10 Jul Rent-to-buy scheme | The gap between the rich and the poor in Australia | 1 into 4 lot subdivision | A good first impression – does it make a difference to a valuer? | Plus more
Solicitor Peter Carter answers the questions about the rent to buy schemes that are catching many would be Aussie investors.
Also we hear that the gap between the rich and the poor keeps widening. In some countries the gap is at its highest level in 30 years. The good news is that Australia is not only one of the wealthiest countries in the world but also has one of the most equal distributions of wealth. Today we look at why the rich are getting richer with Michael Yardney.
This weeks success story features a young man who together with his Dad did a 1 into 4 lot subdivision which involved a minor renovation of an existing house and creating 3 additional lots.
In real estate there is a saying that ‘you only get one chance to make a good first impression’. First impressions do count and can make or break your chances of getting a property sold. But does it make a difference to a valuer? We find out today because that is what we asked a valuer.
Any drop in interest rates is promoted widely as “good news” for the housing market and whilst a drop in rates may on the surface bode well for mortgage holders wanting to pay down debt, the bleak reality remains, that for savers, many of whom are would-be first-home buyers, the news is not good at all according to Catherine Cashmore. She tells us why today.
Brad Beer returns to answer a question from David that came about because of a comment Brad made in an earlier show.
Kevin: I don’t know if you’ve seen it in your area, but I’ve certainly seen it in mine. Driving around, you’ll see signs on lampposts and street signs that say, “We will buy your house for cash. We’ll pay the full price, and we’ll buy it now.” What’s behind those? It’s a rent-to-buy scheme, and I want to talk about it because it has been of concern to me for some time.
Peter Carter is from Carter Capner Law, and he joins me. Peter, I know you know what I’m talking about. Could you just explain how these schemes work?
Peter: It depends on the imagination of the entrepreneur behind it, but typically it’s a situation where the perhaps desperate, or hopeful, or optimistic seller thinks they’re going to get a bargain out of this type of deal. On the face of it, they do.
The entrepreneur offers to pay full price, but it’s a projected long-term settlement. Usually they’ll pay an option fee of cash or sometimes it’s even monthly fee. But they get the right of immediate occupation. The entrepreneur – or agent; let’s call them that – gets the right of immediate occupation, and they install their customer as buyer under those terms.
The option fee is paid out of the rent received by the agent’s customer to the seller and comes off the ultimate purchase price. But if you have a three- or five-year term involved there, it can become a nightmare for the owner-seller. They might never get paid, and that’s often what happens.
Kevin: Is the figure that’s paid today’s figure, or is it the figure projected toward the settlement time – which could be two or three years away)?
Peter: It’s today’s figure, but it’s the asking price. There’s usually no argument about what the asking price is, because the object of the entrepreneur is to get hold of the house so they can put a tenant in.
Kevin: The real risk here, of course, for the seller is that you’re giving up occupation. There have been a number of occasions, I believe, where the property either wasn’t settled or when it was due to be settled, it was trashed.
Peter: Yes, that’s right. The attraction to the buyer is that they get a long time to settle. They’re actually only paying rent, and part of that is going to the buy price, which to many punters looks attractive. But of course, the entrepreneur is taking a cut as it goes through.
Kevin: Then of course, the risk is that the property won’t settle. What sort of recourse do you have in this situation? What are the contracts like, Peter?
Peter: They’re innovative, customized contracts, and they have all sorts of weird and wonderful conditions. The ultimate outcome is that neither the buyer nor the seller is satisfied – legal action is required, or sometimes Fair Trading intervenes.
Kevin: What would be your advice to someone who brought you one of these contracts?
Peter: Certainly have a good look at it. Look at all the fine print. Sellers beware, and buyers especially beware. I’ve never seen one come out well.
Kevin: What happens to the poor tenant in the middle of all this? They’re going into the property, and they assume that they’re paying rent, which is being split between two parties.
