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The world of property ownership is changing. The GFC and its aftermath have caused traditional methods of buying and selling the Australian home to come under scrutiny. The Australian public is proving increasingly receptive to new and less expensive strategies to buy and sell property.

Housing market predictions are subject to much spin doctoring. In an attempt to talk up the market, real estate agents would have us believe that the worst is over and things are on the up. The Australian Bureau of Statistics (ABS) however, tends to be a reliable source of information that often paints a different picture. Its recent figures reveal the following:
<ul>
<li>a 1.1% national fall over the March 2012 quarter</li>
<li>average Australian house prices have now fallen 6.1% from their last peak</li>
</ul>
The fact is that property prices have been falling for 21 months, which is the longest downturn in nominal prices ever recorded by the ABS. 
Why is the market tough at present? 
Tightened lending practices have been bought in by lenders in an economy where their cost of funds is high and the global economy has ongoing challenges. Additionally, the Australian Securities and Investment Commission (ASIC) brought in stringent lending criteria and the new National Consumer Credit Policy (NCCP) is making both brokers and lenders more cautious in their lending practices. These forces have made it difficult for many potential home buyers to borrow and, in turn, made it difficult for property vendors to sell their properties. 
What is the impact of this tough market? 
Borrowers often simply don’t have a 20% deposit (plus stamp duty costs) for a house or unit purchase that may be costing them $400,000-$600,000 at the lower end of the sought-after capital cities markets. The discontinuation of the government grants for stamp duty exemptions for first-home buyers has caused a rapid reduction in the numbers of first-home buyers seeking properties at present.
Increasing numbers of self-employed and contract workers have particular challenges in qualifying for a home loan. Frequently their incomes are not packaged in a way that presents well to credit assessors despite the fact that their actual incomes are robust.
Fewer buyers means fewer properties sold. Many sellers are going through the agonies of waiting months for properties to sell and are being forced to lower their sale price well below expectations. Of course when the property does sell at a lower rate they are still having to pay real estate agents 1.5-2.5% commission on top of the marketing costs.
Investment properties and negative gearing that looked so attractive a few years ago have, for many people, become a painful liability. With little hope of a quick sale in a slow property market and the possibility of negative equity looming, the viability of a negatively geared property often looks questionable.
These are tough real estate market conditions, and those of us wanting to reduce debt and gearing levels by selling a property have often faced difficulties. Those of us wanting to buy into the market or with grown children seeking their first homes have often been challenged by lenders who will not lend money and valuers who seem to routinely undervalue the properties we offer as security for our loans.
Seller or vendor finance?  What is it?
It’s timely that we look at some lateral solutions to these challenges. Chan &amp; Naylor Finance has been discussing these issues with an associate who specialises in vendor finance. We present the benefits and the new thinking around processes involving the use of vendor finance when selling or acquiring property. Strategies such as “rent to buy” are rapidly gaining acceptance and provide an attractive alternative to the traditional approach to buying and selling houses and units.
Here is some information from them on how the process works.
SELLERS There are several reasons why owners may want to sell their property quickly:
<ul>
<li>real estate agent hasn’t found a buyer</li>
<li>cannot keep up with their home loan repayments</li>
<li>have a negatively geared investment property and want to reduce gearing and debt levels</li>
<li>have a property with negative equity</li>
<li>have been retrenched</li>
<li>need to relocate</li>
<li>have a property that requires work or is unattractive</li>
<li>have acquired a deceased estate property that they don’t want to keep</li>
<li>are going through a divorce</li>
</ul>
Example Here is an example to demonstrate how “rent to buy” works for sellers:
John has an investment property he bought for $450,000 two years ago with a $380,000 mortgage. He wants to sell quickly as its market value is dropping below $400,000. The house has failed to sell over a four month period and has cost John $6,000 in marketing and will cost him another $6,000 in real estate agent’s commission when it does sell.
Fast Home Solutions (FHS) agrees to purchase the house at the market value of $400,000. The transaction takes only days. The transaction is similar to buying equipment through Harvey Norman, where you pay for the goods 24 or 36 months later. A deposit is paid to the seller, John, and monthly payments to cover the home loan repayments are made from rentals paid to John by FHS from that point on. John has the security of retaining ownership of the house until final payment is made. After 24 months the balance is then paid to John, the mortgage is replaced and ownership on title is transferred.
 
