Episode 93 | How to optimise future property opportunities through best finance structure | David Johnston, Director Property Planning Australia

Post Banking Royal Commission - are lending limits on the rise?

David Johnston, is Managing Director at Property Planning Australia, co-host of the podcast The Property Planner, & author of multiple books including: ‘How to Succeed with Property to Create your Ideal Lifestyle’ and ‘Property for Life – Using Property to Plan Your Financial Future’.   

As a Property Planner and Mortgage Strategist we asked him to explain recent changes to the mortgage industry, including:

• What is a property plan & why everyone needs one before they purchase 

• The property plan conversation - building it around life plans

• Loan structuring tips, risk assessment & extended approvals. 

• How good brokers are helping clients buy quality assets 

• What are the options if your pre approval & bank valuation don't stack up?

• What are the main mistakes property buyers make, particularly investors?

• Pre-approvals:  why postcodes, property type & property title can make a difference

• Why timing your property sales/purchase in the same market matters

• The future of mortgage broking & why all mortgage brokers are not equal 

It’s a great episode, we hope you enjoy listening!

WEBSITE LINKS:
Episode 46 - Lorna Patten, Why wishful thinking costs you more

GUEST WEBSITES:
David Johnston - Property Planning Australia
Freebie: E-book “How to Succeed with Property to Create Your Ideal Lifestyle – The three steps to success and the seven critical mistakes”  
Podcast: Property Planner, Buyer and Professor Podcast 

Work with Veronica? info@gooddeeds.com.au
Work with Chris? hello@wealthful.com.au

EPISODE TRANSCRIPT: 

Please note that this has been transcribed by half-human-half-robot, so brace yourself for typos and the odd bit of weirdness…

This episode was recorded on 11 September, 2019.

Veronica: You're listening to the Elephant in the Room Property Podcast withere the big things that never get talked about. Actually get talked about. I'm Veronica Morgan real estate agent buyer's agent, cohost of Foxtel's Location, Location, Location Australia and author of a new book "Auction Ready how to buy property even though you're scared shitless".

Chris: And I'm Chris Bates, financial planner, mortgage broker, and together we're going to uncover who's really making the decisions when you buy a property.

Veronica: Don't forget that you can access the transcript for this episode on the website as well as download our free fool or forecaster report. Which experts can you trust to get it right, www.theelephantintheroom.com.au.

Chris: Please stick around for this week's elephant rider bootcamp and we have a cracking Dumbo the week coming up.

Chris: Before we get started, everything we talk about on this podcast is general in nature and should never be considered to be personal financial advice. If you're looking to get advice, please seek the help of a licensed financial advisor or buyer's agent. They will tailor and document their advice to your personal circumstances. Now let's get cracking.

Veronica: We've all heard about financial planners. After all, Chris has one. I recommend everybody who wants to invest should consider engaging a planner so they break out of their own thought bubble, make sure they get their structuring right, avoid pitfalls and consider all the options that could get them to where they want to be financially, but what about property planners is less of them on the ground or mortgage strategists? What the hell is a strategist anyway? What's the difference between a strategist and a broker? Do we really need a mortgage strategy? Aren't we just after the cheapest rates? Well, I think you know where I'm hitting, we'd big decisions that commit us for decades were hundreds of thousands of dollars. If not millions are involved where opportunity costs can unravel our plans without us even realizing we need expert advice from a number of different quarters. In this episode we pick the brains of David Johnson who happens to be both a property planner, end mortgage strategist.

Veronica: David is the managing director of property planning Australia, a cohost of the roperty podcast, the Property Planner, buyer and Professor with Cate Bakos & Peter Koulisos, that is a very long name for a property podcast by the way. Um, both, both Kate and Peter have actually been on this podcast before, so you're the, your completing the try the traffic, all the trombone. David is also the author of multiple books including "How to Succeed with Property to Create your Ideal Lifestyle", which he is kindly making available as a giveaway for listeners. So keep tuned in order to find out how you can get your copy and Property for Life - Using Property to Plan your Financial Future. David and his team are passionate about educating and empowering professionals and families to create their own personalized property plan, mortgage strategy and money management system and have been doing so since 2004. He's also fiercely independent in terms of these advice and these company calls, what he calls pure planning means they don't earn any dollars from buying or selling property or selling any investment insurance or super products fee for service. It's a model I certainly believe in. Thank you very much for joining us, David.

David: My pleasure. Great to see you again Chris.

Chris: Yeah, and I mean, I guess for our listeners here, bit of backstory. David and I used to work together. I used to work for his business, Property Planning Australia. Um, and I mean it's a bit of a thank you really. I mean a lot of what I know around mortgages and, um, the importance of, um, structuring mortgages the right way does come from this man. So I thank you for all that.

David: My pleasure Chris.

Chris: but I mean it's interesting because, um, you know, it's one of my frustrations. I've been trained to look at mortgages a little bit differently than most mortgage brokers and um, you know, it comes down to what I guess something called the property plan, the thought process behind what the property plan is. Um, you know, David's probably the guy who invented I guess. So what to you is the property plan and why is it so important rather than just go and get a mortgage?

David: Well, the property plan is essentially creating a longterm plan for life's most valuable asset class. And people jump into that decision with I think often not enough, uh, pre-work and analysis and research, not only on the property market and the asset class, but right back to starting with your goals, your cashflow. Um, how do you manage money, how much money you trapping, how much setting money goals. Hm. How much money are you then going to put towards a property? Uh, what is that next property decision going to be? Is it going to be a home or an investment property if you go one way or the other? Because it's the only asset class we live in, which adds a whole level of complexity that I think is not talked about enough. I think the home buyer component of property buying is, is really neglected. And so that's something that we focus on in every one of our property plans.

David: So, um, you move, you move really, you know, there's a series of decisions that lead to the final selection of the property. And when I was a young whippersnapper, Chris says at 24 year old and came into this fledging mortgage broking industry that no one knew what a mortgage broker was. Uh, 20 years ago. Um, I started to realize my clients wanted to learn about how to make better property decisions and I couldn't help them. And then I discovered there was no way you could go for independent property advice. And I found that pretty surprising and I set up property planning Australia if they knew a go and have been on a journey of discovery in many regards ever since trying to build a great unique product and service for Australians.

Chris: So you know, let's say I'm comparing your business to a traditional mortgage broker. What's the you know, and obviously not all mortgage brokers are the same but no can transactional type of mortgage brokers there to get in the rate and that's what they think they are comparing that service to yours or theirs, what do you think the major differences are in terms of what you provide?

David: I think we start with analyzing what people want to achieve in life. And then work backwards from there. Everything we do is to live a better life. And I think we make poor decisions when we lose sight of that. You know, this morning I, I work from home on Wednesdays, my highlight so far today has been taking my five year old and three year old sons to kinder and preschool. You know? And so we start with looking at those aspects and work downwards from there. And I think it so often we start with the end part in mind, whether it's buying a property, whether it's an interest rate. And so with mortgages in particular, you know, you can manage risk through your mortgage. It's the most expensive cost in our lives yet, you know, we only focus on small components of it. Your buffers, you can set up how you manage your cashflow. You can set up offset accounts that allow you to set up money management systems that interact with your mortgage, redraw. You can optimize your tax deductions, you can optimize your ability to hold future properties in the future as you accumulate more properties. But you can put, you can only do those things. And set them up and optimize your future opportunity if you do them early on and you have to have a longterm view. So yeah.

Veronica: It's a danger. I think about my own start in property. You know, the first property I bought back when I was 27 and the mistakes that I know that I made and through lack of advice, lack of understanding that there might've been some way to go and get advice, they may or may not be, I don't know. But at the time it wasn't. It certainly, even now, I think predominantly it's not and considered that you need to get advice because everyone just thinks around particularly buying their own home. Well, we should all just be able to do that. But there are so many aspects, as you mentioned, the whole chain of events that leads up to the point at which you might sign a contract. Um, all those little decisions that get made along the way. Um, you know, and then afterwards while you are in that property before you actually decide to upgrade or renovate or whatever, that the entire life of, of an individual at or a couple or um, as they deal with property in one form or another is, is, is littered if you're like as even like the word but littered with decisions, little decisions that actually, um, often we don't understand the implication of. So it's, it's interesting that you sort of saw that so far go and realize nobody had anywhere to go for advice because I guess people think more, I'll go, I'll go to a real estate agent.

