Buying before Selling
More and more property owners are getting themselves into financial hardship through purchasing their dream home before they have sold the current property they are living in. They do this by entering into Bridging Finance to pay for the property they are purchasing which is then repaid once they sell their current property.
This all sounds great in theory especially in a rising market and if a real estate agent has given an overstated value of the owners current property they trying to sell. But with rising interest rates and a declining property market many owners haven’t been able to sell their current property in the timeframe nor for the price they require.
This has led to property owners breaching their Bridging Finance agreement and being stung with up to 20% interest rates or hefty fines. They also risk being forced into settling for a lower sales price due to the urgency to sell their property.
We also need to consider that in a declining property market the equity value of a property you purchased 2 months ago can be more than what it is at the current moment. By this I mean that you can purchase your dream home at the moment for $X and think you are getting a bargain but in actual fact if you wait another 2 months the value and purchase price of the property will be less than $X.
Imagine the situation if you purchase your dream property now and in two months time you still have not sold your current property and both properties have decreased in value. The value of the property you purchased is now less than the amount you paid for it and the value of your current property is less than what you budgeted to sell it for 2 months ago. Your dream home has now turned into a nightmare home!
In summing up, during the current property market conditions home owners should be extremely cautious when engaging in bridging finance and having to commit themselves to selling their property for a certain price within a defined time frame. Its simple don’t take the gamble and purchase before you have sold!
Comments
I have heard about property owners getting themselves in to strife like this. Personally, I would never be able to do this as I would be too worried about not selling my property. It is quite a big gamble doing this.
Micky
23.07.08
7:14 pm
Bridging finance at best is always risky given you are gambling on selling your existing home at a price that will generate the return you require to gear up to buy another property that you have alraedy contracted to buy.
In essence you are relying on an agent to sell your property at a particular price while you are paying interest to a financial institution for the loan you have contracted to buy your new investment.
In todays market this is a recipe for disaster as you are dealing with too many variables that you cannot control including the realism of the price you have on the property you wish to sell, the time it may take to sell your property, potential vendors bargaining the negotiated price down [ even worse if they find out you are on bridging finance] and interest rates going up on both your current property and the new property you have bought on bridging finance .
If you are caught in this predicament you will be burnt financially such that you will probably regret making the decision to take bridging finance.
My advice is simple. In the current market don’t go near bridging finance . It is a buyers market not a sellers. Get your money first then negotiate hard on the property you want to buy.
Dave
24.07.08
8:49 pm
Yes, this is an interesting point you have made. Its just a simple thing but i guess when pushed by and estate agent trying to sell you your ‘dream’ home people make decisions which seem good at the time. A point well made.
Steven Price
25.07.08
10:34 am
Good points all. A friend of mine had first hand experience with bridge financing. He did exactly what Dave mentioned above and organised a 60 day bridge finance loan. The agent told them their proeprty will sell easily and within this time frame.
The 60 days approached and they still had no buyer. They ended up running over the bridging finance deadline and were stung with an interest rate of 18%. Almost three times higher than the market rate. Luckily the property sold just over 90 days, but what a pain in the b%$!
Mark
25.07.08
3:29 pm
As a bridging finance expert, I think there can be winners here as well, at a time where property prices are falling and rents rising, it can be a great solution.
Gareth Johns
26.07.08
4:27 pm
I agree there are opportunities available for property owners in the current market because rents are increasing but they are only really available to those property owners who own their property and who are not exposed to increasing interest rates.
There is always the option for owners to rent their property if they can not sell it but if they do not own both properties then they will be paying two mortgages. There is a good chance the rent received for the property will not be enough to cover the loan repayments for that property, meaning the owner needs to pay the extra money to make up the loan repayment.
In my opinion this should always be avoided. Remember, a property is the most valuable asset a person will ever own, they should make sure they do everything they can to protect it, in particular avoiding exposure to interest rate pressure.
Rodney Munch
27.07.08
6:02 pm