Homebuyers are prone to making dumb property decisions because of human weaknesses. Hong Kong author Suhei (素黑) said human beings have five major weaknesses – greedy, confused, lazy, stubborn and dumb.
We need conscience and guts to admit that we have made a mistake. However, it is not difficult for us to confess that we can be greedy, confused, lazy or stubborn at times. It is because being greedy means we are ambitious. Sometimes we are confused because we think too much. We are lazy when we prefer to take things easy. Being stubborn can be the result of our perseverance.
in contrast, there is no nice word for dumbness. If we are dumb, we are dumb. And it hurts our pride to admit that we are dumb.
Below are four dumb property decisions that homebuyers often make.
Dumb property decision #1: Buy. Return. Repeat
When I wrote the blog post “New project with most returned units. The winner is …”, never did I expect that the post could garner over 8,000 views. I thought the topic was boring. After all, returned units to developers is nothing new. It has existed in the private home new sale market for donkey years.
According to URA’s monthly data on sales by developers, from January to May 2023, a total of 262 buyers had to return the units they happily bought at the sales galleries to the developers. With more new projects launched in June and July, we can expect more returned units in the coming months.
Depending on when these buyers returned their unit, they could lose 1.25 percent of the purchase price, 10 percent downpayment, and other possible charges demanded by the developer.
Buying a multi-million-dollar property is no small matter. Had the buyers run the numbers? Did they check their affordability and loan limit?
Here is a real-life story of a homebuyer who backed out due to cash-flow problems resulted from the pandemic:
” … he failed to complete the purchase of a new $3 million apartment after having signed the deal in 2018. Not only did he lose his initial 10 per cent down payment of about $300,000, but he was also told to compensate another $700,000 to the developer for various losses that were incurred as a result of him reneging on the deal.”
– “Home buyers who back out of the deal can lose more than just their deposits”, The Straits Times, 28 May 2023
What did this homebuyer get in return? He compensated the developer $1 million for a property he couldn’t keep. For the same amount, he could have bought a fast car for a great ride and flaunted it too.
Dumb property decision #2: Buy to open the door of loss
Another buyer also threw away $28,750 or 1.25 percent of a $2.3 million unit at Blossoms by the Park.
“He was hoping to sell the property if he could get a capital gain of between 15 per cent and 20 per cent after three years. But barely two weeks after buying it, his optimism began to waver and the spectre of his investment turning into a financial burden began to loom large … I was invited to a VVIP sale of The Reserve Residences and I saw a unit that I like, so I decided to pull out of the Blossoms by the Park purchase.”
– “Condo buyer lost nearly $30k when he backed out of deal after two weeks”, The Straits Times, 18 June 2023
If a buyer bought a new unit priced 50 to 70 percent higher than the resale projects in the same area, what makes him think that he can still make a capital gain of 15 to 20 percent after three years? Honestly, we can’t even guarantee that he can break-even. Don’t forget that buyers of CCR new launches in 2007 and RCR/OCR new projects in 2012-3 are still under water.
Contrarily, after buying an overpriced new unit, the buyer has just opened the door of loss. The chain of loss continued with $28,750 penalty from a cancelled property deal. He went on to lose more money by buying a higher priced $2.4 million unit in another project with higher stamp duty and higher mortgage payment.
As I mentioned in my book Behind The Scenes of The Property Market, the number one investment rule is to close the door of loss and seal it. Leaving it open will initiate the unstoppable draining of money from our wallet.
Dumb property decision #3: Sell high. Buy high. Borrow more
In 2021 and 2022, loads of cheap money and delayed construction pushed home prices to sky high. Many saw their home value jump and couldn’t wait to sell and profit from it. Like winning in a casino, few can resist the temptation to put more money back to the gambling table for a bigger win.
Why did you choose to sell high and buy even higher? Because as a typical Singaporean, you join others to buy an HDB or BTO flat as your first matrimonial home. After fulfilling the 5-year MOP (Minimum Occupation Period), you start thinking about whether you should upgrade to a private home. As a homebuyer, you cannot wait to upgrade your home using the windfall from selling your previous home. It is just like investors who cannot resist the temptation to go back to the sizzling market for a new round of profit.
– Vina Ip, Behind The Scenes of The Property Market
With the fat profit these home owners can now afford to buy a more expensive home. A better home also comes with a bigger mortgage and higher expenses.
When we sell high, buy high, and borrow more, what have we gained in the process?
