The demand for Australian residential properties sees no signs of abating despite the record high prices. Nevertheless, prospective buyers should weigh the rewards against the risks.

APART from taking note of the regulatory changes, Malaysian buyers should also conduct due diligence before purchasing a property, says Alka.

Rental guarantees offered by property developers must be scrutinised, she says. While it may seem like an attractive offer, it is pivotal to ensure it is a sustainable promise. 

“Not that everyone will be offering unsustainable rental guarantees, but make sure you do the research and check if these rents can be obtained when the rental guarantee has expired. The question you should be asking is: Can I get a tenant who will pay me the same amount of rent? 

“So, do a comparative valuation of properties sold in the area to see if the values stack up. If the values are not stacking up, you will realise that you are being offered a rental guarantee because it has been factored into the price of the property. Moreover, in the Australian climate you don't need a rental guarantee because demand outstrips supply in most areas.” 

Alka warns prospective buyers not to decide on a property based on the “freebies” offered. “They only appear free, but they have also been priced in.”

Another proposition that Malaysians are often lured into is a single contract, she says. “In a single contract, the agreement is sealed the day you sign the purchase agreement and put your 10% as down payment. 

“A single contract is buying and building in one contract. For example, you have two years before you need to start paying your mortgage and you could see this as an advantage as prices can go up in two years. But it is also a risk as prices can come down. You need to be aware of this. 

“Under a single and unconditional contract, you put down your deposit and you don’t need to show bank financing as banks will not value the property yet. Once you sign the contract and it becomes unconditional, it means you are bound to pay the full sum according to the contractual price. 

“Two years down the line, when you are ready to collect the keys, that is when you will look for a bank to finance your purchase and the bank will send a valuer to value the property, which is going to be done based on the prevailing market value. 

“So if the market has not done well in the last two years, and property prices have come down because supply is exceeding demand — which is happening to a lot of apartments in Melbourne — valuers will give lower valuations as they are usually conservative in their estimates.” 

While it is not a trend, several acquaintances have been affected by such a contract, says Alka, and had to fork out more than they had ready upon settlement. 

Landed properties, on the other hand, usually come with two contracts — for the land and for the building of the property — commonly referred to as a “house and land package”. Such contracts are subject to financing. Hence if financing has not been approved, the contract is cancelled right away, explains Alka.

“The banker values the property based on what is on the plan and it is only when the banks give the financing approval that the contract becomes unconditional. At that point, the bank has already done a valuation. 

“Occasionally, valuations don’t necessarily reflect market sentiment because valuers can be very conservative in their approach. Be prepared for the valuation to come below 7% to 8% as it is still a fair value to pay. 

If you are not prepared, you will be caught by surprise. So be wary and do your research. Preferably, buy apartments only after they have been built,” she says.

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on May 4 - 10, 2015.

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