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Life in the fast lane
As the property market gets up to speed, Alex Frew McMillan looks into the best buying strategies for potential homeowners
Hong Kong’s property market doesn’t just shift into high gear. It goes into overdrive. The city’s real estate saw one of its periodic surges towards the end of 2007. And with interest rates low, another growth spurt could happen later this year.
It may be tempting to sit on the sidelines at such a time. But you risk losing out on the biggest gains, and there’s no guarantee the market will drop any time soon.
So what are the best strategies for buying property in a fast-moving market?
Be decisive
Agents say it is vital to be organised and sure of yourself before you start out. Good preparation is the first step.
“First of all, the buyer has to be committed to buying,” Caroline Ergetie, the broker who runs the agency House Hunters, says. “So they have to decide that they are definitely buying, and that they are well informed before they make any purchase.”
Buyers feel more pressure when property prices are rising fast. They are more likely to face competitors for the places they like, and they are much less likely to be offered a price that they consider a “steal”. In fact, they may have to pay above the asking price to confirm a deal if they get into a bidding war.
Investors – rather than people who plan on living in an apartment – will normally find that rental yields are only attractive in a down market.
“In Hong Kong, when the market is weak and when the market is about to bounce back, the yield is normally quite handsome,” Paula Lam, a real-estate agent with Fidelity Realty, says. “But when the market is good, people normally consider only the potential of capital gain.”
It may be particularly tricky for first-time buyers to make decisions when the market is shooting up. Brokers say they need to seek out plenty of advice, and look at enough properties so that they get an idea of the market and start feeling comfortable.
“In today’s market, if you see something and you like it, buy it now,” Ergetie says. “But it is very hard when someone has not been in the market before and they have only seen three properties, one of which they liked. People often want to keep it up their sleeves until they have seen 50 other properties. But it doesn’t work like that.”
Don’t feel pressured
Decisiveness is a key asset. But at the same time, you shouldn’t feel pressured.
“In a faster market, your agent may push you, and you have a lot of competitors so you enter into an agreement,” Ricky Poon, the executive director of residential sales at the agency Colliers International, says. “After you have signed the preliminary Sales & Purchase agreement (S&P), you are already committed, and you can’t go back. So you have to be careful.”
Less scrupulous agents may inflate the asking price, in a bid to smooth and accelerate negotiations. By getting you to agree to a higher price in the first place, the seller may be less likely to try to renegotiate.
If you’re suspicious that the price is inflated, ask the agent to show you the Estate Agency Authority listing form that the vendor filed when they first listed the property, which shows the confirmed asking price.
Of course, that’s all arbitrary if you have actual competitors who are willing to outbid you on a hot property.
“A big mistake a lot of the buyers commit is to spend too much time to knock down the price,” Lam says. “These days the market is extremely transparent, so it is unrealistic to expect to get anything much cheaper than the market price. To indulge in too much time normally will result in the property being taken by another bidder.”
Besides the annoyance of losing out on a property, such delays carry their own “costs”. You have to look for another target property. During that time, prices will have risen another notch. So penny pinching can end up costing both time and money.
Although you may be keen to lock in a price on a property you like before it rises any more, you can’t take shortcuts. You still need to do a proper title search. Check if there are any illegal structures on the building. Find out if there are any outstanding government orders.
Talk to your bank manager
Poon recommends that you get your bank financing lined up before you start looking for a property. Early discussions with your bank manager will help you set a budget. Buyers sometimes get stuck in the unpleasant situation of having signed a S&P deal on a place they like, then finding out their bank won’t lend them the money they need.
Buyers pay 5 percent when they sign a preliminary S&P and another 5 percent when they sign the full S&P, normally about two weeks later. If they back out after either stage, they lose that money.
“In a fast market, if you go to the bank once you have signed the agreement, you are in trouble,” Poon says. “Once you are committed, you have to go through with it. If you can’t complete it, you forfeit your deposit.”
When evaluating whether or not to give you a mortgage, the bank will get its own assessment of the property’s price. One common problem in a quick market is that the bank value rarely reflects the market price – the bank uses valuation companies that work off the most recent transactions in comparable properties.
If the complex is a big one, there are likely to have been recent sales that provide a pretty accurate gauge. But for more unusual properties or smaller locations, the last sale may have been many months ago.
Poon says it’s not worth sweating over small discrepancies. The bank will normally match your purchase price once you’ve signed the S&P if your price is within a reasonable range.
“My experience is that once you sign the deal, normally the bank will accept it,” Poon says. “But if the difference is more than 10 percent, you need to worry about it.”
Buy to flip
Of course it is in times of rapidly rising markets that speculators make the most money. Once they have signed an S&P and locked in a price, speculators will often ask for as long a completion date as possible before they have to settle the deal.
In the meantime, they can try to flip the unit while having put down only the 10 percent initial deposit. Such deals are called confirmor sales and maximise the speculators leverage – if they are able to offload the property.
“If they make it, they will make 10 times more return [than a regular sale] because the money they’ve actually invested is only 10 percent of the property value,” Lam notes. “This is how the speculators make big profit with small money.”
That’s hard to pull off. And it can backfire. The recent bear market for stocks has caused some buyers to step back, as have the subprime problems that first hit the United States and are now spilling into some European property markets.
But the subprime problems in the United States have also contributed to Hong Kong’s property surge. The U.S. Federal Reserve has tried to ward off the worst of the downturn there by cutting interest rates.
“We believe that people are having a wait and see attitude,” Poon says. “But the U.S. Federal Reserve is going to cut interest rates and most banks are going to follow, which will renew interest from buyers.” |
