Buyers Tips and the Property Market

The difference between a selling agent and a buyers agent

Fri, 18 May 2012 05:58:00 GMT

Both are real estate agents, so apart from the obvious, that one represents the seller and the other looks after the purchaser, what sets them apart?

Well, most selling agents have never been buyers’ agents and a lot of buyers’ agents have never been selling agents, but I have been both and there are some key philosophical and practical differences.

Now, believe it or not, selling agents have a bit of a reputation for over-paying for property. John McGrath, probably Australia’s most famous real estate agent, has a particularly stellar record for losing money on his real estate transactions. Only the other weekend, it was noted in Title Deeds that he “copped a loss on Tallowwood, his weekend retreat at Duffys Forest”. Over the 12 months in which he owned the house he managed to lose nearly $700,000 plus renovation costs. When you add in the stamp duty, whch would have been over $240,000, that’s a million dollar change of mind. Adding insult to injury, he sold another property earlier this year, this time in Walsh Bay, for $45,000 less than he paid for it in 2009. If my memory serves me correctly he also took a bath a few years ago on a Potts point apartment that he “unimproved” by converting it from a three bedder into a giant bachelor pad.

Selling agents simply aren’t as critical as buyers agents. Why is this?

Bryce Holdaway, my partner in crime on Location Location Location Australia, sums up the differences in this way: a selling agent is skilled in marketing and negotiation, a buyers agent is skilled in property selection and negotiation. I can take it a step further. The selling agent doesn’t get to choose what they have to sell. In some cases they list a property that will be very popular but often they list something that is a bit of a challenge. So a good agent will be very skilled at objection handling. They become very adept at seeing the positives and glossing over the negatives. Consequently, they have a cup half full approach to buying property. On the flipside, by casting a critical eye over a prospective purchase, a buyers agent will be more objective when determining what is a good property and then establishing the right price to pay.

Careful of free advice from your friendly agent.

We come across quite a few people who have such a good relationship with their selling agent that they seek out their advice when it comes time to buy. They recognize that they need expert help, which is a great thing, but the selling agent is not the expert that they need. Apart from the fact that their favourite agent views property through different lenses, they are usually receiving free advice. And free advice is worth what you pay for it...

Not that I charge my friends and family for my professional opinion, but I can’t help but notice that those who benefit from our free pearls of wisdom are much less likely to actually take the advice. But our clients, on the other hand, who have made a commitment and paid upfront for access to our expertise, always place a high value on what we tell them.

But, I digress. It is about getting the right person for the job. Let the selling agents stick to selling and the buyers agents stick to buying. That way, when you sell you will get the best price and when you buy, you are more likely to have a property that will be easier for a selling agent to market down the track. That is, there will be less objections that need to be handled.

Understanding win-win will help in property negotiations

Thu, 03 May 2012 05:57:00 GMT

One of things I love about the real estate game is that it is all about people. Sure, bricks and mortar are involved, but it is people who build, sell and buy property. Try as they might to remain unemotional, the fact is that very few people can be clear-headed, particularly when it comes to buying or selling their own home. This personal involvement intensifies if the property for sale has been lovingly renovated by its owners. Even investors can get very personal when it comes to choosing a property to add to their portfolio and selling it down the track.

So one thing to never lose sight of when negotiating on a property is that the owners are human beings with very real emotions and sometimes very irrational ideas on what their property is worth. Everybody loves a bargain when they buy but nobody wants to “give their property away”. Even in a forced sale situation, there is a difference between the seller walking away feeling resolved about taking a loss over them leaving the deal feeling fleeced.

It is crucial when negotiating to understand the concept of win-win. This means that both parties come away from the negotiating table with the feeling that they have achieved something. If a deal is struck, the buyer gets to buy the property, which is an obvious win for them. Ideally the purchaser feels like they paid a fair price and the seller feels like they achieved a fair price. But is is not always possible, particularly if the vendor’s expectations are too high or if the market has dropped since they purchased the property.

In a sellers market, the buyer may be the one to feel remorse after paying “too much”. But in a buyers market the person who takes the hit is the owner. And if you expect somebody to take less than they want for their home, you will be more likely to achieve a favourable outcome if you haven’t insulted the vendor during the negotiation process.