Benefits for the seller 
<ul>
<li>quick sale in days, not months</li>
<li>seller doesn’t have to pay the $6,000 real estate agent’s commission </li>
<li>seller receives sufficient monthly rental to cover the mortgage payments</li>
<li>receives market value for the house</li>
</ul>
 
BUYERS How does the bendor finance process work for a buyer?  Many home buyers are finding it difficult to achieve home ownership because the banks are making it difficult to qualify for a home loan.
Key reasons for failing to qualify are:
<ul>
<li>newly arrived in Australia</li>
<li>are contracting, self employed or receive cash payments as income</li>
<li>the buyer may have black marks on their credit record</li>
<li>the buyer may not have a stable employment or rental history, or</li>
<li>they simply don’t have a big enough savings for the deposit and costs required – up to 25%  in most cases</li>
</ul>
Example Here is an example to demonstrate how “rent to buy” works:
FHS has purchased a house from a seller for $400,000. They introduce a buyer, Sam. Sam is an IT contractor with $30,000 savings for a deposit and costs of a purchase. This is insufficient to complete the purchase. Additionally Sam doesn’t qualify for a home loan because of an irregular employment record, despite the fact that he is earning $130,000 per year. Sam is presently renting and paying $500 per week. He agrees to buy the house. It takes only days to organise and sign the legal paperwork.
Sam will pay rent plus an additional amount to save for a deposit over a period of around 24 months or less until his employment record is more stable, his rental history is good and he can qualify for the home loan he needs. At Chan &amp; Naylor Finance we can work with FHS and a buyer to prepare them as quickly as possible for the purchase loan that they will need to complete this purchase.
The seller has the security of retaining ownership of the house until final payment is made. The original home loan is then retired and the property title is transferred.
Benefits for the buyer 
<ul>
<li>the buyer can get to own a property without having a full deposit saved or a bank loan</li>
<li>the buyer gets into a property with an agreed price</li>
<li>FHS works with the buyer to establish a savings routine for the home loan deposit</li>
<li>Chan &amp; Naylor Finance helps with advice to ensure the buyer qualifies for his own home loan in the shortest possible time</li>
<li>should the buyer improve the appearance of the house (agreed with owner), any increase in value is retained by the buyer should the property market improve, any increase in the house value is retained by the buyer</li>
</ul>
Jenna Ford is a finance strategist and partner at<a href="https://www.chan-naylor.com.au/finance/" target="_blank"> Chan &amp; Naylor Finance</a>
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Vendor finance provides new approaches to owning or selling a house in a difficult market

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There are a few issues to financing property investment purchases in mining boom areas.  You may not have run into these before and because the lenders are operating very conservatively at present with their credit decisions it’s easy to be caught unawares.  Get up to speed on the possible hurdles to financing these deals. We'll look at a few of the issues you need to be prepared for and give you tactics below to get your loans approved more easily.
Postcode
Most lenders rate postcodes for the risk they perceive to be associated with these areas. Their credit policy will change where they perceive a postcode to contain higher risks for them.   For example, a small and/or remote town will have a higher risk rating, as its harder for a lender to sell the security at a price that will cover the loan on it should a borrower default.  Some lenders will not lend in postcodes they perceive as a higher risk or will limit the loan’s LVR (level of loan to property value), such as in Moranbah, Queensland. If you intend to borrow over 80% LVR in a mining town then the mortgage insurer will have its own postcode and policies related to it, and these are generally more conservative than those of the lender.
Tactic: Get to know the risk rating of the postcodes you are interested in before you decide it is the place to buy.
Type of security
Stick to more traditional types of security, as unusual securities are rated as higher risk, again because they are harder to sell in event of a borrower default.  Again, there is a difference between the lenders on how they view unusual securities and so you do need to research this if you are considering buying an unusual property.
Brokers are generally well informed and aware of where the windows of opportunity lie for unusual securities, e.g. a large house divided into one-bedroom units or a boarding house – both attracting a fabulous rent return – may be declined as suitable security.  A transportable home may be accepted by some lenders but only at a 70% or 80% LVR loan.
Tactic: Decide the types of security you are targeting and find the lenders who will accept them. If there aren’t any lenders or the lender’s products and policies are not suitable for you then change what you are looking for before you waste time and energy researching properties you cannot obtain the finance for.
 
