There’s nothing wipes the winning smile from an estate agent’s face like discovering that prospective buyers have taken encouraging words from finance brokers to mean “pre-approval”.
Show me the pre-approval
In real estate, part of the job agents do on behalf of their clients – their vendors – is to “qualify” buyers. That’s industry jargon for making sure a buyer can actually afford the property they’ve offered to buy, regardless of whether it’s an investment or an owner-occupier.
And it never ceases to amaze agents how many prospective buyers are completely unqualified. Not only that, but how peeved these buyers are when agents ask a few questions to make sure they actually know what they’re doing before signing the contract.
My good friend Sheena Hyena and I were mulling just this topic last Saturday afternoon when I popped in to catch the tail-end of an Open Home she was hosting for one of McMansion & Hovel’s more attractive properties (and given that M&H can’t boast many of those, I was naturally curious to see what Sheena had been crowing about earlier in the week.)
“Would suit investors looking for competitive rental income and potential capital growth – vacant and ready for tenants right now,” read Sheena’s ad in the Saturday real estate pages.
As I arrived, however, Sheena was angrily shooing a harried-looking couple out the front door: not knowing who I was, the wife scowled at me and said “What a rude, nosey woman!”
‘Tell me something I don’t know,’ I thought, as the couple scuttled off.
Now ordinarily at Open Homes, Sheena does make a gargantuan effort to act pleasantly towards all and sundry (and they’re mainly sundry) prospective buyers, unless of course she’s enduring one of her colossal hangovers, in which case you’d better watch out if you’re not offering the asking price unconditionally and paying with cash.
But on this occasion I knew Sheena had had a very quiet previous evening curled up at home with only the one bottle of red, so I was all ears to learn what Mr & Mrs Indignant had said or done to get Sheena’s goat.
They’d toured the house, said Sheena, then all full of puffed-up confidence had made Sheena an offer.
Never one to miss a beat, Sheena produced a contract from her genuine fake Louis Vuitton briefcase and asked the couple to sit down so she could “do the paperwork” with them, and painstakingly filled in all their relevant details down as far as “deposit”. Now in Queensland, whilst there is a maximum deposit a buyer can pay of 10%, there is no legally required minimum. However, like most agents, Sheena always insists on at least $5000 just to ensure a buyer is serious.
But when Sheena popped the standard “and I’m assuming you can put down at least $5000 deposit as soon as we get the contract signed” question, the Indignants looked at each other, the colour draining from their faces. Somewhere between irritably and apologetically, they told Sheena they didn’t realise they’d have to pay that much deposit. “We haven’t got that much in the bank,” said Mr Indignant. “We’ve only got $2000 and that’s saved up for a holiday on the Gold Coast with my sister and her family in October,” said Mrs Indignant.
“Well how on Earth do you imagine you can afford a $400,000 property if you can’t even lay your hands on $5000 for a deposit?” asked Sheena. “I mean, how much are you borrowing?”
And here came the answer real estate agents hear so often these days: “That’s none of your business. Our finance broker, Cheryl, told us we were pre-approved with enough equity in our own house that we could buy a $400,000 investment property. She never said anything about having to pay a deposit.”
We suspect Cheryl did not say “pre-approved” at all, but rather told the Indignants the limit of their potential borrowing power.
“So I suppose Cheryl didn’t get round to mentioning all your other costs?” asked Sheena.
“Such as?” asked an impertinent Mrs Indignant.
“Well such as,” said Sheena with just a teeny hint of impatience, then firing off the sums like a staple gun. “Investment property stamp duty, $12,475. Loan stamp duty, $1280. Transfer fee, $632.70 and finally the mortgage registration fee, $111.30 – a grand total of $14,499. Oh, and did I get to your conveyancing fees? No, because at this point it’s all academic anyway, so thank you for coming and may I suggest you go and talk to Cheryl again before you bother any other agents. Good day to you both…”
So if you think you have pre-approval for a property loan, make sure it genuinely is pre-approval. The number of buyers who think that just because a finance broker has told them they can borrow such-and-such they are approved for the loan is astonishing. And with real estate agents becoming sick to death of having to tell their vendors that the contract has crashed because the buyers weren’t approved for finance after all, it’s no wonder they are qualifying buyers more and more stringently. Even if they’re not always as forthright about it as Sheena.
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Mac writes: There’s another article stemming from this re the percentage of sales that fall-through post deposit. This process disrupts and hinders the sale process, which has the main aim to sell the property… that is, the ‘knee-jerk’ that a deposit ‘for free’ and is ‘icing on the cake’ is far from the truth.