David: Hmm. Yeah. Well I think that's what people thought back in the day. And I think, you know, mortgage broking where I started after I left the bank can be pretty boring if you don't actually try and explore all these kinds of things. So you know, it actually is about your personal development, trying to understand all those different ways that you can create wealth and manage your risk through your mortgage. Beyond an interest rate and just understanding what products do

Veronica: Are you sort of been, you call yourself a property, planet animal who strategists, and yet in this conversation thus far, those two things seem to have been very melded together. Is there a distinction between the two?

David: Yeah, there is. So we've got our independent property advice, which is pure fee for service. And then we have our strategic mortgage brokers. So although they focus on mortgage strategy in detail, they also do mortgage broking. But one of the things that I put in place about three or four years ago was a fee for service option for our mortgage strategy service. So if someone wanted to just pay a fee and get the mortgage strategy, we've created a very detailed mortgage strategy report that we provide for people. Every everything we provide to our clients we built ourselves. And then people can pay a fee for it and then go and select the lender themselves. And that is to ensure that we remain true to our goal of being fiercely independent. Yeah. But they, they're very distinct, different areas of the business that the property advice and the, and the mortgage broking.

Chris: So what are some of the common traps that people get themselves into with mortgages that, you know, they just go and select a lender and just didn't know what they didn't know and then a few years later they go, Whoa, I didn't realize I shouldn't have done that.

David: I think they're, one of the main, um, mistakes people make is, particularly when they're investing, is not structuring their loans the right way to optimize their tax deductions. And I think a lot of the mistakes can feed into that. So they own multiple properties. They mixed debts together so they're not maximizing their tax deductions. They, uh, want to keep an existing home when they're upgrading and they have paid down a lot of the debt, so they haven't optimized their tax deductions. They also have an optimized their savings to go towards a future home so they can have more debt on the future home or that less of a case to be able to keep that first property. You would have seen a lot of mistakes, Chris.

Chris: Yeah, I mean that's a really, let's, let's talk about that one there because I think, you know, this is the one that, which is very common, you know, clients will buy a property. They didn't get any advice when they purchased that property. I just went and got a mortgage. They didn't know whether to get an 80 loan or 60% loan or 70 cent loan. They just went and selected the right loan. They'd put all their money in. So they might have got a low loan. They might not even have borrowed it 80%. And then I, um, they bought within their means cause that's what society told them to do. And they bought a little place, not a place they can grow into. And then they save really hard and then they paid that property off and then they get to a point where they go, we're outgrowing this property, I want to upgrade.

Chris: And then they go see a broker to do it and they say, I want to keep that property. Um, and then the problem here is that the property has got no debt on it and, um, really their only option for financially is probably to sell that property. Um, and so, you know, because of the tax situation and so even if they do want to keep it and as a good asset, they really have to sell it and buy it. You know, that's a big, you know, if they did see a mortgage broker originally likes, you know, someone with a property clear mindset would've said, maybe let's borrow an 80%, let's use an offset account. And then they would have potentially had the ability, might have one interest only, um, to keep that property. So that's a big one. I mean, what about some of the little small things in the mortgages itself though? Like, yeah. In terms of discounts and things like that, are all lenders equal? No discounts always locked in. How does that work?

David: Yeah, I look at, I don't do the actual mortgage broker anymore and haven't for a little while, so I'm not as close to it as I once was. Uh, you know, we've got a team of six or seven mortgage brokers, but it, I don't think it's changed too much. The, you know, some lenders will guarantee and ongoing discount, whereas others won't. Um, you know, people chasing low rates with, um, smaller lenders who have to, it's harder for them to access funding, uh, come under pressure. You know, I've been around 20 odd years now and you see when they come under pressure for their funding, they bump up rates. So people entered a really low rate, um, but then they ended up paying much higher over time. So that's a risk, uh, that can happen with, with discounted rates.

Chris: Yeah. So, I mean there's definitely, I mean there's a lot of, um, in the last few years in particular, a lot of borrowers have had to go to non big four banks because their servicing got limited and they went to smaller lenders like non banks. And what Dave told them that there is, if those non-banks get their funding cut, they, they're more likely to put their rates up. And so it's a big risk for people using those lenders and they, you know, entice you in with the low rate and then you get in and then you've got that risk in terms of, um, you could've made a decision as a business though to uh, around the property selection to look at lots of different properties both new and established and things like that. What decision did you make back many years ago and how did that kind of play out?

David: Well, I came to learn as you to know that um, there are a lot of risks with newer property and the actual land to asset ratio is often quite low. What that is, is the overall percentage of the value of the property that is made up in the land component, um, is quite low with new properties. Uh, and the actual building that sits on top of the land or the national land in the apartments is depreciating quite rapidly. So we, uh, looked at land to asset ratio is one of the foundational pieces to determine what types of properties outperform. And generally the land to asset ratio when it was above 50% was established property. And we, we had buyer's agents in house, you know, 15 years ago before most people knew what a buyer's agent was on the exploration of, uh, ultimately the path way of the business that we've gone down. So we've, we've mainly bought established property with good land to asset ratios, uh, because fundamentally the land, as you both know, does the heavy lifting, uh, in the capital growth and Australia's capital growth has been historically very strong.

David: And it, you know, the growth is growing the biggest dollar value of the asset, you know, rather than the cashflow. So residential property has been a asset, capital growth play predominantly where you maximize your money over the long term. And you know, I try to have tried to look at property as if it wasn't anything at the end. It other than a dollar figures. So break down what are the numbers really not even dollar figures. Break down the numbers and what are the numbers doing and what are the numbers telling us and what are the two, what are the components of the asset and one is land and one is dwelling and, and analyze those days still in terms of the dwelling play absolutely plays a part and you need a dwelling for the yield. Uh, and it costs a lot to change an ugly floor plan. Uh, you know, there, there's a beauty to certain properties and you know,

Veronica: There's certainly uniqueness around certain architectural elements, et cetera, et cetera. Yeah. You mentioned the word outperform though. How, what, what do you define as outperforming or how do you measure out performance?

David: Well, I like to try and keep things simple. So really it's above the average capital growth rate and use average rather than median. Well average when it's a, when there's lots and lots of numbers, um, median in terms of values but maybe average on capital growth rates. It really, it depends on what the different data providers, how their methodology and looking at their numbers and then assessing it. The thing that, that we, you know, is really powerful with property and for people to remember is you only need a 1% out performance on a asset figure of hundreds of thousands of dollars, millions over time, millions over 20, 30 years, you know, goals have been to help people buy as few properties as they need to reach their goals and try to sell as few as possible. And you know, as you mentioned before, um, I've made the mistake, that mistake we've talked about before I sold my first property because I didn't understand the mortgage strategy at that point. Uh,

Chris: That's an interesting point is it goes against, um, you know, property magazines. Um, you've just mentioned there your, the goal is to, uh, buy as few as property as possible. That doesn't make sense. Listeners, why be thinking because you're a mortgage broker and you know, you're not gonna get paid as much or something like that. Right? Because your goal is to, you know, buy lots of properties. And then you said sell those few. So tell us why those are the two things that are important because um, yeah, it's interesting.

David: Well, you don't need to own lots of property to be wealthy. Some of our wealthiest clients, only own two to four properties. The family what they own, right? That's right. Exactly. And you know, paying down debt and having strong capital growth and holding for a long time, you know, common boring isn't it? It's really boring and that we want to help. Fantastic. Boring strategy is sounds boring. I've got 10 10 properties.

Chris: It's interesting you say that though because you're saying some of the wealthiest, but um, I mean, how many clients do you reckon you've probably seen over the last 15 years, you know, as a business, I guess

David: How many of I personally as a business, how many do you reckon? 10 over 10,000? Yeah, yeah, yeah.

Veronica: That's a quite a Um, significant amount.

Chris: Yeah. And it, all of that, you know, have you seen many that the quantity strategies that's actually worked for people?

