Edition 2 James Market News Property Report - Flipbook - Page 5
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Renovation DIY Learning Fee
Here we have the case of “the
Switzers” who paid $1,700,000
for a home that was in need of a
$300,000 reno. As with many renos, not
everything went to plan and their
renovation ended up costing them
$610,000. But they got what they really
wanted. Well sort of – the home isn’t as
close to the shops and they couldn’t
afford the pool or the special
Masterchef oven. In fact, the Switzers
now acknowledge they would have
been just as happy to have paid the
$2 million in the first place and avoid the
drama of the renovation, and be within
walking distance of Hampton Street’s
“Brown Cow” – and have a smaller
mortgage. DIY Learning Fee: around
$300,000 and then some.
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The Investment DIY Learning Fee
Here we have Jason and Kylie, a
couple of 25 year old hot bods
who charge off to one of those
investment property seminars which
promise you’ll make a million dollars in
six months, but instead our bright young
things end up knee-deep in cash-flow
tables, bank documents and (whoops!)
a signed investment home contract that
results in their off-the-plan, out of town,
so-called whiz bang investment
property growing at a miserable 1.3%
per annum over the next ten years.
It’s not only preventing them building
any wealth, but worse, it’s stopped them
buying the dream home they wanted to
live in, which they could have afforded
except the banks won’t back them now
they have this off-the-plan out-of-town
millstone around their neck restricting
their borrowing abilities. Their Learning
Fee ends up being their whole life –
keeping them in a McMansion in
Pakenham when they really wanted to
be in a period home in Hawthorn.
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The Emotional
DIY Learning Fee
A real life Eastern suburbs
example here where a potential client
wanted to put a bid in on a home,
with a “take it or leave it” demand.
We suggested opening up negotiations
with an offer a few hundred thousand
dollars lower, telling them that
“sometimes it’s not how much you offer
but how you present it”. No, they said,
“that’s our offer and they can take it or
leave it”. Unsurprisingly their offer, and
their ultimatum, wasn’t accepted.
Annoyed and fragile, these people
walked down the road to another agent
and paid $400,000 more for a home
that we had passed on six months ago
when it sold at auction. The home
requires a major rebuild – in the millions
– that will leave very little rear yard.
It may be the right home for these
people, who knows, as we never really
The investment DIY: If it sounds too good to be true, it probably is.
got to know them, but it’s a very real
possibility that a very large learning fee
has been paid.
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The DIY Valuation Learning Fee
If you are told it’s worth $2.2 and
you think it’s worth that but it is in
fact worth a lot less.
The DIY Negotiation Learning Fee
If you are told to pay $2.2m and
you don’t know how to correctly
offer $1.9m.
Of course, another Learning Fee can be
the fee you pay to a buyer agent to help
you buy. An argument against paying a
buyer agent learning fee is that at an
auction, under the hammer and on the
market it’s the person with the most
money who wins, and buyer agent fees
are just additional imposts. This at times
is a legitimate concept (especially with
inexperienced and incompetent buyer
agents). But when many deals are
Expressions of Interest or Pass-Ins or
Private Sales or Pre-Auction Offers or
boardroom dealings … (where there
are no rules) not under the hammer
public auctions the argument isn’t
so legitimate.
A substantial argument in favour of
paying a Learning Fee to a buyer agent
is that it can significantly reduce your
overall Learning Fee on this a most
important financial decision, which
you may make only once a decade.
Alternatively, a buyer agent fee can be
regarded as an insurance against paying
the kind of hefty Learning Fees we saw
in the above cases.
A result of paying a Learning Fee to a
competent buyer agent could be savings
off your mortgage, better capital growth,
more money in your personal life and –
the hard to measure, but no less
important – better emotional outcomes.
In life we all pay – the question is
how much.
Capital growth,
cash flow
and risk
For me, it’s all about land. Land with
growth potential reduces your risk
while maximising your investment
(and it’s fun for the children to run
around on).
High Land-to-Price Ratio: The closer
to a 100% land value, the better the
investment. Apartments, for instance,
typically have only 10% land value
– the rest is tied to a building that
depreciates, like a car losing value
the moment you drive it off the lot.
Some new homes on smaller land
are not much better than apartments
in terms of an investment with
capital growth.
Heritage Properties: If the land value
approaches 100%, even properties
with a heritage overlay can be
worthwhile. Large parcels of land are
always in demand, especially in an up
market, and heritage can sometimes
mean a built-in discount if you know
how to approach it.
Give me a big parcel of heritage land
with a home I can live in without
renovation over a heritage-free,
smaller block of land with a
“Faux Chateau” or a brand new
home of average quality, and the
heritage property wins every time
for long-term value.
Cash Flow and Risk: Residential
properties rarely offer great cash
flow, so capital growth is where
you have to win. Substantial land
parcels tend to be lower risk if your
debt-to-price ratio is reasonable.