Peter: Well, remember, the tenant is the buyer. That’s how the entrepreneur makes it all work. They get a buyer in – a very optimistic buyer – who that thinks instead of paying rent they’ll own this house one day. But it really is one day. I’ve seen contracts where it would just be impossible to actually finally pay the ultimate purchase price. It just doesn’t add up.
Kevin: Yes. You’re preying on the dreams there of someone who wants to get into a house, and maybe they can’t do it in the traditional way by getting a loan, so this is the only way for them to do it. Pretty risky all round.
Peter: Pretty risky. The typical advertisement you see is not just signs on lampposts; you’ll see advertisements in newspapers, etc. A good example i, “We want ugly, smelly houses, debt-ridden houses. Any price, any condition. If you don’t want it, we do. We can buy your house fast. Agents can’t.” That’s the sort of message they’re putting out to desperate sellers.
To buyers, the advertisement typically runs “Own my home! Must sell! Stuff the banks! Move in today!” – that sort of thing.
Kevin: The alarm bells should be ringing when you read that sort of stuff.
Peter Carter has been my guest from Carter Capner Law. Peter, thank you so much for bringing this to our attention, and thanks for your time.
Peter: Thanks, Kevin.
Kevin: As a follow-on from an interview that I did with Brad Beer from BMT Tax Depreciation a couple of weeks ago, David wrote to us and said, “In a segment on tax deduction for depreciation, it was said that why would you let the tax office have that money? Doesn’t the tax office get all those amounts that you’ve claimed over the years when the property is sold by you or your estate?
“Sure, inflation will have diminished the effect, but they still get it all back. Or do they take the view that even if you didn’t claim depreciation it still happened, and would take it off the cost base and hence increase the capital gain on which you pay tax?”
David, thank you for your question. I have Brad on the line.
Good day, Brad.
Brad: Hi, Kevin.
Kevin: Brad, I’ve sent that through to you. What’s your response there to David?
Brad: It’s a question around the capital gains tax and the impact of claiming depreciation and capital allowances on the capital gains tax position or the cost base.
Now, the cost base will be reduced by some of the claims that you make. Yes, inflation causes a diminished effect. But the other big difference is that when you make those deductions on the way through while you own this property, you make those deductions against your other income at your full marginal tax rate.
When and if you potentially pay capital gains tax at the time you may sell a property – providing you own it more than 12 months, etc. – you pay capital gains tax at half of your marginal tax rate.
When you actually calculate the numbers, because of the fact that the deduction and the amount you put in your pocket on the way through is more than what you would lose in capital gains tax at the end, it’s still usually worth claiming them. It’s more than just the diminished effect of inflation; it’s also the fact that there’s a different amount.
We’ve run some case studies in the past, and I’d be happy to provide those to you, Kevin, or any of your readers on some numbers on this on what difference it actually makes in a couple of different scenarios.
The accountant will be able to look at yours in particular – because we’re not the accountants, remember; we’re the quantity surveyors who work out the depreciation. But generally, you end up with more money in your pocket than what you end up paying in capital gains tax or additional capital gains tax at the end, should you sell the property.
I’m also a believer in the fact that if you have the money, you can use it, and you can use it to help minimize the interest you pay on debt and things like that. You just have to recognize that at the end you may need to have that money if you do have a bit of a capital gains tax bill. That’s all.
Kevin: Now, those case studies you mentioned there, Brad, are they available on your website, or would people need to talk to you directly to get those?
Brad: It’s in one of the previous editions of the Maverick newsletter, so it would be available on the website. Or just drop us a quick e-mail, and I’ll direct you in exactly the right position.
Kevin: Okay. David or anyone else listening, if you’d like those case studies, you can get in direct contact with Brad, or let me know through the website and we’ll put you in touch.
Brad, thanks so much for your time, mate. I appreciate – as I’m sure David does – you answering that question. Thanks, mate.
Brad: Thanks, Kevin.
Kevin: According to the latest OECD report – the Organization for Economic Cooperation and Development – the gap between rich and poor keeps widening across the world. That’s not necessarily the case in Australia.
To understand what that really means, I’m joined by Michael Yardney from Metropole Property Strategists. Hi, Michael.