David: Uh, I've stayed at work and it has worked. Uh, but it's outside the risk profile of most people and it's outside the financial capacity of most people. And I think, you know, you could also potentially make a case and maybe it's just me getting older and more conservative, whether the property market is going to have the same longterm capital growth rates. Now, you know, average income growth is lower productivity is stuck, lower interest rates are lower. So yeah. So, um, the ability to be able to buy multiple properties live off the equity fund, the next purchase. Like, you know, some clients, some of our clients have and they've been really successful, you know, they've got 10 $20 million portfolios, but that, that's their, they're not even in the 1% yeah. They're in the 0.01%.

Veronica: And so what have they had or did that was different to everybody else?

David: I would say high income. Okay. The where with all in the first place. Yeah. High income, uh, higher risk takers and purchased predominantly in major capital cities and mainly Melbourne and Sydney where most of our clients have bought.

Veronica: And this is a bit of a problem with that sort of selling the dream of the quality or the quantity versus quality is that quite often as the people that don't have the high income and they're actually seeking to make up for the fact that they don't ever know income by accumulating property and they're trying to fast track things as opposed to having a high income and then wanting to make the most out of the fact they've got this cash flow. It's a very different way of approaching it, isn't it?

Chris: Yeah, I think you're right. I think that, you know, a lot of the way the property sold is, you know, substitute your income, additional income, et cetera. And so people who are kind of cutting it fine January tend to take the biggest risk because they end up buying the cheapest, most risky properties and then all of a sudden they've got four or five properties and the cash flow is really tight and then it takes one little [inaudible]

Veronica: one little mining town crash.

Chris: Yeah, that's right. Especially if they've crossed the queue and they've got to play down there at all. Kind of unravels really fast.

Veronica: But you talked about also their, their higher appetite for risk. And so the reality is if they're buying lower risk properties, even though the dollar value of each purchase is going to be higher, you could argue that that's actually not high high risk at all.

David: Yeah, yeah, absolutely. I think so much of what we do is about optimizing probability of positive outcomes for our clients and that feeds directly into risk management and so that, yeah, buying in the capital cities because of the underlying economies, job opportunities, hiring comes, it's more expensive to get into, but it's also going to have with more certainty. Yes. Yeah. A longterm demand,

Chris: right. In terms of, um, mortgage strategy that, you know, in terms of like, um, cause I've thought of people are first time buyers, right? And so they go, ah, I don't ever pay lenders mortgage insurance. You know, can you explain why that is? Sometimes a bit of a false economy and it's not really a good idea. Sometimes you should pay lenders mortgage insurance.

David: I think if for historically the property market has grown at a rate faster than most people's income, that's probably that simple. You know, if you wait too long to save your extra 15% or you know, if you're starting at 95 and as, as we 95% doesn't mainly need 5% it means about 15% because you need some money left over after you settle.

Veronica: Costs and buffer.

David: Yeah, yeah, yeah. And so, um, if you're, if you're waiting too long, you know, time is, uh, for forgives a lot of sense. You know, and if you select a half decent property and you get in nice and early, you create opportunity because of capital growth and because of inflation and because you're a young person, your income's likely to continue to grow. If you're in a couple, you might be not have kids, but you've got two incomes. So you've arguably got your largest surplus cashflow that you'll have, you know, until you have kids.

Veronica: Yes. It might also give you opportunity if you've got serviceability to actually buy a better asset, then you would if you were trying to get your budget smaller so that you could avoid LMI.

Chris: Yeah, I mean definitely. So if you've only got a cut $200,000 let's say, and you want to avoid lenders, mortgage insurance, you could probably buy something around 750/ 800,000 but if you want to pilot a little bit of lenders mortgage insurance, maybe you could buy us on the a million or $1.1 and that could be the difference between buying an asset that you might outgrow in a couple of years versus an asset that you could live in for 15-20 years, you know? And that could be a much better decision. So just avoiding that lenders mortgage insurance fixated on that really limits your options because you use, you end up shopping in an area and it might not be get you a great asset or not the right asset for you. The first time buyer is definitely one part. But then another big customer for you would be, you know, the upgrader, you know the person who's got a property but then they want to move into another property. Yep. I feel like a lot of brokers will, you know, just do the easy option, sell your property and then come back to us and then we'll help you on the buy. But what some of the things that a good broker can do to really guide someone through that whole decision?

David: Well, there's so many decisions to make if you're buying and selling simultaneously, particularly if you're in the fortunate position to be able to keep the property that you're currently living in. And that's where the mortgage strategy can make a, making a huge difference to your ability to do that. But if you're not in that position, then timing is really important. And one of the first decisions you need to make is that you're going to sell first and then buy, or are you going to buy, which has bigger risk and then try and sell. And so taking the time to talk through the decisions around this process of upgrading is a big part of, yeah. What a, what a quality mortgage broker. Probably planner buyer's agent should help people do.

Chris: And so I guess why would you potentially go down the by route first versus the cell first? And you know, cause a lot of people would just think, Oh, we'll just take the easy option and I'll just sell first. Um, but then there's risks to that. Right. And then I guess it all someones as are buy first. There's risks with that option. So what are some of the pros and cons about, you know, going down different strategies?

David: Well, with buying, first it makes more sense if you're in a market that is, uh, on the upward swing at a reasonable trajectory because every a day of delay, uh, the market's costing you more. So the sooner you get in, uh, there's the, the, the lower price you pay. And the more likelihood that if your property is in a similar market that it, you're going to get a better return on your property.

Veronica: But any other issue with, a buyers markets are, sorry that is a seller's market. We're talking about. The other issue with that sort of market conditions is that the availability of this sort of property that you would want to buy is going to be generally lower. And also the competition for that property is going to be higher. So it's actually a harder thing to do is to buy it that it is to sell. Absolutely. Yeah, yeah, yeah, exactly right. And then the higher you go up the totem pole in property prices, the more scarce they are. Yeah. So you can be out of the market for quite a long time if you've sold, um, you know, waiting, waiting, waiting for the right property to come up. I actually in the, in the, um, in the last boom, um, I had people coming to me after having sold and then being out of the market for two years. So basically some people had sold in 2013, for instance, came to me, 2015 couldn't buy their old house back. You know, they priced themselves out of the market that upgrade gone. They can't send the same area they have to forced took them that long to, you know, get over the grief of it and went, Oh my God, I need to really radically change my whole approach. Um, so, you know, there's, there's some real dangers with selling first, you know, given what it would do it, depending on what the market's doing.

David: That's a huge danger, you know? And this is why you need to put your ducks in a row beforehand, buying and selling, whichever one you do first, you've gotta be ready to go on the other. Yes.

Chris: Yeah, that's a good point. So, you know, if you are going to sell first, there's no point going to a real estate agent because they're gonna want to sell it. So they're going to be saying, let's put it on the market. Right? And they're probably going to overinflate your expectations potentially. So, but you need to get real really stick of what you're going to sell it for. But before you push the button on that, you really need to figure how much money am I going to walk away with? You know, let's say it's 300,000 or 500,000 and then can I get a loan right now for the property that I want to buy? Because you know, it's not, you know, if you go to a mortgage broker and you say, they might say, well we know you can't actually borrow at the moment because you know, you're only on one income and your partner's is on maternity leave or you know, or you know, for some reason the bank lending or you've just started a business, um, and you need two years.

Chris: So you really need to make sure you can borrow the money you need to on the next purchase.

Veronica: But then you've also got to understand what it is you can buy and what the possibilities are. So we actually have a service where we are, we do that, that session with people to educate them as to what the possibilities are. And we asked them to go there broker at first so they fully understand what their capacity is and then we sit down and we get them to fill in wishlists and say, right, let's show you what you could have bought. So in the last three to six months, depending on, so we're basing it on what really is in the market and actually going through all their different options of various price points to, and also getting rid of that needle in the haystack mentality as well. Um, to say, right, you need to have your absolute crystal clear understanding of what your possibilities are and where you're going to be looking at, what you're going to be buying and what that's going to cost you before you put your property on the market so they can hit the ground running the minute you get an offer. Absolutely. Yeah.

