Time Magnifies Mistakes

Oct 10, 2018

Many people subscribe to the theory that it doesn’t matter if you make a mistake with property, it will fix itself over time. Sure, you might have paid too much but you’re in the home you love, what could be the problem? The longer you leave it, the worse it becomes, and we’ll show you why.

There’s a number of ways buyers can make mistakes on a property purchase. No matter the mistake, the longer the time taken to correct the mistake the bigger the impact it will have on your financial future.

Mistake #1: Overcapitalising

There’s a basic premise when it comes to the underlying change in value of a property, that the land appreciates and the building depreciates. This means that over time, the value of the building is decreasing. Buyers who fall in love with a home that sits on a small piece of land or where the value of the land is worth less than the house will fall into the trap of compromising the capital growth of the property. Just because the suburb is growing at a certain rate doesn’t mean the total value of your home is growing at the same rate. If most of the value in your home is tied up in the building, then the only value that is increasing is the land component of your property. You’re not getting the same capital value increase that other less capitalised properties with larger land components in your suburb are enjoying.

Mistake #2: Compromising on your location

When we say making a compromise, we don’t mean to say that you can’t be happy in fringe suburbs to your goal, what we do mean is don’t buy something 20kms further away from your goal if you want to ever reach your goal. Typically the growth rates of property decline the further away from the CBD you go. The reason for this is pretty simple, it comes down to accessibility to jobs and infrastructure. Yes schools and hospitals and shops are all important, but we all need money to live so that’s the primary need to be able to afford to buy a home. Buyers who compromise on the location and not on the property or the price will fall into the trap of never being able to get back in or ever get in at all into the location that they want to end up living in. As prices closer the CBD move faster than your suburb, the harder it will be to bridge that growth gap.

Mistake #3: Buying a B or C grade property

This is probably the hardest mistake that is most commonly made, because there’s only so many A grade properties to go around, and we are emotional beings that make decisions with bias – whether we like it or not! Falling in love with a property, just like dating, blinds us to the imperfections. These imperfections start to be noticeable once the warm fuzzy feeling has worn away after some months. Then these imperfections start to become more than just an annoyance, think about that road noise that you can hear inside your house or the balcony overlooking your yard when you’re in the pool. They start to impact your happiness and before you know it you’re looking for a change. This is human nature, and why it is so important to get it right from the beginning, it will save you stamp duty and headaches and the opportunity cost of missing growth during that time you weren’t in an A grade property.

So why does any of this matter?

One thing we can’t always control or predict is when we will need to sell. There’s income changes, illness, family separation, and many other significant events that can derail your home life. If any of these events force you to put your home on the market and the market is not as strong as it was when you bought, you may be waiting for a buyer for a long time and may have to reduce your asking price. What we don’t ever want to do is put ourselves into a forced sale situation because you lose all the bargaining power. The best thing you can do is have a property that is in a good location with minimal compromises, so that the day you need to sell, you will achieve a great result from a larger pool of buyers.