Off the plan apartment mistake

Hi Luke,

I would probably do a couple of things in your situation.

The first is to do a proper cost analysis of selling and see what you really will end up with as a profit or loss. There are some figures in your text, but even if you bought it for $310,000 and sold for $330,000 I would be surprised if you came away with any profit from a capital gains point of view, even though it was off the plan with what I assume is some stamp duty concessions (Vic new properties).

Remember to work out your cost base for when you bought as well.

As you say you are green, I’ll just point out a couple of things although you may already be aware of them.

If you sell using a real estate agent, commissions are typically around 2.2%. RE agents can and typically do charge for marketing above and beyond their commission, and its not uncommon for about $2000 worth of marketing for a standard agent (this is: professional photos, “feature” ads on realestate.com and domain, billboards, etc.). So on a $330,000 sale, expect a $7260 commission, couple of grand worth of marketing, $1500 for legals (contract etc.) and you easily can say good bye to $10k.

You purchasing costs include stamp duty, not sure what that looks like on this particular property but it would be in the correspondence you have with the conveyancer (legal team that did the transfer of title), as well as the legal team cost, plus any inspections that you had done, e.g. pre settlement inspections to identify defects etc. If you bought this off the plan you may have paid a fee to an investment group or buyers agency, that’s also a part of your costs. Anyway, for a $310,000 purchase price, it wouldn’t be far fetched if you actually had to spend $320,000+ to get it (more if it was an existing house as you would pay more in stamp duty).

By the time you work out your sales costs and your buy costs, there isnt a lot left for a profit margin. And dont forget capital gains tax weighs in here – if you have made a profit.

I have a similar situation with a property so I can more than emphasise.

However, this isnt to say that you dont have some capital to roll into your next investment which you allude to. I am assuming your loan is around $290,000 or less. You mention early exit fees from your financier, there should only be minor fees unless you have a fixed interest rate for 6 months plus. Otherwise its pretty straight forward, some discharge of mortgage documents and the like, but nothing expected in the thousands, at least at the conventional ‘big four’ banks anyway for a standard variable investment loan.

The real estate agent can do a market appraisal and/or a comparative market analysis – some agents call this one and the same but just beware your terminology. ‘Valuations’ are typically reserved for valuers, who assess a property and give a formal report. A valuation is typically ordered by the bank (at your behest), in order for you to get them to realise any growth so they will look at financing out some of the equity. Have a look at what the RE Agent gave you, hopefully there is comparatives in there (some times the appraisal is just a letter) so you have an idea yourself – real estate agents can inflate a price to get you to want to sell so just run some diligence on this side of the fence as well.

I’m a numbers man, I like to do a lot of analysis because the numbers dont lie, and informs you exactly what point you may sell at to make a loss, or make a profit (dont forget CGT).

The other side to this is your concern about your market. This is another conversation however what I would say to you is this: How well dialled in is your goals and strategy? Are you not sure about them, and you’re not sure about this property as well? Really take the time to evaluate your goals and strategy and plan. I wish I had done that before I started my portfolio, buying and selling assets, making losses and some profits. If your concern is about the over supply, then get informed, really dig into it, all these apartments on the way, well what does demand look like? Whats pop. growth? Hows employment looking? Whats the economy (interest rates/consumer sentiment) doing? how much supply will these developments give? whats the feeling on the street – talk to real estate agents, buyers agents, existing investors, locals, council, town planners – whoever.

Not saying dont sell, just saying do the numbers, and if you are going to sell, know what you will make or lose before you do it, and have a reasoning for why you can take the loss or profit at that time that stacks up. Do the research and be informed. Perhaps its just that you can do better with that capital somewhere else as you mention. Realise the time it may take you to sell the property, or even find a property that is in line with your strategy.

Hopefully a couple of things to think about,

Happy investing and best of luck,

BS