David: So vital, and this is why we ask in our probably pathway questions that we start with at the beginning of the property plan journey. One of the questions we ask everybody is, do you plan to purchase a future home? Because we really need to consider, okay, what would that look like? And then we have a run a bunch of questions around the home location, the type of property, the land size, the dwelling, what are your priorities for the location? We have about 10 options and they need to prioritize them. One to 10 what are the suburbs you're looking at? What's the price range? Because the sooner you are thinking about your future home, if you have one, the better. And we've got a great example of a client of ours who missed out on a property about seven years ago before they were clients of ours. This has subsequently, uh, they became clients, but they missed out on property for $900,000 in Hawthorn East. They bought it two or three years later for $1.6 million, same house, same house.

Chris: and that, and then what'd they do for that two or three years? Did they buy something else and then try it? And now they're just waiting for the market to fall. Yeah.

David: That's what now hoping.

Veronica: Yeah. Yeah. And they finally worked it out. Oh, it's not gonna happen.

David: exactly. Yeah. Yeah. And they, because they didn't have clarity on like they were looking between Hawthorne East to middle park.

Veronica: Oh yeah. Yeah. And what I find to the buyers, what they will do, they'll go on this sort of linear, you know, this sort of curvy swervy linear project trajectory. So they'll start here, Oh I don't really like what I can get for my money here. So I'll go and look in that suburb over there and then, Oh I don't really like that made me go back there. Oh there's actually something over there. And they can't physically cover all of these in one at one time. So it's very linear. You know, when you need the helicopter approach and pull up and go right where you got it, you've got 5% chance of getting what you want in that area, you know, through scarcity or whatever you've got, you got 90% chance of getting it over there. You need to spend all your activity or your energy over there. But don't forget 5% cause you never know. You might get lucky, but cover the whole lot. Don't just focus on the 5% or spend your all your time in the 90% or and go, Oh, but I really don't want to be here. Cause you haven't really, really come to terms with the fact that well you can't actually afford where you want to be. Yeah. Yeah. It's really hard.

David: It's a really hard journey trying to buy that ideal home. Uh, but the sooner you start getting clarity on it, the better. And if we can help people have a framework to work through, you know, anything. As we get older, we realize that we're trying to figure out and project manage. Having a structure and a framework to manage the project really helps. So that's part of what we help our clients do as well.

Chris: Yeah, I think that's um, you know, the conversation generally though, when you would walk into a mortgage broker, and I think a lot of listeners would have had this experience, is that the mortgage broker isn't too concerned about what you're doing. You know, they're not really going to ask you too many questions around the asset you're buying. You know, they're not going to say if that's a good property or not. I doubt very few would probably ask, you know, is that going to be your future home? Are you going to have kids? Um, et cetera. But really you've got it before you go and buy property, you've really got to know, um, have thought about your future home. You know, if you are going to have kids and things like that, are you going to, cause if you haven't thought about that and you go and buy an investment property, then you go and, Oh, actually we want kids and we've got a one bedroom unit, what are you going to do? Sell the unit and then go buy a house. And so I think that's one of the biggest, you know, value adds that you can get going and seeing a bit of a strategist with a mortgage that actually cares about those things. Because I'll ask you the right questions.

David: Yeah. I think a good strategist, mortgage strategists, property planner or buyer's agent will talk through those things and they won't be F, uh, predominantly focused on making a sale.

Veronica: Well and yes. And the same problem is with buyer's agents. Of course, you know, if you're not, um, dealing with the buyers agent who's asking those questions, really just to clarify, it's a massive big commitment, buying a property massive. And you know, if you haven't actually thought through, even next year, they'll own five years, 10 years, you know, all that sort of staff, then take a moment for God's sake. You know, because once you're in it, it's like that turnstile you through the turnstile. You can see where you just came from, but you can't get back there, you know, you committed. So, so getting that right is so critical. But I know a lot of buyer's agents are saying that they're very transactional. It's like, Oh, you want one of those? Okay, I'll go and find you one of them. And it's like, well, can we just check for a minute? Whether that is really, you know, am I, I don't believe in my business, I'm properly serving the client unless we actually properly advise them. And sometimes that means telling them things that they may not want to hear, but it's, if they still choose to do it, that's fine. But at least we've actually educated them along the way.

Chris: Well, that's a good point actually. I mean, what are some of the things that you do say to clients where, um, you know, they're not what they want to hear and not what they were expecting because I think that's a really interesting point because, um, yeah, that's the experience they would get. Right.

David: Well, I, yeah, so, um, I absolutely, I think that one of the, the qualities of a, uh, top notch advisor in any field is you're willing to say things that your client doesn't want to hear. Yeah. That unpopular. Yeah. Yeah. Bed bed. The reality is people want to hear that.

Veronica: Some do.

David: Yeah, that's true. That's true. That's a smaller percentage. Downton. Well, unfortunately they're probably going to end up with poor quality advice,

Chris: no advice, because they know us validators. And so that customer walks in and they are thinking about, you know, I get this, you know, sometimes, um, and they will have a strategy and I'll, I'll say this is what I think about it. You know, it's, you know, I'm very careful how I say it. I'm not [inaudible] like, you know, position it in a way and you know, massage it through. So sometimes it's, you know, it's digestible, but if they say, look, they want someone to validate what they do is then they're not really a client that you want as a business. Because if, if it upsets them, that's fine. But if that's the right advice, they need to be able to deal with that. And then they're going to be a client for life anyway.

Veronica: Absolutely. Say out to to potential clients who are sitting down in front of them and you know, they might pay us or pay us for a strategy session. So that's a really just a one-on-one, you know, 90 minutes. We actually go through their situation and give them three points to go next. Right. So it's like get put them in the right direction. I sat recently with some people who had this crazy idea and I'm like, Oh, okay, your minutes are ticking away. There's on many lives there. 90 minutes left on. And finally I just said, right, okay, we can go two ways here. You're paying me for my time. I could either just Pat you on the back and tell you that yes, yes, you'd want a great job off you go in going Nick to go and feel good about yourself. Or I can tell you what I actually think, which is probably not what you want to hear. Now I'm going to give you the opportunity this moment to tell me what service you want me to Pat you on the back or you want a clever person you are and you can just go off picking nothing different or I'm going to open your eyes to a different way of looking at that. And it's up to you then what you do. And you can see they really had to think about that because truly they wanted me to Pat them on the back

David: That's really well expressed. Uh, you express that so well and you probably realize that people who wanted to be patted on the back, which is why your position,

Chris: your experience, those clients, have you found that when you have said that they don't want to hear, you might lose them initially, but do they come back years down the line?

David: Yeah, I look absolutely we've had clients or people who you've had a conversation with two years ago and it's taken two years for the conversation to resonate.

Veronica: The penny to drop yeah, exactly. Give us an example, I've seen no naming, no names.

David: But yeah, look, I mean the probably the most common example is when people have considered buying off the plan and then you know, you've shared with them why they are high risk or just say the higher risk, you know, because a small percentage of them can work if they have something really unique about them. Yeah. Um, but you know, then they've experienced, they've read, they've watched, they've looked and you know, the pennies dropped. A couple of, you know, sometimes you have, they've actually made the mistake, they've gone, gone and made the mistake and then come back. Yeah, yeah.

Veronica: Already sunk so much in it. They did it anyway.

David: Absolutely. Yeah. And you know, I actually had one of those, funny, we're talking about this because I had a, one of those conversations yesterday afternoon in terms of two thirds of the conversation was talking about something the potential client didn't want to hear because he's looking at buying an off the plan property. He um, doesn't service the amount of debt he'd need to take on. Ah, yes. Okay. But he's planning that this property will go up in value in four years time.

Veronica: So he's got a crystal ball

David: He's rubbing the crystal ball and this is a really smart guy who runs a successful business that he started and he wants to say the bright lights. And mainly he's excited by the concept, you know, and it is a bit of a unique, um, off the plan opportunity. You know, the price points are two to $3 million and you know, so I'm just trying to frame it around risk, you know, if you can. Yeah. Yeah.

