Property auctions during housing booms are a wonder to behold. A room packed with people all trying to outbid each other in an attempt to secure the property that they all want to buy. Auctions are a showcase for psychology in action – and they work because they tap into powerful and basic human instincts. They channel competition for a scarce resource into one place by bringing all of the interested parties together and letting capitalism take its course.
What’s less well understood is that the same phenomenon is at play during flat markets – but in reverse. When the market is flat the scarce resource isn’t property, it’s buyers - and it’s the vendors who compete for attention in order to try and make their property more attractive to buyers than others on the market.
And, as with auctions, it’s usually price which wins the day – except, in these circumstances, it isn’t the buyer who’s prepared to spend the most who wins – it’s the vendor who’s prepared to accept the least.
Start your property search
But sometimes even this isn’t enough and vendors will go even further and offer additional inducements to try and convince potential buyers to make an offer or even distract them from the price the vendor wants. Vendors have been known to offer cars, boats, overseas holidays and furnishing packages to attract buyers to their product – and, as recently as a couple of weeks ago, at least one residential property developer was offering to pay part of the mortgage for the first year in order to sell off the last four apartments at their city-fringe apartment complex.
Several homes have been placed on the market recently with sports cars thrown in as an added extra.
So are such deals worth it? In short, yes – but with some caveats thrown in to make sure that you’re doing so with your eyes wide open:
1. Nothing is ever really "free".
If you’re thinking of buying a property where freebies are on the table, remember that someone is paying for them and that’s generally going to be either you, or the vendor. Either the price has been increased to cover the cost of the enticement or the vendor is forgoing some of their profit, or even making a loss. There’s nothing wrong with that in itself – in fact it’s the same basis upon which loyalty programs operate – but be aware that you may be paying more than you need to and that you could be negotiating a better sale price instead.
2. Focus on the property – not the baubles.
While I can understand how an offer such as payment of your mortgage for the first year could influence your buying decision, don’t let it. Put the freebies completely out of your mind and focus on the property. If it doesn’t stack up as the best decision, on its own, no amount of freebies should sway your decision. If it’s the best option, take the baubles or negotiate a price in place of them. If it’s not, walk away.
3. Keep an eye on the valuation.
If the cost of the freebies on offer has been loaded into the price of the property it may mean that the property doesn’t value up to the agreed purchase price. This is particularly important if you’re raising a mortgage to buy the property and the amount you’re borrowing is close to the loan-to-value deposit limits. This could be enough to cause the deal to fall over - particularly if the value of the freebies is substantial. Watch for this.
4. Make sure you have finance in place.
In the case of the developer offering to pay the first years mortgage interest as an enticement, the purchaser was able to choose any lender he or she wished. If that hadn’t been the case, and if no mortgage had been required to be raised until the end of the first 12 months, I would have advised any potential buyer to be extremely wary. The mortgage market can change substantially over 12 months and the risk of getting to the end of that time and finding that it was no longer possible to raise a mortgage doesn’t bear thinking about.
- Ashley Church is the former CEO of the Property Institute of New Zealand and is now a property commentator for OneRoof.co.nz. Email him at [email protected]