Michael: Hello, Kevin.
Kevin: Michael, a brief overview on what the study showed and what the differentials are for Australia?
Michael: The OECD has 34 member countries, and what it showed was that the richest 10% of the population of these countries earns about ten times the income of the poorest 10%. That’s not unusual. But what it’s shown is that the inequality – the gap between the rich and the poor – has actually widened overall. But the good news for Australia is that not only are we amongst the wealthiest countries in the world, we’re also amongst the most even in our wealth distribution.
Kevin: How wealthy are the wealthy?
Michael: It depends where you look. The richest 5% of Australian households have a net wealth of about $2.7 million, which is marginally above the OECD average, while the richest 1% have equivalent of about $4.5 million (US). That’s the richest people. But interestingly the wealth of our poorest people is growing faster than the wealth of many other countries’ rich people.
The reason is in Australia most people have a job, most people own homes, and that’s keeping up the level of their wealth.
Kevin: How much of it’s geared on property, Michael?
Michael: Well, a lot of it has to do with property in Australia. While you and I keep talking about property investments, what we’re saying here is that it’s their home. In fact, the home represents 51% of the average Australian’s wealth. A lot of Australians – 1.9 million Australians – also own property investments, and that helps.
One of the other factors about wealth is wages. The equality of male and female wages in Australia is more than in other countries.
One of the reasons that the rich have been getting richer compared to the average person – we can’t really call them poor in Australia – is because of the number of part-time jobs that have come up since the Global Financial Crisis. But there was an interesting recommendation from the OECD to level inequality.
Kevin: How can we reduce that inequality, Michael?
Michael: It’s not what a lot of people say about taxing the wealthy, rich property investors or the big corporations. What the OECD suggested was to improve skills and educate people in promoting better jobs. What they were saying is rather than bringing the top people down and soaking the rich, it was actually wanting to raise the level of the poorer people in their countries.
Kevin: How do they do that?
Michael: A lot of it has to do with education and improving skills so that people can get better jobs. Part of the issue with inequality was that people weren’t well-equipped to take better-paying jobs.
Kevin: That’s a good part about Australia. There are so many opportunities for people who want to get ahead.
Michael: And the country is changing. We were living off the sheep’s back at Federation, and we were a manufacturing country, and then we had a little mining boom that came and went very quickly. Where jobs are going to happen in Australia, and the big growth prospects, is in service industries.
We are so well geographically situated to provide services to the Asian Pacific region. But Services are going to occur from the big offices in the capital cities, particularly the big four capital cities of Australia. That’s where economic growth’s going to be, that’s where wages growth is going to be, and in my opinion, Kevin, that’s also where property capital growth is going to be, because people will have more money and be able to afford better properties.
Kevin: Great stuff. Thank you so much for your time. Michael Yardney from Metropole Property Strategists. Thanks, mate.
Michael: My pleasure, Kevin.
Kevin: Any drop in interest rates has been promoted widely as being good news for the housing market. Whilst the dropping rates may on the surface bode well for mortgage holders wanting to pay down debt, the bleak reality remains that for savers – many of whom would be first homebuyers – the news is not always good according to Catherine Cashmore. Catherine says any long-term downward direction in rates should always be considered a concern.
Catherine, thank you for joining us. Maybe you might like to explain a little bit more about that.
Catherine: Yes. Whenever you get rates dropping, it normally sits at the bottom of a number of economic problems. It points towards a lower trend of growth, and any lengthy period of low rates is always harder to reverse because consumers generally come to rely on cheap credit. They come to rely on a low-interest-rate environment, particularly when you’re trying to boost growth.
I think it’s also important to mention – as we all know and we’ve heard it said many times before – that lowering rates is a pretty blunt instrument that the RBA has to use. They have marginal control on the banks, where the banks choose to lend that cheap credit into, because banks typically like to lend into the residential property market.
When you get a low rate and investors start to look for high yields and they start to try to hold onto the purchasing power their money before it diminishes away completely, what you get is that they start to look for different areas and different aspects that they can put their money into. That is exactly what we seen with property market.