Chris: That's interesting one though. Cause a lot of listeners wouldn't have thought through the real risk there. There's two risks there the in two or three years time or four years time or whatever it is, it is it worth and um, you know, it's not only is it not worth what he paid, but it's, you know, it's worth less. And so that's always, yeah, that's happening now, which is a lot of brokers who deal with off the plan space. I know, Dave wouldn't do a lot with it unless clients come and they really want help and I'm sure you would help them. Yeah.

David: Don't give if someone's bought off the plan where you help them. Absolutely. We send mortgages. We don't advise buying off the plan almost ever, but yeah, yeah, exactly. Yeah.

Chris: And they still want good mortgage advice and yeah. And we've got to help them. And so, you know, and um, you know, we know that it's not quite, because a lot of the time we do have valuation problems and we do have to get people out of the messy situations and do multiple valuations, et cetera. But that's the settlement risk is something's really coming up. But the real risk with Dave was just the hallway and there were just a lot of gloss over a lot of people is they signed the contract in 2019 and then this guy thinks in 2022 he's going to earn enough money that he's going to be able to settle on that property.

Veronica: because you already said that he can't save a sit now. So he's banking and betting on his own income in four years time. That's massively risky.

David: That's hugely risky and you know, are great. One of our great strategic mortgage brokers and he's been talking to a number of mortgage brokers and he said, our strategic mode mortgage broker who has been dealing with has been fantastic. You know, he's going to use him, but, um, he wanted to have a chat about the property side of things and estrone take all our strategic mortgage brokers have a level of property expertise is, you know, you learned obviously Chris, a lot of property grounding with us and um, and uh, not taking credit for all your knowledge. Yeah. Um, but uh, yeah, so he wanted to have a chat with me about the property, uh, side of things and um, you know, that borrowing capacity pace, not having the borrowing capacity, the risk around that is, is monumental.

Veronica: Let's talk about that a bit more because.

David: He doesn't have that savings at the moment either settle on it. LVR or,

Veronica: So this is a thing though that, that I've often spoken to people about. They say that off the plan is so good because I only have to have a small amount of money and I can use the rest of the time to save up the rest of the deposit. Um, you know what I mean? Like it's so it's like the sailing's high close to that when there's, it is, yeah, there is no margin for error. If that property ends up being valued at less than the contract price, you know, uh, apart from the fact that is their income and serviceability, do interest rates do what we think they are going to do between now and then. There's so many variables and yet they're trying to jump into something well before they actually physically are able to.

Chris: That's exactly right. So what day was just the second point? There is no, he hasn't got the income level that he needs when he wants to settle on his property a years later. That's risky because he runs a business as that as an example. And if that business doesn't perform as he expects, we're all a bit optimistic in the future and the world reset, who knows? We just don't know. Savings savings risk is also another one. I've seen this as well. If you haven't, you know, and with off the plan you generally need a 20% deposit. Not an, a lot of lenders won't want to do LMI on them. And over 90%. 80%. There are a couple that will, it's not to say they won't, but there's only a handful

Veronica: what does that say about their perception of the risk.

Chris: Well, it's funny actually because one of the banks that does it is actually a really conservative, ING do over 80%. Um, but you know, generally they're a bit more conservative. Um, and so it's, but you know, if you haven't got the savings, um, and you've got to then say that money over that year or two years or three years, what have you, if you can't save it, yeah, things pop up. Yeah.

David: Well, what happens if you can't say, but what happens if a LVR has change lending policy? You get sick, your income doesn't grow, interest rate grows out, properties go down.

Veronica: It just shows the massive naivety and thinking, we'll go back to her. So we did a wishful thinking episode back in the 30s. what is it about wishful thinking? That's a great example. You know, there could have been your property Dumbo, but I'm sure you've got an even better example. Let me give to that.

David: Well this guy's clearly an optimist and he's a successful person and so some of his positive character traits and taking over in this micro example think there's the Dunning Kruger effect, which is, you know, when we don't know much about something, we think we know a lot more. Once we learn a bit about it, we realize how much there is to know and then when you can become an expert, you actually can lose sight of how much you know. Yeah,

Chris: So the elephant in the room is 100% for you.

Veronica: The reason that Chris and I do this podcast is because we passionately believe that property buyers can do it better. We really want to help all of you understand all the risks, but also the ways in which you can avoid your elephant making the decisions

Chris: So what we would love for you to do is just to share this episode and share other episodes with people around you that are going through the property process.

Veronica: Give us a review on iTunes. Five-star, please would be very appreciated because this is about making sure that we all benefit from the wonderful information that our guests have been sharing with us.

Chris: preapprovals was, uh, something that, um, you know, a bit of a funny topic. You know, a lot of people, um, think they're preapproved and they're not, you know, can you explain how that is a bit of a problem that especially I think it's starting to go there now even more. So how is this problem? Um, how is it a problem? Well,

David: as you, as you know, you guys know, I mean, no preapproval is a guarantee of getting financed full stop. Now, it's absolutely worthwhile to get preapproval before you're negotiating a purchase or bidding at an auction every single time. But it's, it's not, um, a certainty that you're going to get finance because they need to reassess that your circumstances are still the same as they were when you applied for the loan. Lenders have pulled back in terms of, uh, allowing the preapproval to last so often, Sony three months rather than six months. Sometimes some lenders don't have a human being assessing it. Computer says yes. Uh, so, um, and, and also if the external economy outside of, you know, we talk a lot about, I'm a fan of re understanding your internal economy, your personal economy and making your decisions on your own personal economy predominantly. But then if the external economy does change, if rates go up, well you can't borrow as much, you know, because benchmark assessment rates are likely to go up as well. So, so there, there's a number of risks.

Veronica: Yes. And that's the fee and the property. You haven't talked about the property and when the evaluation comes in? Um, you know, because people often think, Oh well the bank will just go in at auction price for argument's sake. And they may or they may not.

Chris: It's, that's a really good point as well. I mean, in the past, you know, lenders would have pretty simple property security, you know, restrictions. But as you know, there's more risk around, banks are saying, well, I don't want to be playing in that space. It's small apartments, you know, people go, I've got pre approvals. So they go out and spend $600,000 on an apartment and then they find out it's 35 square meters and yeah, that preapproval is invalid.

Veronica: Or they didn't realize the was offered a people buying company title at auction and not realizing that their approved preapproval didn't actually cover company title and the bank wont lend on it or is the contract in advance? Everybody go your Bronco. I always say get the broker to comment on that particular property to see if there's any hurdles that you need to want to know.

David: Absolutely. And, and find out to Chris's point, find out all the restrictions. The lender, you're getting preapproval with places on properties and LVRs and guest post codes, property types, um, title types and the end, you know, the reason the banks put those restrictions on them is very simple. They think they're at a lower risk of growing in value. Yeah. They're less likely to grow in value. So

Veronica: it's a self perpetuating because of course if the banks won't lend on, and of course they got a lot going to grow in value. At the same rate, because not as many people can borrow the money to buy the things. That's a really good point. It is very good.

Chris: Exactly right. And especially if you get something called a black listed postcode and a black listed building, um, you know, especially if there's, you know, I think about things, you know, Opal tower as an example and you know, as an example, doesn't need a bank to blacklist. You know, if a bank does it this blacklist that no one can ever borrow to buy into that building because the bank doesn't want to go anywhere near. But that's happening on whole suburbs and whole buildings.

Veronica: I think different banks do that though. Um, I had client some years back who was with st George and the, you know, we were looking at a building and sent off to the broker and the broker at Cemex, at old st George wetland in that building, their exposures to hire in that building it, but other banks will, you know, and because of her decision, she wanted to go with st George. She didn't buy that property because of that. That put some doubt in her mind. That's just one bank, one building, no other banks going to the same explosion. That building cause probably St George has line's, share of loans in it. But, but you know that that's an interesting difference because it doesn't necessarily reflect that the building's bad. It actually flags that particular bank's exposure.

David: That's exactly right. I mean most banks will limit their amount of exposure to a medium to high density apartment block. Yeah. Because of the risks.

Veronica: Sorry, it's per block. Right. So yeah. So there ended up getting a whole list of addresses. Yeah.

