Top 9 property buying risks revealed

Buying a property isn’t devoid of risk, but there are certainly some actions that are far riskier than others. With the plethora of products on the market helping people buy a new home, it’s hard to shift through what’s a wise decision and what isn’t.

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Do you know the biggest risks when buying a property?

ME Bank spoke to three property market experts to get their view on nine key market concerns.

1. Not getting a building inspection before buying a property

Simon Wendt, auctioneer and licensed estate agent at Hockingstuart: “This is a risk if you don’t have knowledge of the building faults and the cost to rectify it, it may cost you later down the track. But if the value is in the land, then there’s less risk.”

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Patrick Nolan, head of home loans at ME: “Risky. Emotions can cloud your judgement when inspecting a property. Give weight to any niggling hunches that give you cause for concern and always get a professional property inspector to do the looking for you, such as a building or pest inspection.”

Nicole Jacobs, buyers advocate at Nicole Jacobs Property: “This can be high risk. You wouldn’t buy a car without a roadworthy, so why wouldn’t you outlay between $500 and $1000 to know the health of a property before buying it. A building inspection gives you knowledge on what needs to be done and what costs there will be. If there’s nothing wrong then you will have the confidence to go forth with gusto.”

2. Buying an off the plan apartment

Simon Wendt: “Buying off the plan isn’t risky if you know what you’re getting and fully understand the dimensions, aspects and quality of finishes. Do your research.”

Patrick Nolan: “There’s moderate risk when buying off the plan. While there’s benefits in terms of stamp duty savings and depreciation benefits, you do need a healthy dose of imagination to picture how the finished product will look. Do your homework into the developer, builder and seek independent legal advice on the contract of sale.

Nicole Jacobs: “Buying off the plan can be risky if you don’t know what you’re doing. Do your due diligence into who the builder is, who the architect is and so on. Do your research on the market value of the area and ensure you’re not overpaying. Make sure you have a legal expert look over the contract, so you aren’t tripped up.”

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3. Buying property with friends or family

Simon Wendt: “Buying with a family member may have some risk, but there’s also some potential benefits too. Risk can occur when one party decides to sell and the other doesn’t, or different life situations can send parties into different directions. However, the benefit is that you share the costs and there’s less outlay.

Pat Nolan: “Co-buying offers valuable advantages because it means you can pool financial resources. However, it can be risky if one person wants to sell or situations change. I would suggest that you have a formal co-ownership agreement in place drafted by a solicitor.”

Nicole Jacobs: Ï view this as risky. We are emotional beings and emotion can often lead to poor decisions. If partnering with someone is the only way you can get on the property ladder, make sure there’s a contract signed between everyone – you don’t want a house to be the death of a friendship or family relationship.”

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4. Setting up finances with a lender outside big four banks

Simon Wendt: “Going with a smaller bank doesn’t have to be risky. Sometimes banks outside the big four are less expensive and can offer better features.”

Pat Nolan: “Of course this isn’t risky. Many of the banks outside the big four, such as ME, have home loans with lower rates but all the same bells and whistles.”

Nicole Jacobs: “This can be risky – but like all home loans, be careful to look at the hidden clauses with all lenders. If you go through a mortgage broker, ensure they are qualified and have a good track record.”

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5. Buying an investment property in a regional town

Simon Wendt: “Buying in a regional town can have some risk as a sudden turn in unemployment (due to an industry down turning) can cause vacancy rates to rise. The other thing about regional towns is that there’s less capital growth.”

Pat Nolan: “This can be risky if you don’t do your homework. When buying an investment property in a regional area, consider the local economy, particularly if dominated by a single industry, in which case property prices and rental yields may fluctuate with the industry’s fortunes. Mining towns are a good example.

“Towns that have greater economic depth and breadth are more resilient to industry changes. Geelong in Victoria is a good example, where the loss of some manufacturers had a smaller impact on the local market.”

Nicole Jacobs: “Investing in the country is a calculated risk. More investors are looking to regional areas because it’s more affordable and you can positively gear. However, ensure you opt for bustling regions which have solid infrastructure nearby like nearby transport, shops. Similarly to investing in the city, it has to be the right property in the right street at the right price.”

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6. Selecting an interest only loan to finance your property

Simon Wendt: “Not that risky, provided the buyer has the capacity to repay and capital growth is expected.”

Pat Nolan: “Interest only loans are risky, especially if the market dips. Interest-only loans mean relying solely on rising values to build equity in your home. The other risk is you are never really paying off that debt. And for home owners, aiming to own your place debt-free at some stage – preferably before retirement, is a worthwhile ambition.”

Nicole Jacobs: “I’m not a finance guru but if you are unaware of your loan and the debt you have then this is risky. For others this is a strategy and they are aware of it.”

7. Selling your home before you buy another

Simon Wendt: “Not risky in metro Melbourne as there’s always stock on the market to buy.”

Pat Nolan: “This isn’t too risky. Selling your home first means you know exactly how much you can spend on your new place, however if property values are rising you could run the risk of paying more for your new home.”

Nicole Jacobs: “This isn’t risky – the only risk is that you won’t find something by the time you settle, which may mean you have to rent.”

8. Buying at auction

Simon Wendt: “Not risky as it’s the most transparent method to buy and will ensure you purchase at market value on auction day.”

Pat Nolan: “This isn’t risky, but ensure you have your conditional loan approved first and know exactly what you can afford as your highest bid. Buying at auction only becomes risky when the adrenalin kicks in and you go above your limit.”

Nicole Jacobs: “This has the lowest risk, provided you keep a cool head on auction day. Auction is the most transparent way to buy a property as you know your competition on the day. As long as your emotions don’t take over, then it’s a safe way of buying.”

9. Buying in winter

Simon Wendt: “Not risky at all. Buying in winter allows the purchaser to see the minimum amount of natural light the home will have and will be pleasantly surprised with the increased sunlight for the rest of the year. You also cannot predict what part of the year your dream home will arrive on the market.”

Pat Nolan: “This isn’t risky, in fact, there’s less competition in winter so you’re more likely to snap up a bargain or negotiate better settlement times.”

Nicole Jacobs: “This has low risk, people don’t stop buying and selling because it’s cold.”