Newsletter

Loan to valuation ratio
There has been a lot of talk lately about debt. The media like to tell us how good at borrowing money we have become. In fact, these days it is not uncommon for people to buy a property without saving any deposit at all. They borrow the full amount of the purchase price plus acquisition cost – a loan-to-valuation ratio of over one hundred percent.

Is this a good idea?
Obviously there is no single answer to this question that works for all people at all times. Those who decide to take the risk of borrowing all the money to buy a house usually do so because it means they can get into the market sooner and so buy at current prices. Their intention is to save money on the purchase price when the market is trending up. If the property market is booming, and prices are rising by the month, those who borrow to buy sooner may soon have a large amount of equity in their property just because of the rate of capital appreciation. If the market is stable, however, this strategy is unnecessary and can put buyers at risk of losing money in the long run.

Buyers whose loan-to-valuation ratio is higher than 85% are usually required to take out mortgage insurance on the basis that ther likelihood of defaulting on the loan is greater.

Of course, a reasonable deposit is safer and is almost always preferred when there is no upward pressure on prices.

There is no ideal loan-to-valuation ratio that will minimize risk while maximizing investment potential at all times and for all people. As with most decisions to be made in the course of buying a property, the risks and benefits associated with high and low loan-to-valuation ratios vary with the state of the property market at the time of purchase.

* The term used to refer to the relationship between the value of the loan and the value of the property expressed as a percentage is loan-to-valuation ratio.

The 'right buyer' fallacy
Many people think that the way to ensure their property sells for a high price is to inflate the asking price.

Is it really that simple?
In fact, the opposite is often the case. If a property is really overpriced, purchasers just sit back and wait to see what happens. If they’ve been looking around long enough to be ready to commit themselves, they’ve also made themselves very familiar with what they can get for their money and can recognise an overpriced property when they see one.

Many even refuse to waste their time inspecting properties they perceive to be overpriced. The problem for vendors is that the buyers who don’t know what market value is have usually just started looking. They are not ready to buy because they haven’t done their homework yet.
It is common for inexperienced vendors to overprice their properties in the belief that the “right” buyer will eventually come along - someone who will fall in love with their property and pay the earth for it. In practice people buy with their pockets as well as their hearts because for 97% of Australian and New Zealand home owners, the family home is the biggest purchase they will ever make. No one goes into it without making comparisons and weighing up all the factors.

In a sense, there is no such thing as one “right” buyer. Most people want value for money and many houses are “right” when the price matches the property. It might help first-time sellers who think that no matter what price a property is advertised at, purchasers will always make offers to put themselves in the purchaser’s shoes. Buying a house is really stressful. Most people won’t let themselves get emotionally committed to something they feel is never going to come down to a realistic level. It’s easier psychologically to move on and make an offer on something that is more realistically priced.

It’s always worthwhile to leave a negotiating factor when setting the asking price of a property for sale, but the price should be competitive so that buyers will want to snap it up before someone else does. The best price is nearly always achieved in the early stages of marketing.
Fee cuts not always good value
Many vendors think the best agent is the cheapest one – the one who is prepared to cut their commission to the lowest figure. But does the cheapest commission actually represent the best value for money?
It is common wisdom that value for money is rarely either the cheapest price or the most expensive. Why is this? Often the cheapest fails to do the job it was meant to do and the money is wasted; the dearest, on the other hand, is so much more expensive that it doesn't represent "good value for money".

When it comes to real estate agents, the one who gives way so easily when negotiating their fee is unlikely to be the best at negotiating a good price for your home.

Whether going to the dentist, employing a builder or shopping for whitegoods, it is rarely the cheapest that is the best in the long run.
Would you go to the surgeon who says that their point of difference is that they are the cheapest?

Or would you choose the one who has the reputation for skill and successful outcomes?

When it comes to selling what is for most families their single greatest asset, it is equally important to choose on the basis of reputation as long as fees are reasonable and that is they represent value for money
Raising the rent
There has been a lot of media discussion recently about decreasing vacancy rates and increasing rents in many areas.

While this may be cause for excitement amongst many rental property owners, it is important to remember that successful ownership of residential rental property is all about maximising long term net income, rather than the rent right now.

Most experienced residential property investors agree that setting rent at 95% of market value usually achieves a higher income long term than holding out for a 100% or more.
Most property managers carry out market rent reviews on a regular basis and the rents are raised according to supply and demand. Novice investors often think the best approach to raising the rent is to make frequent small increases, but these are seen by tenants as penny pinching and lead to disharmony, increased demands for repairs and higher vacancy over the long term. Experts say that in most cases rent increases should occur when market indicators show that a 5% increase is warranted – so if the market rent reviews in your area don’t yet indicate a 5% increase is warranted, it makes better financial sense to wait until such time as a 5% increase can be justified.