Chris: So sometimes you can debate a little bit that can catch you out if you are buying big a unit blocks and not the smaller one so much. Do you know the banks just like I'm happy with that. That's a good asset. Even if I've gotten three or four of the six, I don't mind the point. You've got 30 40 50 in apartments or more. 200 that's where the banks getting a bit nervous, but day just, you know, these are the same on these podcasts. Sometimes you're saying great bits of advice, but it just kind of slides through you. You made a point around computer assessment versus human and assessment. Now if you think of you're a bank and you've got a mortgage book, um, you've got a, to process an application, there's actually a cost to the bank. They've got to have a human assessor sitting on a chair in a capital city, they've got an office, they've got a wage, they've got sick leave, they've got super, it's expensive for the bank to process these applications. And so what happens is, is the banks are thinking, how can we, and they know that pre-approvals and your very small portion of pre-approvals actually turn into business because sometimes you get a preapproval, you don't buy, you use a different bank, et cetera. And so what's happening now is all the banks are moving to automated computer assessments for pre-approvals. And you know, most banks are going that direction and computer preapproval is worthless. It is not worth anything.

David: And a lot of us as much as the quality of your mortgage broker. Well, yeah, the quality of their assessment prior to lodging it because it's really just trading the numbers and the documents provided by the broker.

Veronica: But don't you guys like 0.1 of the differentiators of a good broker is really you're pitching your client as a story, right? As in this, is there a case effectively? How can you do that? If a computer's assessing the application?

Chris: Well, you see, If you're a good broker, you would actually do the checks that a human would do. But one of the benefits of using doing a preapproval is utilize it with the lender. You're not the one doing the assessment. The bank is going to lend, the money is doing the assessment and you know that if they're gonna lend the money, it's not hard. The risk isn't on you. But when you use a computer pre-approval, the risk is on you as a broker. If you've then got a computer pre approval, then they get declined. That's not great. So I'm really hesitant using these because if you're going to, if a class trust in your word and you've missed something, then the client's gone and bought a property. And a lot of people have got, you know, computer pre-approvals go out and bid at auction every day. But they have no idea that it's not actually

Veronica: the big elephant isn't, it is actually really good elephant. Yeah. So, okay, let me get this right. So you can, can you choose how your application is assessed, computer or otherwise? So how do you do it as a broker? How do you go, Oh, I'm not going with that bank because they use computers. I mean obviously the law and they'll be using computers one these days.

Chris: So in the past there was only a few lenders that did it. I think it was Bankwest,

David: Bankwest were one of the first. And then, yeah, we definitely as a business would, I'm not to put pre-approvals with bank West because it was assessed by computers. Yeah.

Chris: But now of course Macquarie do it see, ah, you know, coinage ING and now doing it, you know, and so it's now spreading. Right. And so you, um, and I'll nap, I'll do it. And so you can't, like people walk into NAB or CBA and they think they've got, I've got a client who just bought on Friday, on Friday, he's got a CBA preapproval. He does not know. I had to tell him that that was a computer based assessment.

David: maybe if they thought about things in a different way and looked at the risk assessment, maybe they could start extending the preapproval period at the six months. So they don't have to be re-assessing as many loans every three months. So there'll be less loans to assess which saves money, saves cost, and maybe they could, but then put the humans back in, you know, so maybe there are different ways they could look at things to differentiate and keep using the humans for the pre-approvals, but minimize the work, the people who are running the business.

Veronica: This is a giant elephant. This is one of the issues that I've always, always done my head in right there, that the risks purely lies on the buyer. You know, really in so many ways. But certainly in this particular case, so buy goes to auction by has preapproval, um, bank or broker has seen brochure of property and said, yeah, yeah, yeah, sure. That shouldn't, it shouldn't be an issue. They go along though. It's still subject to valuation. Now obviously if they've got enough equity or cash, then you know, the risk is diminished because you're not sitting in that borderline 80, 20 rule, you know, but, but if the valuation does come in at less and they've got to find money from elsewhere, the risk lies completely in solely on their head right now. I guess that you as a broker, they come to you and then the valuation comes in lower and all of a sudden they don't have the cash. Um, you know, the all the horrible making, they're selling their youngest child or whatever. Um, and what are the options if they get themselves in that predicament with a low valuation? Yeah. Well, what is the, what are the options? If somebody has got a preapproval that they have been acting on in good faith and they've got really realized at the end of the day, even at one assessed by a human isn't infallible, isn't it? So, look,

David: I believe there's a moral obligation for the lender to still approve it if the circumstances haven't changed. Yes. And on the rare occasion where this exact point has come up, whether a human or computer assessed it, that's absolutely what we've held the lender to account to. And, um, I can't think of a circumstance that like, there might've been one or two in, in a long 20 years, you know, that I can, that we might've had to go to another lender, but it's very rare, you know, big and they, you know, at the end of the day, the ultimate decisions are made by humans and, um, you know, most of them are decent people, so

Veronica: somebody digs their heels in and get a bit stubborn. I know valuers can do that.

Chris: Yeah, yeah, yeah, definitely. So low valuations, don't generally happen if on established property, um, it's more the off the plan newer space.

Veronica: Oh, we've sort, I've seen it. Not, not very often, but I have definitely seen it. The low valuations happen more often than say a preapproval not being honored. Right? Yeah. Okay. Yep.

Chris: But sometimes they can happen if you're buying in an auction, like a environment that you buy pre auction, um, the, the valuer goes in and looks at that property, uh, and thinks the only way this property has been sold prior to auction is you've paid more than they thought they were going to get at auction. And I've had that where even if it's a quality asset, yeah, they're bought in a pre auction environment and now I've actually had to have the buyer's agent in this scenario, um, prove why that was actually a fair price and to prove that it was actually a pre auction bidding wall with another buyer. Got them to that price. But I haven't actually, other than that though, established probably I haven't had any problems with, but they're in your mind that we buying really quality assets. No main roads. We're not buying, you know, risky properties, et cetera. But I'm sure a lot of brokers do have problems with valuation where they're not, you know, the potential. But at auctions conditions, it's probably the best way to value your properties. What it's worth is on auction.

Veronica: Oh no, it's worth the, what the second last bid was, because that's the only bid you've got what two people are at.

Chris: but you're not getting more than a hundred grand more than the last bead. You usually be the, you know, five, 10 grand more.

Veronica: Oh no. It w well then again, the way we beat is very different because of all the research and education that we've done prior. You know, we are chase quicker. Some press recently because we were $500,000 knockout bid right now. I was like, Oh no, I knew damn well that, you know, it was, it was a gutsy thing, but there were 11 people registered at this auction. It had been quoted very, very low. We had five comparables that were more than what we paid for it. Um, and we also knew that there was an underbidder for another property in the room that had gone up to $25,000 less on another property than what we paid for this one. You know what I mean? So we had so much information as to why we did what we did. But of course my poor buyer's agent because, you know, Lucy, we were standing there and I'm like, right, cause we plotted out this, we had a plan, the client was party to it as well, but, um, so we had our plan and we, we had a very good reason for doing this.

Veronica: Um, but it, you always feel better if somebody does beat a heart higher then you, but in that particular instance, that was $500,000 a load. The first bid was so stupidly low. It was ridiculous. You know what I mean? So, but made a good story, of course I was able to make, to put forward our case in terms of why we'd done it, but I mean, you know what I mean? I mean, that's sort of.

Chris: As long as it wasn't a 500, a thousand dollar property. And you bid $1 million or something, is it significantly more than Eastern suburbs?

Veronica: It was, really bullish. And it was very, very gutsy. But the reality was that our pricing showed that that thing could have gone over our client's budget. And that's one of the other reasons why we went, we did that shot and see if we can, yeah. Yeah.

David: I, do think, you know, and we do see and have seen at times where a conservative value are, will undervalue even a, you know, well bought property at auction ROL bought locally in private sale, you know, and it is a risk and it can happen. And then we'll hand down the, um, comparable sales and provide them, we train our, um, strategic mortgage brokers too if they think, particularly if you're doing a refinance and the LVR is tied to 80%. Yeah. Um, then find comparables in advance and actually proactively provide them to the valuer beforehand, uh, because yeah, they, they'd prefer not to have to, um, change a valuation.