Rental returns
“One-industry towns”  have recently been the focus for lenders.  They have viewed the high rental returns often achieved there as unsustainable and therefore risky.  While you, the buyer, may see the rental returns on some properties as hugely attractive, the lenders are worried. A number of lenders have recently changed how they assess these rents when deciding if you can service the loans you apply for.
While it has been normal in the last two years for lenders to want to see long-term leases in place for these properties, it is now common for a lender to only consider 60% of gross rental when they calculate your borrowing capacity on these properties.  This 60% gross rental is then further reduced to 75% or 80% (of the 60%) as a ballpark rental income net of expenses such as agent’s fees and rates.
Tactic: Do not expect that large gross rental income will help in your ability to service a loan in the eyes of the bank.  Ensure you have other regular income (wages, two years of business drawings, other rental incomes) that is high enough to give the lender comfort.


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Valuations
Generally valuations are very conservative at present and in mining towns valuations tend to be more volatile as values seem to keep pace with rental returns which also fluctuate with demand. It’s the norm in larger cities to receive a valuation at, or very close to purchase price, however , in mining towns where lenders are more fearful of the boom/bust cycle this may not be the case.
The valuer is all powerful. He can value down a property if he thinks it has an inflated price or high risk factors. That means that if the valuation is lower than expected and you have additional cash you might put into the deal you could still proceed to buy at a lower LVR loan.  This may not always be the case. A valuer’s  notes on risks associated with a property he is inspecting can send a lender scurrying for cover and kill the deal . For example, if the property is close to a mine site that could be considered as polluting, if its access road is a rough dirt road, or if there is little infrastructure  nearby ( town water, public transport, schools).   Again, the lender wants to be sure it could sell that property quickly should you, the borrower default.
Tactic: Look at all properties that you are considering from a lender’s point of view. What is there on the deal and the property that would make a lender nervous or would make the property difficult to sell quickly? Is the mine near the town building its own accommodation for their workers? Is the access to the property steep or rough? Your broker needs to mitigate against these possible risks in his or her presentation of the loan application to the lender.
Valuations again
It is also important to be aware that in the last two years most lenders have swung over to a system of valuation called Valex. The system is designed to put a distance between the valuer and parties who may want to influence the valuers’ independent assessment of a property. It is almost a black box system and can’t be bypassed. It also means that it is difficult to know which valuer has been assigned to a particular job. Additionally, valuers who have wanted to be included in the Valex panel of valuers have had to compete on their service price and are often delivering reports for a low fee. This inevitably means that many valuers are in a rush to do volume reports and may miss some of the features that make your prospective purchase property a good deal.
Additionally,  the valuer may not be a local valuer, but travel a long distance and not be as familiar with the area you are seeking to buy in. With many lenders, the valuer for Mt Isa travels in from Townsville despite the fact that there are local valuers in Mt Is a who know the market there intimately.
Tactic: Check in with your broker to see if there is a suitable lender who does not use the Valex system if you are worried about a valuation ruining your proposed purchase plans.  You can also consider using a lender who will facilitate an upfront valuation so that you can know the valuers estimation of the property value before you go to all the trouble of submitting a loan to that lender.  You can always take the deal elsewhere if the valuation is too low and seek a second opinion.
Investing in mining towns can be done very successfully.  If you do need finance to complete the purchase (as most of us do) then remember when you are researching your purchase to also research the finance hurdles that may apply to your deal. And once again, do the finance application well before you find the property you want to buy.
Jenna Ford is a finance strategist and partner at<a target="_blank" href="https://www.chan-naylor.com.au/finance/"> Chan &amp; Naylor Finance</a>
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Overcoming hurdles when financing property investment purchases in mining boom areas: Jenna Ford

