Monthly Archives: July 2015

Strata fees weigh on boomers

Baby boomers often sell the family home and downsize after their children have moved out.

Because many boomers have seen a phenomenal increase in the value of their home recently, some have entered the market sooner than they otherwise would have.

They have been able to consider this windfall similar to that of having had a second superannuation fund. Over the next decade, many more baby boomers will enter the market and sell their family home.

One thing that has surprised many people in the real estate industry though, is that despite long held predictions that baby boomers would leave Sydney in droves for that ultimate ‘sea change’, many are opting to downsize and remain in Sydney.

Well positioned, modern apartments close to the CBD and its infrastructure, seem to be the boomers’ preference.

Modern CBD lifestyle apartments tend to offer superior appointments as opposed to older style buildings, which were not built to modern lifestyle specifications. The flip side of this equation is that superior amenities often mean higher strata levies and fees.

A big consideration for many boomers in the future, if they move into modern
CBD apartments, what are the ongoing fees and levies they will pay over the long term? Whilst rates and levies may be manageable for those who still earn an income, these fees can suddenly become burdensome once retirement arrives and the big incomes stop.

For example, quarterly strata levies of $3,000 will add up to $120,000 over 10 years, without allowing for any increases or inflation. This could be a crippling financial burden for some.

Buying a CBD apartment

Apartment complexes which have high-end amenities are usually the most expensive ones. Gymnasiums, spas, saunas, concierges and elevators are all features which drive strata levies higher on a continuing basis.

If fees and levies seem expensive at the time of purchase, the confronting reality is that they are the lowest they are ever likely to be. Strata levies tend to go up not down, as do council rates.

Furthermore, if a building develops a serious structural or tenancy issue, the strata committee may impose a special levy to fund works or shortfalls not budgeted for.

Prior to purchasing any apartment in a complex, a thorough examination of the strata’s books will help identify any pending expenses or festering issues, which could impact upon your decision to buy.

Buying off-the-plan

Buying off-the-plan can also raise challenges for those seeking clarity on their financial affairs. The expected price of strata levies are not always clear with off-the-plan purchases.

Even when they seem to be clear, there is plenty of scope for those fees to be increased if need be. An established building with a good trading history is usually much more predictable in its levies.

Boomers heading into apartment living will always benefit from weighing up the cost of strata fees and taking inflation into account over the full term of their expected ownership. The only thing worse than knowing about expenses is, not knowing about them.

Non-luxury type apartment buildings where strata fees are less, will hold obvious appeal to many baby boomers downsizing in the future. Many newly constructed high rises in Sydney in recent years, have been overloaded with features that drive the running costs of the building up, for the benefit of only a few in the building.

Trading beyond the evidence

As the housing boom rages on, the market continues to set new highs.

Buyers often have to pay prices that are not supported by recent sales evidence, in order to outbid the competition.Trading beyond the evidence is always risky and nerve wracking – whether you are selling or buying.

In a falling market, as the market sets new lows, sellers often sell for less than the sales evidence suggested. In a boom, such as the current one, the sale price is often above expectations.The sales evidence to date does not support the final selling price.

In this booming market, buyers find themselves paying more for a home than they would have had to 6 months earlier. However when the market is falling – sellers often sell for less than they could have sold for 6 months earlier.

The same principals apply, just in reverse. Selling for less than you could have or paying more than you anticipated, always involves angst.

In terms of the current market, sellers are well advised to acknowledge that the boom will stop at some stage.

When that will be exactly is anyone’s guess. But it will stop. Pricing above the available sales evidence is like playing musical chairs.

When the music stops and prices pullback, those sellers that have deliberately overpriced will suddenly be drastically overpriced.

Given where we are at in the current cycle, pricing above the market and waiting for it to catch up to your price may not be the smartest move.

This is not to suggest that you have to under sell your home. It’s a case of not being overly confident, at what could be the peak of the market.

A subtle indicator that suggests sellers are looking to sell and lock in prices at current levels is the amount of stock on the market this winter. The stock on the market is up in comparison to the previous two winters.

Many of this year’s winter sellers don’t want to risk waiting for spring, when the deluge of stock predictably hits the market. Geo-political events may also be impacting on seller’s decision to lock in these prices now.

Buyers who are frustrated at current prices need to make a decision – will house prices go higher or will there be price relief at some stage in the near future.

There is much talk in the media about a housing bubble and a crash or a correction coming. Maybe there is, may be there isn’t. The only certainty at present is house prices are extremely strong.

Trying to purchase a home on the basis house prices are going to crash won’t do you any good at present. It will simply lead to frustration as the market ignores the thesis of a bubble.

Selling off market. Advisable or not?

Many real estate sales occur off-market. An off-market sale is one which is not publicly advertised to the open market.

Sales like this can happen in both rising and falling markets, but it is particularly common when markets are rising. To explore the merit of selling property off-market, it is imperative to look at this type of sale in the context of different market conditions.

Rising (strong) markets

A symptom of strong markets is low supply and excess demand. Essentially, this means that there are more active buyers than sellers. The main effect of this situation is that excess buyers drive prices higher by outbidding each other for limited housing stock.

When the market is like this, there can be advantages for both buyers and sellers in an off-market sale. Firstly, an off-market sale can save the seller both the effort and cost of a full sales campaign. Secondly, the buyer secures the home they desire without having to compete with multiple buyers.

