~Originally published in The Sunday Business Post, September 16 2012
In simpler times, a property wish list used to include features like large bedrooms, open-plan diners or a south-facing garden with potential to extend. Now, the wish list demands have changed. Buyers today are looking for a bargain, albeit a bargain in a desirable area with access to good schools and a decent barista within walking distance.
With so much uncertainty remaining in the market, they are in search of distressed sellers, or at the very least, motivated sellers. The most motivated of these usually take the shape of one-time, amateur investors circa. 2005. They are the landlords who bought during the ‘110%LTV interest-only’ mortgage days.
As a strategy for buyers, it’s not a bad one. In fact, these sellers dominated the market in the years after the crash. In late 2009 and early 2010, when the market was at its worst, there were 2,300 houses available to buy in Dublin City below €200,000. Today, there are less than 1,000. These houses do attract investor interest, but most are purchased by first-time buyers.
Frieda, a non-national living in Dublin for more than a decade had viewed a large number of these houses before finding her dream home, a modest 3 bedroom terraced house in the Stoneybatter area of Dublin 7. Unable to secure a mortgage from an Irish bank, she borrowed the money from her parents, effectively making her a cash purchaser. As a savvy buyer, she used what advantages she had. The property was listed at €165,000, which was outside Frieda’s budget. However, with a bit of patience and careful negotiation, her cash offer of €130,000 was accepted. The structural survey was carried out, booking deposit paid and solicitor instructed. With the formalities underway, Frieda started to look forward to redecorating and moving into her new home.
Things hit a snag when the contracts for sale arrived with Frieda’s solicitor, showing a purchase price of €105,000. This was not mistake. The seller demanded the additional €25,000 to be paid ‘under the table’. This is a throwback to earlier years. Back in the days of 3 to 9 per cent stamp duty, it was not unusual to see contracts for sale split the total selling price into a contract amount and an addition hefty sum for contents. This was always considered to be a form of tax avoidance, which is legal within reason, rather than tax evasion, which is illegal. But there were no contents included in this sale and the painting job, however pleasing to the eye, was not worth €25,000.
When Frieda and her solicitors correctly refused to engage with the seller and requested contracts to reflect the real deal that had been struck, the seller withdrew from the sale. Frieda was left reeling. This experience reaffirmed all of her worst fears about buying in a market so lacking in transparency and weighted against the buyer.
It transpired, in fact, that the seller was the epitome of a distressed seller. He was so distressed that the bank was effectively calling the shots and he, the seller, was a mere puppet in the transaction. He had tried to regain control by declaring a sale price of €105,000 to the bank and pocketing the remaining €25,000. By declaring the real purchase price of €130,000, the seller saw no benefit in his pocket or even on paper. The mortgage debt was still huge (so what’s another €25,000?) and the bank would not give any commitment about the level of debt forgiveness he could expect. Their directions were to sell first, talk later.
The seller in this scenario was unquestionably wrong. Legally, morally and ethically wrong. But we made him, our State, by our draconian laws and antiquated banking practices. Banks need to put a level of debt forgiveness in place that makes it worthwhile for debtors to work with them, and ultimately with us. The carrot and stick approach might not be entirely appropriate, but it’s fair to say that the stick and stick approach is not working either.
Recent, high-profile, bank and Receiver auctions have proved that there is steady demand for bargain properties from Irish and overseas buyers. We know too that sellers want to off-load but they can only do so at a price that the market will pay. This is not an unsolvable problem.
So buyers, remember that you are the market. Keep searching for that motivated seller but avoid becoming the motivated buyer.