Guest Blog: John Lindeman - The property market disruptors
By John Lindeman, Researcher and Educator 7steps2success.com.au
The digital era has ushered in a host of disruptors such as Trivago, Expedia, Wotif, Airbnb, gumtree, eBay, Uber and Amazon. There are even disruptors in the property market, so I investigated what they claim to offer.
Disruptors replace or upend existing markets, industries and technologies in sudden bursts, changing how we go about our daily tasks and the way in which we do business. Given that aspiring property owners and investors face huge obstacles, it seems an ideal business model for disruptors to overturn.
Buyers must raise a deposit, qualify for housing finance and be able to maintain regular mortgage payments. For many, especially those living in capital cities, the dream of home ownership or becoming a property investor seems completely out of reach. That’s when the disruptors come along to provide their solutions.
Got no deposit? – Not a problem
Low or no deposit offers are typically provided by non-bank lenders and vendor finance providers. The issue is that the lender makes up for your lack of a deposit and the higher risk you pose by setting a much higher rate of interest than you would get with a bank loan, resulting in much higher loan repayments.
Project marketers and developers can offer their own deposit grants, cash rebates or deposit cash backs. Some will even offer you double your deposit as cash back after purchase. Others will fully landscape the gardens, include fencing and floor coverings in the offer. All this makes the process of purchase far less painful. But be warned, the cost of these incentives is loaded into the purchase price, so not only will your repayments be higher, but the value of your home is actually less than what you have paid for it, because it does not include the cost of those incentives.
Can’t get finance? – Don’t worry
Rent to buy, or rent to own schemes, sometimes known as wrapping schemes are offered to potential home owners unable to get finance. They are really leasing arrangements, which allow you to rent a property, require you to cover all holding and maintenance expenses and also oblige you to make additional payments. In return, this agreement gives you an opportunity to purchase the property after an agreed period of time for an agreed price.
The issues with these schemes are that you are not the titleholder and have no rights to the property if you don’t keep to the agreement. In other words, if you fail to make the repayments, you can lose everything you have paid. Even worse, if the owner fails to make their own payments to the finance provider, their lender could repossess the property, leaving you with nothing.
Can’t afford repayments? – That’s easily fixed
Land banking is an easy way to get into the property market with low upfront costs and offers you the opportunity of getting rich slowly. You buy land, or an option to buy land from a property developer from a concept plan as the land is not yet approved for development. There are no repayments, so you only need to wait. Years later, when the land is subdivided, you exercise your option and then sell at a huge profit. The issues here are that the land may never be rezoned or developed or the scheme could collapse, leaving you with nothing.
Another opportunity is participating in passive development. With an investment of just a few thousand dollars, you can, along with other like-minded fellow investors, procure the profits of a development without the pain of participating. Although this seems like an easy way to invest, the risks are enormous, as your money is entirely in the hands of the developer. The development company could go out of business, or the development could lose money – it is the armchair developers who take all the risk.
Although the disruptors will keep trying to find new ways to upend the property investment industry, the unavoidable facts are that property involves some of the largest amounts of money that we are ever likely to deal with. Property investment choices and decisions need to be made with a great deal of care.
About the author
John is the In-Depth columnist for Your Investment Property Magazine and a popular contributor to property related media. John also authored the landmark best-selling books for property investors, Mastering the Australian Housing Market and Unlocking the Property Market, both published by Wileys. For more information, visit www.7steps2success.com.au