One drawback from a seller’s point of view is that the competitive nature of an ‘open market’ sale is unlikely when selling off-market. This means that the major question facing vendors who consider selling off-market, is whether they could achieve a better result by listing on the open market.

Selling off-market for a good price in a boom is relatively easy. However, in a boom market, the difference between a good price and a great price can be tens of thousands of dollars, if not hundreds of thousands.

Falling (weak) markets

Selling off-market in a weak or falling market can be a great way to go. In a falling market, the supply of housing stock generally outnumbers active buyers. Knocking back a good offer in favour of going to the open market can be a risk not worth taking in tough markets.

In addition, during the Global Financial Crisis of 2008 when there was a sharp downturn in the market, there were a lot of prized homes listed quietly with agents. They were for sale, off-market.

The owners wanted (or needed) to sell but wanted the sale to be discrete.

Things to consider when setting up an off-market sale

If you want to sell off-market, there are several options open to you as well as a number of things to consider.

a) In a strong market – listing with an agent

The simplest method is to list with an agent but not allow them to advertise your home. In the pre-internet days of print when agents were sloppy with their data management, this would have been more difficult to execute.

Back then, agents chose to hit every home seller for the cost of a full advertising campaign. However, they were effectively advertising this week’s listings to last week’s buyers using the seller’s money.

While it was a complete waste of advertising expenditure, this policy was dismissed as nothing to worry about among agents, because it was paid for by the vendor -‘vendor paid advertising’ (VPA).

Nowadays though, it is relatively easy for good agents to search through a digital database of buyers and match them to the new listing.

Increasingly, there are agents across the country who actively promote the fact that they can sell your home ‘quietly’, ‘off-market’ or by ‘stealth’.

The best agents are those who can produce lists of qualified buyers on demand. An agent who cannot produce a list of genuine qualified buyers before being granted a listing, should not be given that listing.

b) In a strong market – Not selling through an agent

Sellers who have a low opinion of estate agents can fall into the trap where the sole aim is to avoid paying a commission. Selling off-market without an agent just to avoid paying a commission should not be the sole reason for selling off-market.

In a strong market, prices can easily exceed all expectations by 5% or 10% if the agent has abundant competition at hand.

In a strong market, some buyers, who are unwilling to compete with other buyers often resort to prospecting for a home. Whether it be by word of mouth, social media or leaflet drops, a determined buyer will often sniff out someone wanting to sell off-market.

The sheer frustration of constantly losing bidding wars and poor service from agents leads them down this path. A private buyer will usually promise a win/win situation for both the buyer and seller because the agent misses out on a commission!

‘We can both save’ they will claim. Be careful of this claim. It has some traps.

A seller should never enter into an off market contract with a buyer without having a very clear idea of the current market price for their property. The seller would be well advised to get a paid, independent, confidential valuation from a registered valuer prior to beginning negotiations.

Never show this to the buyer or an estate agent. Once you have the valuation report, then call in an estate agent whom you trust. Ask them what they believe the property could sell for in the current market.

Remember that a valuer’s price reflects what, in their opinion, the property would definitely sell for, today. An agent will give you a price that the property could sell for, if given the time to run a good sales campaign. There will be a difference in those two prices.

If the agent promises more than the private buyer offers you, ask the agent if they would be prepared to guarantee a higher price than what the buyer has offered. You could say something like, ‘as we have been offered $1 million privately, to justify listing with an agent we would need to get $1,025,000 or more. Are you prepared to agree to no commission below $1,025,000?’

Whilst this dialogue may be direct, it will quickly flush out the agent’s real belief in the price they promise you.

c) In a weak market

One of the most suitable and justifiable circumstances for an off-market sale is where there is an expensive prestige or unique home for sale in a slow, flat market. In real estate terms, unique is often defined as priceless by emotional home owners. Unique homes often require unique purchasers and they can be in short supply in a flat market.

Prestige homes in Sydney, Melbourne, and Perth often sell off-market because even in strong markets, the auction clearance rate of prestige homes generally under performs the broader auction clearance rate. This makes selling off-market a sensible option for iconic and unique homes, in all market conditions.

Is selling off-market advisable?

In a strong market, the agent’s job is to increase the seller’s price. In a falling market, the agent’s job (inadvertently) is to protect the seller’s price. If you are going to sell off market in a boom, you want the right buyer negotiating with the right agent on your behalf.

In a falling market, a good off market offer may well be the best offer you could see for some time.

Baby boomers are increasingly selling down the family home

Despite predictions of boomers leaving Sydney for a sea change, many are choosing to downsize in Sydney.

A lot of boomers desire a move into well located modern apartment.

The big consideration for boomers moving into apartments is the ongoing rates and levies once they reach retirement.

Paying quarterly strata levies of $2000 or $3000 is a financial burden for someone who is earning. It can become a crippling financial burden for someone not working.

Apartment complexes that have generous amenities are usually the more expensive ones. Gymnasiums, spas, sauna, concierges and elevators are all features that can drive strata levies higher.

Boomers heading into apartment living should consider the cost of strata fees over the term of their expected ownership.

The only thing worse than knowing about expenses, is not knowing.

Apartment buildings with strata fees at the lower end of the spectrum will hold obvious appeal to baby boomers downsizing.

Developers would be well advised to cater to the baby boomer apartment market