It tends to be slightly counterproductive, if you like, of what happens into the environment. People start to get used to a low interest rate environment.
I also think that on their own, rates have a marginal influence on property prices. You really have to look at what the lending rates are doing, and the lending rates have been higher for a period of time than they were during the GFC, but you need a number of factors to collide for there to be any significant change in property prices.
Principally, you also need consumer sentiment to lift up, and you need the balls to start rolling – if you like – and people to start buying property before you start to see a lift in house prices. Then once investors get confident that the housing market has turned, then you will typically see a rush in to buy.
Kevin: The construction industry is a bit of a cot case right now, too. I think a lot of these measures are aimed at that section, as well. Catherine, is it having much impact there?
Catherine: Not at all. I think the construction industry needs long, sustainable policy decisions in the construction industry to really improve that sector of the market. The problem with new home construction is it is typically done on the fringes of our capital cities, and there is just a lack of infrastructure. Nobody really wants to buy there. Investors, first-home buyers, second-home buyers overwhelmingly prefer the established market – and for good reason. That’s really because we centralize ourselves so much around the capital cities.
What you’re finding with the construction industry is outside the first-home buyer grants that the government will implement for a time and then they’ll withdraw them, which tends to cause a boom-bust cycle in any of the new housing markets, particularly when the first-home buyer grants are concentrated primarily on new housing. That’s the only thing that tends to have any significant influence on the construction sector. I know the HIA has released a list of things that they want the government to address.
Kevin: The number of people per household has actually stopped declining, and it’s increasing again. What is behind that?
Catherine: Again, I think it’s down to affordability. There is no getting away from it. Even though, on the one hand, it’s easier to get a lower interest rate when you’re buying housing – and that obviously helps on the affordability side – I think what is happening certainly with first-home buyers is, first of all, they’re finding it very difficult to save for a deposit initially because their savings are dwindling away. It’s difficult to get any good return on savings accounts.
They’re later leaving home. People are sharing households. Particularly renters, it’s much more economical for them to share and rent a three-bedroom house than it is for them to go and rent a one-bedroom apartment.
I do think you’re going to see more of a push to people renting rather than purchasing houses, so of course, we are going to need rental accommodation, as well. That means inspiring investors to buy new accommodation as well as first-home buyers.
Kevin: Catherine, it’s always great talking to you. Thank you for putting it all in perspective for us, too.
Catherine: No worries at all, Kevin. It’s always good to be asked.
Kevin: Our success story this week deals with Brendan Brown. Brendan works as an area manager covering Brisbane North, from the city out to Caloundra. Together with his dad, he did a one-into-four lot subdivision that involved a minor renovation of an existing house and creating three additional lots. Let’s find out a little bit more about it.
Brendan joins us. Hi, Brendan. Thanks for your time.
Brendan: Hi, Kevin. No problem at all.
Kevin: Tell me a little bit about the property. Where was it located, and why did you choose that area?
Brendan: This particular property that I found is located in Tingalpa, so it’s about 15 kilometers southeast of Brisbane CBD. I tend to look for properties within that range of the CBD, but one of the other main things was that it was surrounded by more premium suburbs. You have suburbs like Wakerley, Manly, Wynnum, Murarrie, Cannon Hill, and even Carindale and Belmont areas. They all circle around it.
Yes, I really liked that. It was at a lower average price than those areas yet was surrounded by those more premium suburbs, so I saw some good opportunities for growth there.
Kevin: How big was the block of land?
Brendan: It was 2023 square meters with a small two-bedroom right at the front. It was a nice, big block of land.
Kevin: Just the single block, or had it already been divided into lots?
Brendan: No, it was just one block, so on one title. We looked to get the approvals to split it into the four blocks and retain the house at the front.
Kevin: Was that something you knew you could do, or did it require a bit of investigation?
Brendan: It does require a bit of investigation. I think a lot of the information is available to anyone. You have planning and development online and interactive mapping and all that sort of stuff.
