What’s wrong with paying slightly over the odds for your next house if it’s the house you want? Not something many people give much thought to other than to hope that they don’t. The thing to remember about property is that because we’re talking big numbers any mistakes are by definition ‘big’ too. One reason property can be an exciting investment is because you can ‘leverage’ your stake and borrow against it. You only repay the amount you borrow – if you sell for more you trouser the profit!
Most people buy a new home with little if any input from an expert. Whilst more than 95% of vendors use an estate agent when they sell fewer than 5% will hire someone to advise them on their purchase. Slightly more than 50% will get a mortgage (therefore ‘investing’ someone else’s cash too) and most will assume that the survey that most lenders require is for their benefit and protection. It isn’t, it’s for the lender.
A survey is undertaken so that the bank can be sure his loan/investment isn’t likely to go sour. The purchasers solicitor will check legal title and that the property conveyed is as it should but neither lawyer nor lender will check that you aren’t paying more than you have to. That’s down to you.
While a lenders’ survey will check that the agreed price is reasonable when compared to what’s called ‘the open market value’ it isn’t provided to help you negotiate the best deal. These days many are done from the comfort of the valuers office using an ‘Automated Valuation Model’ or perhaps from their warm car by a so-called ‘drive-by’ valuation.
Most buyers excuse themselves thinking that if they pay more than they need to then over their lifetime this will even out. It their home of course, but will it?
Even in an appreciating market, you not only have to net any gain against inflation but you should also consider the borrowing cost. On a £500k purchase if you pay 10% more than you have to and this extra is borrowed then you’re saddled with a debt that could cost you £100,000 over the 25 year term of a typical mortgage (@5.5%). So you’ve actually overpaid by 20%!
Of course if we have house price inflation like we’ve experienced over the past 30 years then this will seem like small beer but then that would also mean that average homes in 2036 costs over £600,000!
If instead you buy with your head and not with your heart and you save yourself 10% because you are informed and commercial about your purchase then this could be a 20% saving on the asking price in just the same way. You save yourself £100,000 over the period of the mortgage. It may just be playing with numbers but if I were buying I know which story I’d want to bore my friends at a dinner party with.
2011-03-08