There are so many ways to deliver an offer and buyers often forget life’s little niceties in this situation. How often have we met sellers who have been put offside by the manner in which the buyer has wielded their market power? And then they dig their heels in and refuse to negotiate further with that particular buyer. Or they drop their asking price to a more realistic level and find another buyer, who they favour over the first one, sometimes even at a lesser price.

I love the saying “honey attracts more flies than vinegar” and it certainly applies to property negotiation. How you deliver your offer can make the difference between acceptance and refusal. Show empathy for the owner who needs to take less if they want to sell, don’t be arrogant. Work with the selling agent to get them to prepare the vendor before delivering a low offer, give them some sort of advance notice so that the offer isn’t a rude shock. And if your offer is at market value, you will no doubt be able to get the agent on side. But if you insist on making an offer that is way below market value you run the risk of alienating both the agent and the seller, which greatly reduces your chance of getting any subsequent offers accepted even if you reach a fair price.

Regular readers of my blog will now that I often talk about getting the “ducks lined up” before making an offer on a property. We often see buyers making bids far to early in the process and long before they are in a position to sign a contract. But in the time it takes to complete the due diligence, it is important to employ some “pre-negotiation” tactics. Communicate with the agent and keep them posted on where you are up to in your own process. Don’t just go silent then turn up with a signed contract and expect everybody to jump for joy.

Just remember that you are dealing with people who have feelings and probably take the sale of their home very personally. Even if they have to take a dive on the eventual sale price, their half of the win-win equation will be knowing they got the best price that market was likely to offer, that their agent worked hard for them and that they can now move on with their lives.

Nine things to look for in a property

Thu, 05 Apr 2012 00:59:00 GMT

The key to capital growth in property is resale value. So, how do you determine what sort of property is likely to sell well in the future?

As a general guide, we recommend you look for the following features when considering whether a particular property is likely to be an above average performer in the capital growth stakes.

1. An architectural style that is compatible with the area. For example, a Victorian terrace in Paddington is something that the majority of buyers in that area are looking for. So a 1980s cottage in the same area, no matter how nicely presented, is always going to attract less interest from buyers.

2. A good, quiet street – not a main road. Tree-lined is the ideal, within an easy walk to amenities and public transport. In every suburb there are specific streets that carry a certain cache – and buyers are often prepared to pay a premium for these addresses. Just think of Telegraph Road Pymble.

3. The ideal aspect is a garden facing north or north-east. If buying a semi-detached house, look for the one where the windows are on the northern side. Good natural light is what you are after, particularly in the living areas and garden.

4. The floorplan needs to make sense, with good flow and balance. An unbalanced house would be one with 4 bedrooms and a tiny living area or limited outdoor space. An example of poor flow is where you have to walk through the laundry to get to the courtyard, or where the bathroom comes straight off the dining room. The only exception to this rule is if the floorplan can be simply rearranged without significant structural work.

5. Parking is always preferable to no parking, however there are many inner city areas where there simply isn’t the availability. So in the absence of off-street parking, make it is easy to get a space on the street.

6. Aussies love to live alfresco, so usable outdoor space is always a big plus for resale value.

7. Good property doesn’t always have a view, however the best properties do have some sort of outlook. This can be as simple as ensuring each window looks out onto garden. You could plant a climber so you look at greenery instead of looking at fence palings. Or a row of bamboo or pine trees to obscure the house next door. If you can’t obscure an ugly outlook or rectify a privacy issue, don’t buy the property.

8. Presentation of properties for sale can be misleading. It is easy to fall in love with the appearance and trimmings of a styled property and fail to see the nuts and bolts of what is actually for sale. Conversely, it is just as easy to overlook a fundamentally good property simply because it hasn’t been tarted up for sale. In fact, you might be able to add immediate value simply by addressing the presentation. Great examples are tenanted properties and those owned by older people who have dated colour schemes and furnishings.

9. The condition of the property can set it apart. A well maintained property will need less money spent on it that one that has been neglected. And any savings you make in upkeep go straight to your bottom line come sale time.