I have a pretty good interest in small residential development, so I spend a lot of time studying city plans and that. They can get a bit complicated, but if you can decipher, it can at least give you a good guide as to what you can do with the property. I had an idea that I could split it into the four, but I would talk to my town planner to confirm that.
Kevin: Let’s talk about money now. Let’s talk about the purchase price, and I also want to know how long it took you to actually set it up and then get to the final stages. Firstly, let’s talk money, the purchase price.
Brendan: I had it under contract for $640,000. The good thing about that is I managed to get a two-months due diligence period, and that is definitely a positive in residential development. That basically gave me two months to research everything as well, so I could be confident that I could do all that research that you’re talking about.
Kevin: Was that enough time?
Brendan: Yes, that was enough time to do the research and the finance and all that. It would be pretty hard to get two months these days, so you probably normally have to try to do it a bit shorter than that, but the more time you can get, the better for that sort of stuff.
Kevin: In those two months, did you go unconditional after that stage?
Brendan: Yes, I did. I did renegotiate a little bit, because I did discover in that due diligence, there was a bit more cost involved doing some roadwork and that sort of stuff, so I tried to renegotiate. The seller wasn’t keen to budge, but I managed to get just an extra $5000 off. It all adds up, so it’s worth renegotiating. The final price that we went unconditional on was $635,000.
Kevin: The end game here, of course, was to get three individual lots off plus the lot that has the house on it. Were you successful in doing that?
Brendan: Yes, we were. It was advertised as splitting it into three, so I think a lot of people were maybe just looking at it based on what the real estate agent was telling them –that you could keep the house in the front and get two lots in behind. But I managed to get the four lots out of it because it had a two-street frontage.
With knowing that your minimum lot size for a normal low residential is 400 with the ten meter frontage, and this total site had 20 meter frontage, I got two of those narrow lots at the end that didn’t have the house on it, and that is what got me the extra lot.
Kevin: Did you need to relocate the house at all?
Brendan: No. That was the other good thing. The house was positioned right at the front of the other end, so I was able to retain that, on just over 400 square meters and then create a battle ax 600 square meter with access from that end out behind that. I guess total of about 1000 square meters for those two, and then just over 800 for the other two.
We did lose a little bit in the land dedication to complete a cul de sac. That’s what I was talking about before with the road works. It was an extra cost and we lost a bit of land, but it worked out.
Kevin: With that subdivision, you then have to get the services on there. What was the end cost of the development, and what did you eventually end up selling it for?
Brendan: The end cost of the total project… The purchase price was $635,000. Like you said, the services, there is quite a bit involved in that. You need sewer, storm water, and water, and they’re running a fair way on a big site like that. We ended up finding one coming in that did all that. It was about $120,000 to basically do all our road works, all our sewer – basically all the civil works – which was good. But we had some extra costs in electrical. Our total ended up being a total cost of $955,000.
We actually ended up selling three of them, and we retained one of the blocks, but we did have a lot of demand on it. Quickly, the two bed house, we sold for $370,000, the 600 square meter rear lot for $285,000, one of the narrow lots for $280,00, and retained one of them. But if we did sell that for $280,000, our total sales would have been $1,225,000, which gave us a gross profit of $270,000. The total time was about 18 months. They take a bit of time, but it’s still worth it for that amount of money in that time.
Kevin: As I understand it, you’ve been able to hold on to one of the lots. Is that right?
Brendan: Yes. That’s what we did. That was my recommendation, and I think that has probably been a good thing with the way the market is going. We built just a low-set standard two-bed, two-bath property on that, and it’s probably only a week or two away from completion.
At the moment, it’s just valued at that land value, the $280,000 plus the build cost, which was around $220,000, so about $500,000. But on completion, we’ll get a re-val, and I’ll be expecting a valuation of about $550,000 to even $600,000 based on the sales recently in that area. There is an equity gain just in holding and building.
Kevin: Absolutely. Will you hold it then, or will you then sell it?
