oc | Tuesday 21st January

Learning Fees

As we are now firmly into a new market, we thought it time to have a stab at one of the most perplexing concepts confronting inexperienced buyers in high-end real estate  – the “Learning Fee”.

The “Learning” Fee is the amount you as a Do-It-Yourself buyer can end up paying extra for the home you buy, simply because buying a house is not something you do every day. We all pay some form of learning fee every time we buy – for the inexperienced it is an ‘unknown unknown’,  for the more experienced it is just a question of amount.

LearningAs at James Buyer Advocates, each of us in the office have paid significant learning fees buying property in our personal lives. Let me tell you how many mistakes I made in my personal property life early on. But I’m 50 and have banged my head against the wall enough times for the message to sink in. And now each time I buy personally and professionally, my learning fees are lower.

Learning fees come in a number of shapes and sizes. Here are just some examples we have come across. (To keep the maths simple we’re using $2million scenarios)

  1. Wrong Home DIY Learning Fee: You buy a home, and after a year or two it just doesn’t feel right. With the “happy wife-happy life” jingle firmly in your mind you sell and buy again. Your financial Learning Fee, assuming you bought and sold well in the first place, is: $110,000 in stamp duties $60,000 in agent selling and reselling fees $20,000 in removal costs and another $20,000 in incidentals such as legals, repainting etc. That’s around $210,000 in Learning Fees.
  2. Capital Growth Gap DIY Learning Fee: This is where you buy a home with poor capital growth characteristics, and it grows at the rate of say 5% while everything around you grows at 8%. A 3% difference mightn’t seem like much short term. But over the average seven years of home ownership, your decision will add up to a Learning Fee of $493,557. ($3,173,748 – $2,680,191).
  3. Missed Opportunity DIY Learning Fee: This is the Learning Fee you discover you’ve paid when you compare yourself with Mr and Mrs Jones who always seem to be on holidays, sending their kids to great schools and not working much. That’s because they were prepared to pay an extra $100,000 a few years ago after  beating off stiff competition from six other bidders for a really good period home with good content. Since then their home has been outperforming the rest of the property market at 11% a year. Meanwhile the less than average property you settled for (see Capital Growth Gap – above) has been growing at just 5%.  Even accounting for the initial extra $100,000 the Jones’ spent, “overpaying” for their great home, your Learning Fee for buying your ordinary home is around $1,000,000; over seven years that’s around $200,000 per annum for EACH of those 7 years, before tax.
  4. Renovation DIY Learning Fee: Here we have the case of “the Switzers” who paid $1,700,000 for a home that was in need of a $300,000 reno. As with many renos, not everything went to plan and their renovation ended up costing them $610,000. But they got what they really wanted. Well sort of – the home isn’t as close to the shops and they couldn’t afford the pool or the special Masterchef oven. In fact the Switzers now acknowledge they would have been just as happy to have paid the $2million in the first place and avoid the drama of the renovation, and be within walking distance of Street’s “Brown Cow” – and have a smaller mortgage. DIY Learning Fee: around $300,000 and then some.
  5. The Investment DIY Learning Fee: Here we have Jason and Kylie, a couple of 25 year old hot bods who charge off to one of those investment property seminars which promise you’ll make a in six months, but instead our bright young things end up knee-deep in cash-flow tables, bank documents and (whoops!) a signed investment home contract that results in their off-the-plan, out of town, so-called whiz bang investment property growing at a miserable 1.3% per annum over the next ten years. It’s not only preventing them building any wealth, but worse, it’s stopped them buying the dream home they wanted to live in, which they could have afforded except the banks won’t back them now they have this off-the-plan out-of-town millstone around their neck restricting their borrowing abilities. Their Learning Fee ends up being their whole life – keeping them in a McMansion in Pakenham when they really wanted to be in a period home in .
  6. The Emotional DIY Learning Fee: A real life Eastern suburbs example here where a potential client wanted to put a bid in on a home, with a “take it or leave it” demand. We suggested opening up negotiations with an offer a few hundred thousand dollars lower, telling them that “sometimes it’s not how much you offer but how you present it”. No, they said, “that’s our offer and they can take it or leave it”. Unsurprisingly their offer, and their ultimatum, wasn’t accepted.  Annoyed and fragile, these people walked down the road to another agent and paid $400,000 more for a home that we had passed on 6 months ago when it sold at auction. The home requires a major rebuild – in the millions – that will leave very little rear yard. It may be the right home for these people, who knows, as we never really got to know them, but it’s a very real possibility that a very large learning fee has been paid.
  7. The DIY Valuation Learning Fee: If you are told its worth $2.2 and you think it’s worth that but it is in fact worth a lot less…..
  8. The DIY Negotiation Learning Fee: If you are told to pay $2.2m and you don’t know how to correctly offer $1.9m …………

Of course another Learning Fee can be the fee you pay to a buyer agent to help you buy. In the past financial year we have bought around 80 homes in that $1m to $5m bracket.

An argument against paying a buyer agent learning fee is that at an auction, under the hammer and on the market it’s the person with the most money who wins, and buyer agent fees are just additional imposts.  This at times is a legitimate concept (especially with inexperienced and incompetent buyer agents).  But in this market, seven out of eight deals are Expressions of  Interest or Pass-Ins or Private Sales or Pre Auction Offers or boardroom dealings …(where there are no rules) not under the hammer public auctions.

A substantial argument for paying a Learning Fee to a buyer agent is that it can significantly reduce your overall Learning Fee on this a most important financial decision, which you may make only once a decade. Alternatively a buyer agent fee can be regarded as an insurance against paying the kind of hefty Learning Fees we saw in the above cases.

A result of paying a Learning Fee to a competent buyer agent could be savings off your mortgage, better capital growth, more money in your personal life and –  the hard to measure  but no less important – better emotional outcomes.

In life we all pay – the question is how much.

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