When taking into account these general attributes, it is important to note that every micro-market has its quirks and it would do you well to understand these. For example, a weatherboard house in Balmain is not going to be worth less than a brick one, but in more recently developed areas there will be a significant price difference. If you understand the primary elements of a good property and combine this with local knowledge, you should be well on the path to a successful real estate investment.

The key to capital growth in real estate

Fri, 23 Mar 2012 07:02:00 GMT

I have a real issue with property spruikers claiming to know the next hot spot, the inference being that if you buy in these areas you will automatically be making a great investment decision. Particularly as there are so many would-be investors who are trying to identify the next big location in their hopes of striking real estate gold.

The thing that is so rarely talked about is risk. Now don’t get me wrong, there is a time and a place for taking risks in the hope of big capital gains. But this is the realm of serious investors who are educated and experienced (or pay for advice) and who already have substantial equity to back them up. It is not an investment strategy that we advise for first time investors or those with a large debt to equity ratio.

There are two main elements to capital growth. There is the location and there is the individual property. Many people providing property investment advice will focus on buying in the next hotspot to the point where the actual piece of real estate becomes secondary. In fact many of their clients purchase property sight unseen, with decisions made solely based on “the numbers”. We believe that this is the riskiest strategy of all as every suburb and town has a median growth rate, which means that 50% of properties in that area will under-perform. If you are not focused on the actual property and it’s attributes then you run a very real risk of missing out on the opportunity for good capital growth, let alone maximum returns.

The thing that I love about buying real estate is that on one hand it is so simple, the fundamental principals are pretty basic. But on the other hand it is a very complex game, largely because human beings are involved and we often have to be lay psychologists to make sense of it.

One of these fundamental principals applies to capital growth. It is this simple: for a property to grow in value above the median rate for the area it needs to appeal to buyers. So the key to capital growth is understanding what sells well. Brooke and I spent many years as selling agents, and we have stood at the front door of open houses and dealt with often brutal buyer feedback, or lack of feedback as the case may be. As a result we know what sort of property sells well. And we can see when there are simple ways to create buyer appeal as opposed to features that cannot be changed. And we can also see when buyers are being seduced by great presentation and overlook a property’s down-sides.

For this reason, when we are providing property investment advice to our clients, we firstly cast a fairly wide net in terms of location (within our preferred 10km radius of the CBD) and then actively seek the best opportunities within that area. And what makes a good opportunity comes down to the actual property and it’s future saleability.

There is little benefit in filling your head with statistics about projected population growth, infrastructure development, job creation projections etc in order to determine WHERE to buy if you make mistakes in choosing WHAT to buy.

Auction advice that applies to both buyers and sellers

Fri, 09 Mar 2012 02:09:00 GMT

Know your price before the auction. Don’t wait until the stress and pressure of the auction before making your mind up on what your bottom sale price or top dollar is.

If you are selling your property it is vital that you understand what it is worth. Sounds pretty basic, doesn’t it? But this is actually quite hard to do, especially as so many property owners get quite emotional when it comes to selling their home sweet home.

So how do you do it? Firstly, most people get a few agents in to give an appraisal. Each state has its own rules about the process the agent must go through to arrive at a suggested sale price. Fundamentally you can expect the agents to return with a list of comparable sales that demonstrate what they think your home is worth. But you need to remember that there is often an element of flattery in these comparisons, as the agent at this stage of the game is pitching for your business. So try to remain level headed as you consider these recent sales and whether you can truly expect something similar or better.

If you watch Selling Houses Australia, you will see that Andrew Winter takes his difficult vendors through a property that is currently for sale and competing with their home. This is an important part of understanding value as this is shining a spotlight on what buyers today are looking at right now, instead of concentrating on history. Most markets are pretty dynamic, so you need to get an understanding of the situation at the time you are planning to sell. Buyers usually have choice. Based on what else is available for them to buy, would they choose your home at that price?

