How to spot a red flag when house hunting!

16 Nov

What might be a red flag to one person, may only be a yellow flag to another

How do you spot a red flag when you’re house hunting and what do you do with it? This is a topic I wish more people gave weight to when purchasing a home, and making their biggest financial investment.

What might be a red flag to one person, may only be a yellow flag to another, and that's ok. What is important though, is that, as a buyer, you have all the information you need to make an informed and empowered decision. Ideally, you want to buy a home that is without any red flags!

Red flag 1: Structural integrity issues

This should surface in either a building report, or a strata report if buying a unit. If you don't fully understand the issues in the report, give the inspector a call and ask further clarifying questions. If you're still unsure, or you feel they may not be being completely honest, commission your own professional expert to come and do a walk through of the property with you.

Alternatively, if the report does not raise any concerns, but there are visible issues e.g. Water stains on the outside of the building, uneven flooring, bubbling paint, damp stains, then you should absolutely have your own professional expert inspect the property.

Understand:

What are the structural issues
How much would they cost to repair
What will likely happen if you don't repair them
Are they causing further damage the longer it is until they are repaired

Red flag 2: Misleading price guides

The easiest way to tell if the Agent is having you on with the price guide is to do a recent sales search on RealEstate.com.au

If nothing comparable has sold at that price point in the last 3 months (or 6 months if over a holiday/slow period), then the agent is having you on. Why? The agent represents the vendor, and their job is to facilitate interest in the property and create competition - thus achieving the highest sale price for their client.

I chatted to a buyer recently who was looking to buy a 3 bedroom unit in an Inner West suburb, and the agent told her repeatedly that if they had a budget of $1m they absolutely should be at the auction ready to buy. She'd invested in a legal contract review and strata report. When I told her, in the last 12 months, the cheapest a 3 bed apartment in that suburb had sold for was $1.265 and she should just move on now, she was really quite grateful. Unsurprisingly, at the auction, it sold for $1.3m.

How to check recent sale prices:

Click on the 'Sold' tab, enter your suburb, the number of bedrooms and filter the sold date to 'Last 3 or 6 months'. Then play around with the maximum price and see what properties come up and how many still appear at each price point. If the price isn't disclosed, you can always call the agent and ask.

Red flag 3: No money in the Capital Works Fund (Apartments only)

The most common ways an agent will try and spin this include:

They have just completed (insert major work) and that is why there is no money
The owners want to keep the levies low
The building is really low maintenance

While all, some, or none of those reasons may be true, what it actually means is that you will need to budget for additional funds to maintain and repair the building over time. While this may be a red flag, if you can afford additional strata levies, then you can budget accordingly and it may just be a yellow flag.

If there is no money in the Capital Works Fund, and you would not be able to afford additional contributions if required, then you’ve found yourself between the red and yellow flags.

What people think are red flags, but actually aren't

Not a red flag 1: How long the property has been for sale.

It is likely the vendor has unrealistic price expectations, and/or has not priced based on the condition of the property. Regardless of how long a property has been on the market, that should not be your sole reason for ruling it out.

Not a red flag 2: The colour of the walls, or the choice of flooring.

These are so easily changed, yet it is fascinating how often people are heard saying "I'd rather buy with floor boards". You can remove the carpet!

Not a red flag 3: No one else is bidding, or put in an offer.

In a slower market, a 'buyers market', there simply is not high levels of activity. Just because there is not another registered bidder does not mean the property is a bad buy. In fact, it usually means you can negotiate a great sale price. If you decided the property was for you, I know I'd much rather buy without competition, than with it.

It’s important to remember that red flags are subjective.

5 Camden St, Newtown, a 3 bed house sold recently for $1.4m. It needed about $100k invested into it ASAP to remove active termites and repairs to the roof.

For Buyer A who had a maximum budget of $1.4m this would be a red flag, as if they had paid $1.4m, they’d have no money to fix the immediate issues (and not fixing them would result in the cost increasing).
For Buyer B who had $1.5 - $1.6m to spend, then the same issues could be classed as a yellow flag. The issues are still there, but based on their purchase price, they would have money left over to fix it.
Buyer A walked away from the auction disappointed, and saying “I bet they don’t know about the termites”.
Buyer B had the same information as Buyer A, it’s just Buyer B had a bigger budget.

Swim in your own lane and don’t worry about what other buyer’s are doing - find the right property for you, within your budget and buy with confidence.

Permission to swim outside the red and yellow flags!