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February 04, 2020

Changeover - The Key Number When Buying and Selling

If the market is rising or falling in price, the crucial number when it comes to buying and selling is the changeover number. Simply put, buy high/sell high or sell low/buy low. The market is relevant if you are buying and selling at the one time. Surprisingly, not everyone wins when the market is rising and not everyone loses when the market is falling.

When prices are under pressure, many people are finding that it is the best possible environment to upgrade their existing home. Conversely, many people resist current market prices because they are downgrading therefore losing too much on their sale and not making enough up on the purchase.

As the real estate market gyrates, there will be beneficiaries and casualties. For simplicity, every person looking to buy and sell in the current market needs to be aware of one number, their changeover number.

Upgraders

What is the total cost of buying and selling? Work out on paper the total transaction costs, the difference between your selling price and purchase price and any improvements that may need to be made. The sum total of these costs is your changeover number. This is the amount you will need to put into the transaction, whether it be in cash or borrowings.

Upgraders are the winners when the market is falling. But, if they focus on how much their existing property has fallen, they won’t see it that way. The reason upgraders are the ultimate winners in a falling market is the property they are purchasing drops in value more than the property they are selling. If you are selling a $400,000 home to buy a $650,000 home, a 10% drop in the market means your existing home drops $40,000, but the home you are purchasing comes back by $65,000.

Furthermore, most real estate transaction costs are based on a percentage formula i.e sales commissions, stamp duty, mortgage insurance etc. The 10% drop in the market can also result in a 10% drop in transactions costs.

In a strong market, there are fewer sellers than buyers. When the market drops, it does so because there are more sellers than buyers. People whom have sold first in a falling market also find more stock (more options) on market than they expected. This choice can result in a less compromised purchase.

Downsizers

People looking to unlock the equity in their home can come out of a falling market worse off for the same reasons upgraders benefit. If you are downsizing to capitalise on the value of your home, the stronger the market the better it is for you. Generally speaking, baby boomers are the most likely segment of the market downgrading. With superannuation funds under performing in recent times, many baby boomers are looking at their homes as their nest egg.

Investors

Investors can focus on income or growth. In recent times, capital growth has been all the focus for investors. When the market tightens, focus shifts to income, both for investors entering the market and existing investors looking to maximise their returns. As the housing market becomes less affordable to enter particularly in the capital cities, we will see continued upward pressure on rents.

Investors buy for profit, so ultimately only a rising market is of interest to investors. It depends on whether one takes a short or long term view when investing though. Quite often the best value can be found when the market is falling. Every property sells well when the market is rising, but properties with flaws can underperform in a weak market. When clearance rates are low, properties requiring work or that are not priced correctly from the outset get left on the shelf. In turn, renovators and developers that have been squeezed out in recent times may find opportunities emerge.

Before you buy a property, it is always good to establish the objective of the purchase. Are you chasing a certain percentage return? Are you “investing” purely for capital growth? (If so, this could be speculating not investing.) Are you buying & renovating with a view to attaining certain profit margin?

Prior to the height of the market, putting your name on a contract meant investors would make money. This is less likely going forward, with housing prices set to remain stable.

First Home Buyers

Entering the market was set to be made easier with the Morrison Governments roll out of the First Home Buyer Deposit Scheme. However the roll out has been less than smooth sailing, with lots of confusion around the terms and conditions and limited spots for applicants.

There are two key numbers for first home buyers when entering the market. Firstly, saving a large enough deposit to enter the market and secondly knowing exactly how much it costs to run a property. Every cost from mortgage repayments to council rates to strata levies should be broken down into a figure amounting to the weekly running cost of the property. This then needs to be balanced against income and lifestyle to see if the purchase is sustainable. Leasing out the second bedroom (and third if applicable) is a great way for first home buyers to manage the mortgage in the first few years – however it is important to note that some banks do not classify board as income.

Regardless of what category you may fit into, you have more chance of succeeding in real estate if you have a written plan that is simple. If the plan does not work on paper, it has no chance of working in reality!

Article inspired by Peter O'Malley's original article, Author of "Inside Real Estate"

Are you interested in reading Inside Real Estate by Peter O'Malley? Contact us to receive your free copy. Email: mail@goulburnre.com.au or call 02 4822 8711

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