Lastly, when determining what your property is worth, you need to listen to the feedback from buyers that are inspecting your property. Now, hopefully you have appointed a gun agent who has been able to attract a lot of buyers to the viewings. And this gun agent should have been able to press these people for their thoughts and also be able to read and interpret the non verbal communication. And then this gun agent should be communicating with through throughout the sales campaign so that you truly understand the positives and negatives of your property and how they impact on price. And through this process they should have been able to gain your trust and faith so that, come to the crunch, you will seek and heed their advice. Lastly, the gun agent will have been able to convert some of these buyers into red hot prospects, who are prepared to register and bid at your auction.

Now, whether you have twenty prospective bidders or only one, the principal is the same. Your clear understanding of what the property is worth will give you the confidence to know when you have achieved a good price or whether to pass it in and hold out for more dollars.

Where sellers often go wrong is when they set the reserve too high and they take too long to decide whether they will move from this figure. A successful auction relies on momentum and the decision on a bottom line sale price needs to be made ahead of time with a clear head, not in the middle of a stressful auction. Too often we see what could be a competitive auction stalls as the agent wrangles with the vendor to get the property put on the market. Which is great for us as buyers!

Likewise, when you go to bid at auction, you need to set your top dollar (or maximum bid) beforehand, with a clear head. You also need to know where this property sits in relation to the rest of the market. When you understand value, along with a premium that you are prepared to pay if this home uniquely suits your needs, you are less likely to get drawn into a foolish competition. We ask our clients to consider the level at which they are prepared to let another buyer have it. It is crucial that you know this figure ahead of time and make a commitment to yourself to stick to it!

On the flipside, if you are the only bidder prepared to make a bid, or the highest bidder on a property that has passed in, by understanding value you can confidently continue negotiations and know when a fair price has been reached, or when the vendor simply wants too much. Increasing your bid after an auction isn’t always a silly thing to do, particularly if you know that you are still way short of a fair price. By all means try for a bargain and take advantage of being in the box seat. But keep in mind that if you are way off the mark, and the owner does have a realistic price expectation, in all likelihood they will find another buyer before too long.

Whether you are a buyer or a seller, knowing the value of the property in question will enable you to confidently agree on a price, or know when it is wiser to let it go.

Make sure you get what you think you are buying.

Mon, 05 Mar 2012 11:24:00 GMT

Recently I looked at a strata property for a client in a small complex of five villas. Inside the layout and condition was pretty simple and functional and suited his needs well. But the feature that most appealed to our buyer was a private north-facing courtyard with an established garden.

After the second inspection our client confirmed that he could see himself living there and decided to make an offer. So the first thing we did was to advise the selling agent of our interest and request a copy of the contract of sale.

I always look at the strata plan to confirm the square meters on title and on the first glance I noticed that the courtyard was not marked on the plan. What does this mean? Well in this case it meant that the courtyard is common property and not owned by the vendor of this villa.

This in itself is not that unusual, there are many instances of strata properties where an area of common property is used by one unit holder. Usually this stems from an oversight in the original design, such as a roof cavity that could be used for storage or a “dead” space that could be used as an outdoor area, such as in this case.

But there needs to be evidence that the Owners Corporation have approved this use and the best way for this to be done is in a by-law.

So, flicking through the contract of sale I look for the by-laws and see that there is indeed one that gives Exclusive Use Rights to this unit for a section of common property. BUT, this permission is only for part of the space. Only the deck is referred to, meaning that the garden and fence are not included.

Now I am not a solicitor and cannot advise on a contract, and I can certainly see that we need to get advice in this instance. We need to know the risks associated with purchasing this property without this approval in place.

The legal eagles came back with some options that we will pursue – the most favourable being to try to get the vendor to agree to make permission a condition of the contract. Now this may work as a strategy in a flat market but in a booming market the vendor may not be so willing.

In fact, the current owner of this property only bought it 2 years earlier, when the market was quite a bit stronger. And it appears that the deck had been built around 5 years ago. Which begs the question, didn’t her solicitor pick this up at the time when she was buying?

