WA Strata Titles Institute of Western Australian Inc. Executive Officer Innaloo 6018 Ph: 08 9244 1534 Fax: 9244 1549 Email: <[email protected]> <www.stiwa.com.au/>

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RESOURCES

FAIR TRADING/BUILDING & CONSUMER OFFICES NSW:

ACT: QLD: VIC: VIC: TAS: WA: SA: NT:

Department of Fair Trading <[email protected]> NSW Consumer Tenancy and Trader Tribunal <www.fairtrading.nsw.gov.au/corporate/cttt.html> NSW Department Of Planning & Infrastructure; <www.planning.nsw.gov.au> ACT Office of Fair Trading <www.consumer.act.gov.au> Office of Fair Trading <www.fairtrading.qld.gov.au> Consumer and Business Affairs <www.consumer.vic.gov.au> Victorian Building Commission <www.buildingcommission.com.au> Consumer Affairs and Fair Trading <www.justice.tas.gov.au/ca> Department of Consumer and Employment Protection <www.docep.wa.gov.au> Office of Consumer and Business Affairs <www.ocba.sa.gov.au> <[email protected]> Department of Industries and Business—Consumer and Business Affairs Division <www.caba.nt.gov.au [email protected]>

NATIONAL GOVERNMENT BUILDING CONTACTS Australian Building Codes Board: <www.abcb.gov.au> Standards Australia: <www.standards.com.au> Uniform Consumer Credit Code <www.creditcode.gov.au>

DIVIDING FENCE ACT LEGISLATION NSW: ACT: QLD: VIC: TAS: WA: SA: NT:

<www.dlwc.nsw.gov.au/care/land/llb/about_fences.html> <www.legislator.act.gov.au> <www.legislation.qld.gov.au/LEGISLTN/CURRENT/D/DividFenA53_02_.pdf> <www.dms.dpc.vic.gov.au> <www.thelaw.tas.gov.au> <www.dlg.wa.gov.au> <www.parliament.sa.gov.au/leg/index/update.pdf> <www.darcity.nt.gov.au>

STATE TREASURY WEBSITES NSW: ACT: QLD: VIC: TAS: WA: SA: NT:

184

<www.osr.nsw.gov.au> <www.revenue.act.gov.au> <www.osr.qld.gov.au> <www.sro.vic.gov.au> <www.sro.tas.gov.au> <www.dtf.wa.gov.au> <www.revenuesa.sa.gov.au> <www.treasury.nt.gov.au>

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