Last Sunday, I saved a couple out from falling into the “spectator house” trap. I met them over the weekend, having been referred by a real estate after a banker and a mortgage broker both failed to sort out their funding for a new purchase. They are both talented people; one is a qualified builder and one is an experienced interior designer, who are together a great team. Their plan was to buy vacant sections, build a property, then sell. On the phone, I had to tell them flatly that this isn’t a good idea. We sat down and ran through the numbers in person:
The section was purchased 2 years ago for 200k
The building cost was $400k.
The sales price could be $800k.
So, you could make $200k?
In fact, during the past two years, the section price has gone up and now it is worth $350k.
So, you spend all those months—with the loss of the builder’s income due to all working time spent on the house—and it can really only go up by $50k!
Plus, if you really sell for 800k, and with the profit of $200k, 50% profit will disappear. “Why?” You ask.
Agent’s commission: approx. 3%
The holding cost: approx. 3%
They looked at each other incredulously, “We’ve been telling people our plan and they all said it’s a great idea.” and realised the big problem. We talked more and decided that “buy and hold” would be a better option.
This was perhaps the most valuable “Chai Latte” they spent so far.