At first I thought this may be a case of negligence, but when I thought about it further I realised that this could quite easily happen. You see, unless the solicitor or conveyancer actually inspected the property themselves or at the very least looked at the advertising, they could easily overlook the fact that the courtyard was not covered in its entirety by the contract. And while a proactive property law specialist may routinely ask their client questions that could unearth the issue, the thought may not occur to many generalist solicitors.

So, what is the upshot? Firstly, by engaging our services, our client has had somebody on his side that identified the issue and was able to negotiate a suitable outcome through his solicitor. So he did not fall into the trap of paying for something he was not getting. However, if that does not convince you of the merit of using an experienced buyer’s agent, it is up to you to communicate as much as possible to your legal representative. Perhaps you could provide them with the advertising material for the property and be very specific about what it is that you think you will be buying.

Now please take note that this example is with a strata title property. A smart property lawyer will recommend that you get a survey if you are buying a torrens title property to ensure that everything you expect is there – and nothing you don’t expect.

How do you make sense of the Sydney property market?

Fri, 24 Feb 2012 00:26:00 GMT

At the moment it is very hard to work out what the Sydney property market is doing. Certainly none of the experts seem to have a handle on it.

February is always a time when we exercise more caution than usual, particularly with our investor clients. Normally at this time of the year we have a combination of a stock shortage and fresh buyer activity from rested property hunters and new entrants. It takes a while for the market to take up the slack caused by the downtime over the Xmas period, so we usually see heightened competition, increased auction clearance rates and a spike in prices. And this situation can last until the end of March. In boom years it continues unabated until spring. In 2007 I remember the market ran full steam ahead right up to Xmas!

So far this year has been no exception on two counts. There is a stock shortage and there also appears to be plenty of buyers out there.

But we are now more than halfway through February and last weekend the auction clearance rate was still only 52%, which is a similar level to where it was at the end of 2011. Some properties are languishing (more so in the higher price bracket) while others are selling way above expectations (a number of 2 bedroom cottages in Marrickville spring to mind).

The open houses over the past few weekends have also been a mixed bag. At some properties we have had to queue up before taking a peek inside, while at others we had the house and the agent to ourselves. And there hasn’t been a clear pattern as to why this is so. It is not as simple as saying that anything over $1.5M struggles while everything under $1M flies out the door. We have seen properties well under the $1M without any interested buyers.

Feedback we are getting from selling agents is that both buyers and vendors have been sitting on their hands while they wait for another interest rate drop. Now that the banks have taken matters into their own hands and instigated their own rate rises, we hear that a lot of potential vendors have decided to delay listing their properties for sale. Conversely a lot of buyers seem to have decided they are sick of waiting for lower rates and will take the plunge regardless.

So if these indications turn into a trend we will start to see a rise in both clearance rates and sale prices.

The upshot? Well, we will still exercise caution. That is certainly not to say we won’t be buying anything, however. Because we know the market so well and understand prices, we can assess value and strike accordingly. We also know when to leave something alone because it is selling at a premium that may not be sustainable come April.

And for owner occupiers who have just found their dream property it may well turn out that it is worth paying a premium and it’s just bad luck that their perfect new home came on the market now instead of a more advantageous time. Just remember to decide on your maximum limit before you begin bidding or negotiating so that the emotion doesn’t take over.

A holding deposit holds nothing

Thu, 02 Feb 2012 01:32:00 GMT

How exciting! You have found a property that you would like to buy and have had your offer accepted! And to show how serious you are, you have handed over a $1000 holding deposit. Only thing is, a holding deposit holds nothing.

Now I do not know why some agents persist in getting a holding deposit from buyers since, in NSW, once you have had an offer accepted on a property there is absolutely nothing binding until contracts have exchanged.

There are two ways you can exchange contracts on a property. But you will not always be given the choice of which one to use.

The first way is with a five day cooling off period. You can do this in the agent’s office on a Saturday afternoon if you like and you don’t need to get any legal advice prior to doing so. It is commonly the done thing to pay an initial deposit of 0.25% when you sign the contract and the balance of the 10% prior to expiration of the cooling off period. By exchanging contracts with a cooling off period you will have 5 business days to complete your due diligence. This process includes getting your contract reviewed, building & pest inspection and/or strata search done, finance approved and balance of the deposit arranged.