Chris: It's a really good point I got caught out with this recently, unfortunately, it was all okay. Um, however, uh, we had a valuation on a property and a client was doing a refinance or that one releasing the equity and then had a pre-approval to buy future home. Um, but the cash wasn't released. It was a pre-approval. Yeah. That, um, for the refinance that preapproval would expired. And then when he finally did purchase a home, the bank went and revalued his home and I've got to, we've got a really bad evaluation on the home. So cause it was a refinance, it's up to the value to basically value whatever they think it's worth. Um, and that value of winning really low on the refinance. Any, you need to have enough equity now to do the purchase. Now we, we ended up getting it, we got the valuation for it back up.

Chris: But it was a really testing time because the clients didn't, could potentially not have enough money to settle on the new purchase. Horrible. And so we still had enough buffers in that situation, but it is a risk of sometimes people when they think they're going to go buy an investment property and use the equity in the home. My advice is get the equity at first if you can. In the situation that bank wouldn't do that they had to wait for the purchase and then they revalued the home. So you've got to be really careful with refinances because generally speaking, the valuations do always come in low.

Veronica: the value valuing evaluations are an interesting thing. I bought a property for myself some years back and it had actually been sold a year prior, so I bought it in 2014 so obviously was pretty buoyant. It had been sold. Yeah, pretty much bang on a year earlier. The people that bought it a year earlier did bugger all with it, but what they tried to get through, they want us to basically demolish it, subdivided and put two pair of, you know, duplexes on it. The stupid thing is it's a, it's a conservation area. There's never in a million years where they gonna be able to do this. So they obviously went ahead and bought this thing, making all these sorts of assumptions. Yeah, yeah. We'll get this, we'll get this. We're going to become developers. Realized with a fair amount of cost spent, I guess trying to get it through council.

Veronica: And I mean they did, they sent me to plans. It was just like never in a million easier, you're going to get these, these approved. Um, and so then there were, well, we're not going to become a property developers with this, these properties, so we'll put it back on the market, well from the market. So they took it up there, put on the market some crazy price, did not sell at auction sat there languishing. And finally an agents called me and said, Oh look, we've got a client for these. They finally dropped their price expectations. I went through it, I went, Oh, all right. That's actually what I'm renovating at the moment. Um, this is interesting for me, but the thing is I pay, now I've gotta try to remember exactly what they pay for. I pay $1.3 and I priced it up and on. And that's pretty much where a bank at sec at the time.

Veronica: Um, I think they'd pay maybe 1.24 maybe. Um, so, and there was a fair amount. It was quite a lot of movement in the prices at that time. So that was pretty much bang on. So it was like, yeah, yeah, that makes sense to me. I'm prepared to pay that money. The valuer comes through. He values it at less than I paid. I've got comps, you know, I always give the comps anyway myself. Yeah, I've got comps cause I've done my own research in terms of before buying this thing.

David: I'm going to be careful with that as a strategy though, given the value of, I know sometimes they can get their back up. That is true. Um, then to be very careful to say I'm not totally, I'm not trying to you just thought I'd let you know. This is the research I've done.

Veronica: You go knock yourself it might help you. Why not? Don't worry. Yeah. Anyway, sorry. But the thing was the value or had been the same valuer who had gone through a year earlier when these guys bought and he had put I think 1.1 on it quite a lot less than even what the, the first lot paid for it. He put exactly the same amount of money on the valuation when I bought it. And then luckily, luckily I wasn't sailing close when it didn't matter. But the thing was, his argument was well they paid too much when they bought it a year earlier and I stand behind my valuation then? And it's like hang on a minute, two people are paying more than you valued it a year ago and he's ego got so in the way and it was like ah.

Chris: So when that situation you did you get the high valuation put on it?

Veronica: It didn't matter cause I wasn't, I wasn't relying on it sometimes.

Chris: Oh the risk is that the value of wine play ball [inaudible] will stick to their guns because end of the day for them to increase the valuation, they've got to admitted they were wrong.

Veronica: He had to admit he was wrong twice, you know, it was just not, so I could not believe that he actually spoke up and said that, you know, when someone did try and get a valid in five years time and see if it's moved by then. I read it in 2012 and it was 2013 it was 1.1 it's still worth 1.1 now.

Chris: In the last couple of years we've had the uh, Royal commission and that sent shockwaves through the mortgage industry. Yep. Can you give our listeners a bit of an understanding of where we are at now and how access to CreditEase and some of the changes that occur are doing and just a bit more of, uh, an understanding. Cause I think a lot of it is lost in the papers and it's trying to over emphasize how bad it potentially is.

David: So what, where the market sits now or,

Chris: yeah, just wanted the back story of what happened in the Royal commission as well. Because, you know, I think people thought it was just went, just couldn't get alone, but if people were still getting loans, so I guess it was probably just an understanding of what the banks are thinking now.

David: Well, I think, um, the major changes through that period where the banks tightened up significantly, they got really worried that they ha household expenditure measurement, benchmark, otherwise known as hem a would not suffice. And so all the bank started requiring living expenses, uh, to be detailed. And it started with three items to five items. Now it's 12 items for most lenders and that, uh, forensic, look at what you've spent over the last 10, really only one to three months, um, was uh, really pulled back people's borrowing capacity. And then also the appro, uh, benchmark assessment rate was, uh, increased up to 7.25%. There are also restrictions on interest only loans. Uh, they didn't want investment loans to grow at faster than 10%. So there are all kinds of restrictions that were, um, put in place by the macro Prudential regulators, but also put in place by the banks because they were to quote your books, ah, think scared shitless.

David: Um, um, so, so lending really did tighten up, but now we've seen it open up and you know, Westpac one their case against ACIC that the hem is re is, is fair and reasonable and people will cut back on discretionary spending to keep their home and payoff pay their mortgages. Uh, the benchmark assessment rate, which 7-7,2.5 is now, you know, coming right down to 1.5%, is that right? 1.5% above the interest rate point minimum, sorry, 2.5 or um, 5% 5.5% right? Yes. As you know, so some people will now could be assessed at 5.5% as opposed to 7.25%. Huge difference. And so as soon as that, I mean, you know, we've had the election, we've had the drop in interest rates, you know, people have now started to suggest the property market could rise, particularly Melbourne and Sydney by 10% in this 12 months. As soon as the APRA or changes came through, I thought we could get a an and wrote at the time of 5% bounce, even just the back half of this year. And it's starting to flow through. So I think there's a, there's a lot of different factors, but

Chris: no, I think that's perfect. I think that's cause it's good because I think that, you know, that's reality. It was last year was a bit tough with the Royal commission and APRA are in there. All the banks were really worried about these Westpac case. I mean it's pretty interesting. ASIC um, decided yesterday to appeal Westpac, um, in court and um, at the last minute, you know, you've got a certain amount of days to appeal and at the 11th hour, um, yeah, so ASIC are going to let it die. They're going to go back to the courts. And so that's something that we thought was solved, but it's just come back that it isn't being solved yet. And so that's something that's, you know, we're not sure, but we do think that until yesterday. Um, and I think, you know, going forward though that, you know, the banks are kind of back lending money, et cetera. And I think you're right, like it's what were some of the, the perception change though with your clients ever since the election, before the election? Um, what have you noticed in terms of their overall confidence in their overall, you know, desire to get into the market? Have you seen a big shift? Um, and do you think that, you know, what things have changed?

David: Absolutely. Very big shift and things have changed and usually in the beginning of the change, uh, the pace is slower and speeds up over time, but it feels like the shift it with this shift has moved faster than any I can remember. What do you two think?

Veronica: Oh, overnight I mean, yeah, when you get the election result with surprise, everybody, um, you know, the anecdotally from agents were saying that like, even the mid week inspections on the Wednesday, we just the queues.

David: yeah.