Brendan: Yes, I think the idea is to hold it and rent it out, because with interest rates the way they are, it’ll easily be positively geared, and we can still pull that profit out by refinancing on the equity. Even though some of our cash is tied up in it, we’re still releasing some of that profit and able to move it on to another project.
Kevin: Great story, Brendan. Thank you so much for sharing it with us, and all the best for the future too.
Brendan: No worries, Kevin. Thanks for having me.
Kevin: My guest once again is James Freudigmann from Propell Valuers. In a chat that I had with James in a previous interview, we talked about first impressions count, and as a real estate agent, that’s one of the things we always say.
First impressions do count. But do they count as much with a valuer? How does a valuer look at a property? Let’s find out.
James, how does a valuer look at a property?
James: When the valuer actually looks at the property, it involves a number of different elements. Obviously, when they drive up to the property, they will look at it from the street as to how it presents. But then a lot of people think a valuer needs to spend a long time at their property, when generally that’s not the case. Most of the work is done away from the property. The actual inspection is a formality and getting the actual specifics of the property.
Generally speaking, a valuer will go through a property and they’ll measure it up, either by a laser or with a wheel – or a tape if they’re very old school – and determine the gross floor area. So living area is broken down to outdoor areas, to car areas all those sorts of things.
They’ll detail the style and specifics within the accommodation. What rooms are there? What fixtures and fittings are in the property? Are there any other major improvements – things like pools, sheds, extensive driveways, extensive landscaping, and all sorts of things like that?
Site characteristics? Is it a heavily sloping block? Is it level? Is it rising from the road, or is it falling away? Is it connected to town water, or is it tank water? Proximity that that particular property has to services in the area – public transport, schools, shopping facilities. Is it within a school catchment zone? Is it at high risk of future development? All those sorts of things.
The valuers will do all of that and look at other sales in the area and things like that, as well, to make the actual assessment of the value.
Kevin: I guess they’re the statistical things that you can put a dollar value on. Does the valuer also look at the marketability? If I’m going to sell my property, what are some of the triggers that will help me maybe market it a little bit better and maybe get a little bit more money?
James: Absolutely. The valuer does take into account how that property presents in the current marketplace. The valuer won’t actually comment to you when they’re going through, “You could do this to make your property worth a little bit more,” but what they will generally put in their report is if there are any items that they see as detrimental, they’ll list those in the report.
When you get the valuation report, you can see what items the valuer thinks are holding back the value a little bit, and you could work on those to improve the marketability.
Kevin: As a real estate agent, we always talk about the two big areas as being kitchens and bathrooms. Is that, in fact, the case?
James: It is. That’s very much the case, Kevin. A lot of people, including tenants now, are actually looking for a property that’s in good condition and that they basically don’t have to do anything to. A lot of owner-occupiers want to just move straight in. They don’t want to have to go in and do work. The two major items are the kitchen and the bathroom to really give it a good wow factor when you walk in.
Kevin: The other big trigger I’ve found working with buyers is they always need lots more storage, so the more storage you can provide in a property is going to add value.
James: Absolutely. If you can have built-in robes now within bedrooms, it makes a big difference. Even having a linen cupboard in a bathroom. A lot of people think it’s not important, but a lot of people have far more possessions now than they used to, and they need somewhere to put them all. So storage is becoming a very big factor.
Kevin: A lot of things to consider there that can actually add value. I’ll tell you what, you’d be a pretty hard buyer if I was an agent trying to sell you a property.
James: I’d like to think I’m a little bit more picky than a lot, yes.
Kevin: You know what to look for, don’t you? Just in closing, can I ask you if you see many buyers calling on valuers to give them an impression of value before they’ll actually make an offer?
James: We don’t see a lot of it, Kevin. It is something that we probably recommend to a lot of people, just so you know exactly what it’s worth. Even using a buyer’s agent or buyer’s advocate who is acting purely on your behalf is definitely something else to consider, but not a lot of people do it compared to the percentage in the market that are buying.
Kevin: James Freudigmann from Propell Valuers. James, great talking to you. Thanks for your time, mate.
James: No problem.