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Property investors’ awareness of creating wealth via add value strategies like renovation, granny flat additions and  “knock down and build two”  strategies have been fuelled by the plethora of reno shows on TV and the media  focus on creation of wealth via property in a relatively flat market.
There seems to be a sense of urgency to “get in and get started” particularly among younger investors who are finding it hard to enter the property market for the first time and even harder to  get in if the plan is to renovate or do a small development on the site. For those investors who want to get into the property market sooner rather than later and do not have sufficient savings for a deposit or are short on servicing capacity,  joint venturing a deal is coming up more often as an alternative solution.
“Joint venturing” tends to refer to shorter-term arrangements, while “co-ownership” refers to the longer-term holding of property by two or more individuals or entities, be they a couple, friends, family members or trusts.
Three clients of ours successfully recently completed a 14-month investment project and walked away with $43,600 each (pretax!). John, Helen and Marie were each unable to purchase an investment property in their own right, and all wanted to gain firsthand experience doing a small development.  They decided to join forces and do a small development that they could on sell quickly. Together they purchased an old weatherboard Queenslander on an 1,100-square-metre residential corner block 12 kilometres from Brisbane CBD.   The existing dwelling was at the front of the block and the back of the block had easy street access and room to construct a second dwelling on it.  They erected a neat two-storey, four-bedroom dwelling on the back of the block, subdivided it onto two titles, renovated the original Queenslander and landscaped the property with established trees and plantings.
The maths on this is as follows:  Purchase: $465,000, council and DA costs: $40,000, build costs: $260,000, renovation costs: $85,000, subdivision costs: $20,000, agent’s fees: $37,000.  The renovated Queenslander sold for $570,000 and the new dwelling sold for $610,000.  The profit on the venture was $281,000, which they divided between them. After netting out their original $50,000 contributions they had $43,600 each.  Each of them will have different capital gains tax liabilities as this depends on their individual financial situations, and so they are off to their Chan &amp; Naylor accountant to clarify this.  They are also looking for their next project.
Benefits of joint venturing
<ul>
<li>Savings are pooled towards the deposit, allowing you to buy into a property sooner.</li>
<li>Combined savings can also go towards renovation expenses or deposits on construction loans if an add-value strategy is being pursued.</li>
<li>Borrowing power for the loan is also combined across owners, often resulting in being able to buy a better-quality property than you could have afforded on your own.</li>
<li>Running expenses of the property are shared, affording you a little left over in the budget for the occasional treat.</li>
<li>The expertise, workload and responsibility for planning developments and renovations are also shared.</li>
</ul>
Risks of joint venturing
<ul>
<li>All parties are jointly and severally liable for the entire debt, not just for their individual shares, so if anything happens to one of the partners the others are held responsible for the debt in its entirety.</li>
<li>When calculating serviceability for additional loans to individuals, lenders will take the 100% of the debt of any joint venture into account, not just your individual share.</li>
</ul>
 
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For example, if John, Helen or Marie, during the course of their joint venture project, had wanted to refinance a loan against a property he or she held only in his or her name, the  lender would have counted 100% of the JV loans as their total responsibility.  The message here is to plan ahead for such individual needs when joint venturing.
Conflict may arise during the course of a joint venture project as individual circumstances and needs change.  Plan how you will mediate through differences of opinion before you enter a JV arrangement and put these agreements in writing.
The keys to successful joint venturing:
<ol>
<li>Do investigate joint venturing options, as they can be both profitable and fun.  Be careful to not go into an arrangement and investment without extensive research and planning.</li>
<li>Invest extra time in planning the structures you will use. By using the right legal structure you can come up with the most tax-efficient and safe outcomes for the project that you are planning.</li>
<li>Do your due diligence on any purchase regardless of whether you are joint venturing or not.  The old saying of “you make your money at the time of purchase” has strong backing from experienced investors, so heed it.  Check in with town planners and councils that what you plan to do is allowable in their area.</li>
<li>Number crunch your renovation and construction projects thoroughly and repeatedly. It’s easy to blow the budget and your well earned profit margin with it.</li>
<li>Draw up a joint venture agreement to cover changes in circumstances and seek professional advice to ensure you are each adequately inured and protected. A legal document designed to set out the rights and responsibilities of each owner, whilst an added expense is essential to avoid issues in the future if circumstances change.</li>
<li>Get a good financial or investment strategist to run their eye over your proposed JV and point out its strengths and weaknesses.  They are not emotionally involved in the project and will give you an unbiased opinion on what you are planning.</li>
</ol>
Jenna Ford is a finance strategist and partner at<a target="_blank" href="https://www.chan-naylor.com.au/finance/"> Chan &amp; Naylor Finance</a>
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Jenna Ford

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