How can Property Zoning affect a Property?

“Oh. What does that mean?” is the response buyers often have when we make mention of a little piece of information that can have significant negative flow-on effects for a property purchase.

So what sorts of pieces of information could adversely affect a property purchase? And even if the buyer never plans to sell, how could their purchase eventuate in a headache? We’d like to share some less than happy adventures so that you never make the mistakes we have seen other less fortunate people make.

First and foremost, as we say to anyone who is serious about buying a property—get a licensed legal professional to check out the contract. Most conveyancers or solicitors will charge a small fee to go over the contract for you and their fee is rebated in the total Conveyancing cost if you proceed with the purchase. A solicitor or conveyancer will identify any potential issues for you that appear in the Vendor’s Statement (or Section 32).  They will also carry out any other searches or enquiries that they feel are important for you to know as a potential buyer, such as planned road widening or other such civil works.

One common mistake we’ve seen buyers make is assuming that a lender will be satisfied with the property that they wish to purchase. It is vital for every buyer to recognise that the bank will most likely send a valuer to look at the property for starters. In addition, the bank’s mortgage team will carry out a search on the property and check for items such as Zoning. Property zoning is important because it usually dictates the nature of the area, e.g. Retail precinct, industrial, business, etc.

Banks have different lending policy for the various property types and if the lender makes a decision that the property you wish to buy does not fit their Residential Lending Policy, you may have to consider other loan types such as commercial loans.

Commercial loans are completely different to Residential loans because their terms, rates and lending amounts can be vastly different. A typical loan secured by commercial property will most likely have an interest rate at least one percent higher and will be capped at a Loan to Value ratio of 65%-70%.

This can be devastating for any first home buyer who has a ten percent deposit saved because all of a sudden, the commercially or industrially zoned property that they love is no longer attainable.  The hardest part for the buyer is that the home didn’t look like a commercial premises but the zoning prohibited it from being covered by a residential loan. A good example of such properties are flats above shops, units in amongst old factory areas, warehouse conversions and loft spaces above offices or industrial businesses.

Not every commercial or industrial-zoned property is rejected by a lender under Residential Lending Policy, but it does pay to check before you buy unconditionally so that you have this important aspect covered off. In the case of going to auction—doing so on a property that is not zoned Residential is a risk that any buyer without access to extra funds (or equity) takes.

Importantly—if a property is Residentially zoned but doesn’t appear to be a residential use property (e.g.. Shopfront), it pays to talk it over with your mortgage broker, bank and conveyancer before buying also. The lenders are not obliged to accept any security property, even with a preapproval in place.

Another little thing that can have a detrimental affect on a flat or apartment’s value is the nature of the property title.

Dating back, many owners held company shares as opposed to individual strata titles. The difference was that a formal subdivision had not occurred and instead, owners held shares which entitled them to a certain percentage of ownership based on their unit.

Such titles do still exist on older inner-urban buildings and this type of ownership can create problems for obtaining a loan at greater than an 80% LVR. Converting to strata title can be done, but not quickly and not inexpensively.

Any development applications in progress or approved building plans nearby can also have an affect on a property. If the house you love has views or overlooks parkland that you imagine yourself enjoying, always remember that nobody ever ‘owns’ a view. A search which is carried out by a solicitor or conveyancer will address this question—at least for the time being.

Outgoings can make the difference between a fabulous investment and a bad yielding cash-trap. Again, this information is included in the Vendor’s Statement (or Section 32) and identifies all of the various surcharges and Owner’s Corporation fees, as well as future works agreed to be carried out on a shared building. Recently we had a client ask us about a property and he hadn’t noticed the $4,000 pa body corporate fees on the 1BR apartment. His projected returns were whittled away by the magnitude of the outgoings, presumably fair market fees for the swimming pool and elevator upkeep costs.

Sometimes if it looks too good to be true it might be.