When our income or wealth goes up, we upgrade our home from a small flat to a bigger home. The truth is: We are only taking more money from our own pocket to give to the developers or sellers. What profits have we made?
“If you don’t want to ‘sell high, buy high’, unless you are willing to downgrade, it is naïve to believe that you can profit from the value appreciation of your home.”
– “It’s not easy to profit from your home”, PropertySoul.com
Dumb property decision #4: Sell high. Rent high. Buy high
Home purchase is both investment and consumption. If the home is for own stay, whether property prices rise or fall doesn’t impact us financially. If prices rise, we feel better and richer. But we cannot sell our home and sleep in the street.
Our problem is: Most of us only own one residential property which is our home. Even if we manage to sell our current home at a great price, we still need a place to stay. After we sell, we find property prices are high now and decide to rent for the time being.
Likewise, more people like us are looking to rent. We drive up rental demand and rental rates in the area. If we don’t want to pay high rent to the landlords, we have no choice but to buy a new home at a higher price. Consequently, we are all stuck in a self-created dilemma of sell high, rent high, and buy high.
By the way, reading property articles in the local media these days can really make us laugh. For instance, a property agency spokesperson told us that many are buying (a newly-launched project) because high rents will get higher, or we have more new PRs and new citizens. But a new project will take 4 to 5 years to build, do these buyers decide to pay high rent for 4 to 5 years, or sleep in the streets in between?
Dumb investments of the supposedly smart
It is not a secret that I made my first pot of gold buying from home sellers who had made mistakes in their property purchase. I am sure that these sellers are smart people. But somehow they made dumb property decisions because of human weaknesses.
I couldn’t agree more with what Warren Buffett said during the recent Berkshire Hathaway annual shareholder meeting:
“What gives you opportunities is other people doing dumb things … In the 58 years we’ve been running Berkshire, I would say there’s been a great increase in the number people doing dumb things, and they do big, dumb things.”
Remember the 100 Singapore investors who joined a class-action suit to recover $100 million in losses from Credit Suisse AT1 bonds? Most were in their 50s and claimed that they all have a conservative risk profile. They told The Straits Times that “just because we have a pot of hard-earned money that qualified us to buy a broader range of financial instruments did not make us more financially savvy.” Suddenly, these well-to-do Singaporeans all looked innocent. The once supposedly smart savvy investors all became victims.
Berkshire Hathaway Vice Chairman Charlie Munger slammed many money managers as little better than “fortune tellers or astrologers”. He accused them of taking cash from clients while providing nothing of value to them. They are simply gambling with others’ money.
Be careful of those who advise us on investments, especially about properties. They almost always don’t have our interests in mind, only theirs.
Food for thought
In Singapore, property investment is overrated. The phrase “buying a property for investment” is very misunderstood.
Before we mention the words property investment, think of buying a home from a consumer’s point of view first. We need to be a smart consumer of home purchase before saying that we are a property investor. Because how can we say we are investing in properties when we are just dumb consumers making dumb property decisions?
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I agreed with the sell high, rent high and buy high, yes, what have we gained in the whole process? Minus all the rentals, interests, renovations etc…..the gain is lesser than just the sold price – bough price. Noticed some do not consider the interests they paid over the years as part of the calculation, they consider leverage, isn’t that the nett profit consideration. As mentioned by the articles here earlier, we don’t earn anything from the current property we are staying, which should be paid off as soon as we can, if we can, then probably wait and hold. Some would say, should use the extra cash for ‘other high gain investments’ but if we do not know who what, where and how to do so, better just quickly pay off (high interest rates now) and live in peace.
Well said. We should aim to pay off any outstanding loan ASAP before considering any investment, especially in a high interest environment.
This is a personal anecdote. I was looking for a property (this is years back) and I was a rookie (still am!) in property. I remember the property agent was pitching me a unit and probably sensing I am a newbie and “hot lead”, he then quickly usher me to meet a so called “banker” (aka mortgage specialist).
I remember I was watching in horror as the mortgage specialist calculate my sums and worked out my “budget”. I said “wow, you are assuming the interest rate is zero now” (remember ZIRP days?), “what if interest rate rockets up to 5%?” He said dryly: “then everyone die lor..”
Oh wait… are we here already?
The agent was telling you that it’s none of his business even if everybody die. How much buyers suffer with high interest or capital loss is not the concern of the agents nor the developers provided that they pocket their commission and profit. Like what I said in my book “Behind The Scenes of The Property Market, when they sell you something, what they have in mind is: “As long as I am rich, who the hell cares what will happen to the people left to pay the price?”