The benefit to you is that the property is then off the market. The vendor cannot entertain offers from any other buyers and only you can change your mind – but if you do so, you will incur a penalty of 0.25% of the agreed purchase price. So, say you have offered to pay $500,000, this penalty would be $1250.

The main reasons for backing out within the cooling off period would be either a bad building inspection or strata report or an inability to come up with the finance. We hear of plenty of buyers making offers before they have finance approved but even if you have pre-approval, the bank could take longer than the 5 days to give you an unconditional finance approval or the valuation could come short

One thing to bear in mind here is that in a competitive market, or if you have made a pre-auction offer, it is highly unlikely that you will be given the option of exchanging contracts with a cooling off period.

The second way to exchange contracts is to sign an unconditional contract. The only way you can do this (other than at an auction) is to have your solicitor or conveyancer review the contract, advise you on it, then issue a Section 66W Certificate. This certificate waives your cooling off period, making the contract unconditional. Under these circumstances you need to have done all your due diligence - the contract reviewed, building & pest inspection and/or strata search done, finance approved and deposit arranged - before signing a contract.

The risk here is that while you are busy doing your due diligence, the property is still on the market and other buyers can make offers. Time is of the essence and you need to keep the pressure on your banker, solicitor and inspector/s.

So, back to the issue of a holding deposit. Our advice is to only hand over a deposit at the same time you hand over a signed contract – and get some assurance of exactly when the exchange is expected to take place. A holding deposit is simply an unnecessary step in an already complicated process. All it really serves to do is give the inexperienced buyer a false sense of security.

Different types of real estate agents

Sun, 13 Nov 2011 09:32:00 GMT

In my experience real estate agents typically fall into one of two categories – “deal doers” and “process people”.

The first, and most common, are the deal doers. These are agents who jump to action when they have a buyer on the hook. They won’t let a deal pass them buy. They are opportunistic and often charismatic. They thrive on a sale and know that the only way they get paid is to sell, sell, sell, and they never lose sight of this.

These agents are able to understand their vendor’s motivation and are able to find out their bottom line. They are very focused on managing their vendors price expectations (otherwise known as conditioning) so that they can get a deal together in a timely fashion once they have identified a buyer.

The more skilled agents in this category will be very charming and persuasive and you will want to buy from them, even if the property they are handling isn’t ideally suited to your needs.

The less skilled “deal doer” agents will resort to playing games and being a bit liberal with the truth. So you are unlikely to trust these guys as much and will probably not want to buy from them unless they happen to be selling a property that really suits you.

Regardless of their skill level, a quick sale is a good sale in their eyes. So negotiate hard and decisively, preferably with a signed contract and a walk-away price.

The second group of real estate agent are process oriented and much less focused on getting a deal across the line, often lacking the necessary negotiation skills and nearly always inadequate when it comes to reading people and their buying signals. Often inexperienced (although some dinosaur agents can be like this too), they will be lead by their owners, who generally don’t know how to negotiate either. They couldn’t manage their way out of a wet paper bag so the chances of them having their vendor’s price expectations under control are close to nil. Not only that, but quite often they haven’t even worked out that without covering this crucial base they are less likely to get a sale. And they don’t have the skills to close the gap between a buyer at a low price and a vendor at a high one. Quite often we come across these agents presiding over an overpriced property, where they don’t even realize the price is too high and they have a level of arrogance about buyers who they seem to perceive are simply being cheap.

Typically these people follow a very rigid step by step process and aren’t able to roll with the punches. They don’t think on their feet and won’t know how to handle a curve ball. C follows B follows A and don’t get the order wrong! So now is not the time to get creative with your offer and try to negotiate on things like inclusions, settlement periods and lease-back arrangements. Whatever you do, don’t confuse these poor souls!

Generally those who are the worst negotiators will give you the least information. They don’t know how to use information to get an outcome. So buyers get frustrated with them and sometimes even give up in disgust. Or they dig their heels in and nobody gets anywhere.