Veronica: A go figure and then I'll, you know, hour inquiry, mind you this year has been a lot stronger, um, for our inquiry, right. In the business anyway. Yeah. But we certainly, um, registered an enormous change in positivity. Um, and we could see that also just in terms of auction attendance, all of a sudden you had registration or auction just went and, and that's a big, you know, there's auction clearance rates as one thing, but we watch people register reduction. And so when you've got an auction where a good auction was for people registering in the, in the worst of it, yeah. Same type of property might get twelve people registering that. Yeah. So it's three times the amount of people

Chris: 12 people wanting the same property, right? Yeah. So only one of them is going to get that property if that property is 11 others that are looking for other properties. And so, and there's not no properties on the market

Veronica: This was overnight. All my sort of not where we actually saw the numbers registering at auctions. Yup. Markedly different. Yeah. Um, yeah,

David: yeah. And I suppose probably the main catalyst, we know it was the election, but it was also the policies. We're going to have such an impact on residential property and that party who was expected to win didn't win.

Veronica: But the bizarre thing about that really, I mean we all shape, you know, there in reality, if we were also convinced which weLwere that label, we're going to get in that party that shall remain nameless. Um, we're all convinced of it. You know, I would go and give talks on negative gearing as we all know. I was very, very, you know, mad about the whole policy and um, you know, I ask who thinks, you know, liberal are gonna win the election. Nobody will put their hand up. Then you can see a couple of people put their hand to go hard. But that's wishful thinking. I actually don't think that they will. They will at all. I hope that they will. Um, so that happened and obviously that was the, the, the, the rooms and I've talking to in terms obviously property interested people, but um, the very fact that we all so certain, I mean Bill Shorten pretty certain he was going to win too, you know. Um, the bookies were certain, everyone was certain except the individual electors, but everyone was certain that they were going to win. Why weren't people buying property beforehand? Particularly investors? I don't do not understand because that was the time to buy the market was at an all time low and it, we were looking at policy changes. It was gonna make a massive difference to their financial position, whether negative gearing or not, capital gains tax, you know what I mean? So there were all these things,

David: it's difficult to be courageous and go against the grain for us, such a huge payer. And we were saying to our clients, we think you should be buying now because either way everyone's going to get into the market after the election because they're gonna want established property before negative gearing ends or if the Liberal party wins, they're going to get into the election as well. I get into the market as well,

Veronica: but that you can't pay people to actuay take good advice. Some of those circumstances.

Chris: Yeah. And it was, it was hard cause you know, there was a few, few avenues to it. It wasn't um, a case of, and it was also the other side people things should I sell, you know, like some people that have got properties that would, would have been absolutely smashed if negative gearing came in. No. The removal of negative gearing, especially people who've got like cookie cutter apartments. And I think the biggest savior of the newest all apartments is that negative gearing hasn't gone because the build quality issues now is been gone through the roof. And the only reason someone's going to buy these newer apartments are investors that don't know what they're doing. And I think he got the tax write off. I can get through negative gear and if they couldn't, who was going to buy these apartments? And so you know, we were saying catastrophic falls to new apartments.

Veronica: If when you say new, it's like one year old or one to 20 years old when we call really? Because end of the day, the minute it gets sold, second time is no longer going to be eligible. So you have two partners side by side, one brand new, one a week old.

David: No one was going to buy five after as a secondary buyer.

Chris: That was a right, it was a crazy policy.

Chris: every week we hear incredible stories of the dumb things, property buyers do, dumb things that end up costing a whole of money and or a

Speaker 3: whole lot of stress mistakes that can be avoided. Please David, can you give us an example of a property Dumbo? We can all learn what not to do from these stories.

David: Uh, yes I do. I've, I've touched on it a little bit already. It's the, it's the one where you buy a home and you think you will upgrade into the future and you would like to optimize your ability to keep that home. And if you, uh, pay, you know, counterintuitively, but if you put all your surplus cash into the mortgage rather than into the offset account, so yeah, you can still pay minimum principle and interest on the loan but then put every surplus dollar into your offset account. Well, you then are still reducing the interest payable on that property. But when it becomes an investment property, you're able to optimize your tax deductions because you haven't paid down the loan, your offset account, you have all this money that then can go towards the future homes so you have less interest, non deductible interest on the future home. And uh, you know that, that's a very common one. There's certainly more mortgage brokers are becoming aware of this and people are becoming aware of this strategy. But I thought I'd just, uh, make that the dumbo,

Veronica: the poor old Dumbo is a person thought they were doing the right thing, the conservative thing, the sensible thing in paying down debt but not actually realizing the ultimate cost of that in terms of not being able to deduct it. If they want to keep that property, they upgrade. I know it's so it's a, it's a common Dumbo. That's a really sad Dumbo mostly. Absolutely. A lot of Dumbos are through foolishness, century wishful thinking and through, you know, really ill thought out stuff. Whereas this is actually a Dumbo that gets created through trying to do the right thing. Yeah, yeah, yeah. And that's it.

Chris: And offset accounts. I mean a lot of people don't really know what an offset account is. So make amazing, really, it's one of the most amazing tools you can use. Um, like I didn't know about it really when I was, uh, you know, joined before I joined property planning as a financial advisor, but I didn't really understand all the power of structuring loans using offset accounts. Um, and most financial advisors don't really cause they haven't really got involved in the mortgage strategy part. It's not part of the planners are trained on they are trained on insurance. They tried on super, they're trained on maybe buying some shares but they don't get trained on property. Then I get tried to move strategy. So you know, a good broker will educate you on that but you know, offset accounts, it shows amazing. Um, we didn't really go there too much.

Veronica: Well thank you again for joining us David. That's been a really interesting conversation and for the listeners who might want to pick up a copy of your book that we mentioned in the introduction, we will include the link in the show notes. Thank you so much for today.

David: Thanks for having me. Yeah, it's been fantastic guys.

Chris: We want to make you a better elephant rider. And this week's elephant rider training is.

Veronica: just a little bit, I thought we could add to that whole discussion around whether it's best to buy first or sell first. Now these absolute rule of thumb that I have for this one, and it is, you have to choose the thing that's hardest and do that first. So we did talk about that. We did talk about the fact that in a buyer's market it's odd to sell a property, right? In a seller's market, it's hard to buy a property so it goes with the risk. So whatever that is, the hardest is usually where the risk lies. So if you are going to find it easy to find the next property, then the risk lies with you selling and selling within a reasonable timeframe and selling for the right price.

Speaker 3: So then you've got to get that out of the way first. So that's really the litmus test. What is going to be the hardest thing do that first. Now there's only one provider when this doesn't apply, and that is when you actually physically got, can't get the finance to buy first. So there are times, for instance, when you're retiring and you downsizing, I'm sure you can attest to this, that you are going to find it difficult to get bridging finance or where there's a massive risk involved in getting bridging .Or the cost is going to be prohibitive. So there are certain circumstances where you wouldn't want to do that in which you're going to be in a situation we have to sell first. But generally speaking, you do not want to be out of the market if it is a rising market. And if you are in a position when you can, where you can bridge for a little while. The other thing that you can do as well as request longer settlements so you can actually, when you're selling your property, you can ask your solicitor to put a three months settlement on the contract. Now any serious buyer that wants a shorter settlement can request differently and it's up to you whether you negotiate that or not. And likewise when you go to buy, you can actually ask for a longer settlement as well. You won't always get it, but it certainly doesn't hurt to ask the question.

Veronica: Please join us for an extent. So when we interview a real estate agent and author Geoff Grist, Geoff has been the author of a few books, mostly helping vendors choose agents and understand the sales process. One book has the promise that a vendors will sell above market. So as a buyer we want to understand how do agents get buyers to pay above market price. Now you need to tune in with us next week to find out.

Chris: Don't forget, we're on all the social channels. We're on Facebook, we're on LinkedIn, we're on Twitter,

Veronica: or you can connect with us on www.theelephantintheroom.com.au, The links are all there for you.

Chris: Please connect and send us a message we'd love to hear from you.

Veronica: until next week. Don't be a dumbo.

Veronica: now remember, everything we talked about on this podcast is general in nature and should never be considered to be personal financial advice. If you're looking to get advice, please seek the help of a licensed financial advisor or buyer's agent who will tailor and document their advice to your personal circumstances with a statement of advice.