These are the sorts of agents you have to give a low offer to as they won’t know how to present a decent offer to their vendor. By starting off at a figure less than you are prepared to go to you will be conditioning the vendor (because we know the agent hasn’t been) and allowing our friend to look like he is negotiating. So when you finally get to the point of submitting your final offer, the vendor is better prepared to recognize it for what it is and hopefully accept it.

You might get the feeling that I don’t like dealing with these “box ticker” agents. And you would be right. But we always keep our eye on the prize and act accordingly in our negotiations.

A behind the scenes look at an auction

Sun, 06 Nov 2011 04:41:00 GMT

The Inner West of Sydney is a very auction oriented area and there are certain rules of the game that you need to bear in mind in such markets.

Firstly, you need to be aware of how a quoted price or price range comes about. Basically it is the lowest price that the agent thinks he or she can get away with quoting. And what they can get away with depends on a number of factors, not the least being their legal obligations and requirements imposed by the Office of Fair Trading.

Now before an agent lists a property, they usually conduct an appraisal and pitch their proposal against other selling agents. There is often a temptation to put a high estimated sales price if they think that will increase their chances of winning the listing. Many otherwise level headed property owners can get blinded by a little price flattery. So in order to make these estimates more realistic, the agents are required to provide evidence of how they have arrived at their suggested sale price. What usually happens is that they end up providing a range. What they really believe is at the lower end and what they think the vendor wants is at the upper end. This is the range that is written on the agency agreement and they are not allowed to quote a lesser figure.

However, the vendor probably won’t sell at the lower end of that range without some heavy persuasion and they would need to be convinced that nobody would be prepared to pay any more. Thus begins the conditioning process, whereby the agent seeks to close the gap between what they think the property is worth and what the vendor wants for it.

Now sometimes the vendor is right and buyers are prepared to pay more than the agent thinks. During an auction campaign it is not uncommon to receive pre-auction offers, as David and Marie decided to do. In most auction campaigns there is not much point putting in an offer under the quoted price, so you would expect a serious attempt to buy prior to auction would take the form of a greater figure. Every time the vendor rejects an offer, the agent is required to increase their quoting. And if there is only one buyer at that higher level, that can really sabotage their campaign.

At the moment it is widely believed to be a buyers market throughout the country. In Sydney it is no different, though in the Inner West we constantly see that good property still attracts good interest from buyers. However the quoted price range is an essential component required to generate competition. If the agent is allowed to continue quoting a low starting price, they improve their chances of being able to build substantial interest and have a competitive auction. However, if they are forced to increase their quoting, their job is made all the more difficult.

The fact is that buyers are cautious at the moment and reluctant to compete if they think somebody else is already prepared to pay top dollar or if the vendor has unrealistic price expectations. And we have been at many auctions recently where there has been good interest in a property yet high vendor expectations have ended up causing a sluggish auction.

The bottom line here is to be be aware of the quoted price and what impact that can have on the ultimate sale price. A low price guide can build substantial competition, while a more realistic one can limit competition. So don’t assume all agents are low-balling, there are some good buying opportunities with reasonably quoted properties. But if the home you have fallen in love with is being quoted low, try making an offer that will force the agent to increase the quoting. You may surprise yourself and end up buying it prior to auction!

What sort of property drops the most value in a buyers market?

Wed, 26 Oct 2011 13:03:00 GMT

Contrary to popular belief, not all property prices go down when the market drops. In every area there are certain types of homes that seem to attract interest regardless of the market conditions at the time and may even increase in value while those around it will see price reductions. We estimate that these would comprise 10% of the market at best. The bulk of real estate will be affected by a market downturn, so where are the best bargains to be had?

Unrenovated properties are where you can often see the most marked price drops when the market slows down. In a sellers market buyers can see an unrenovated house as an opportunity to get into an area that they are otherwise priced out of. For this reason these are often hotly contested and end up selling for more than they should if the cost of the renovations was factored in.

In a buyers market, house hunters don’t feel the same panic about getting onto the property ladder and will usually have a lot more choice in available listings. The idea of putting your own stamp on a home loses its appeal when there are more affordable renovated options to consider. For this reason, unrenovated properties start to languish and take a lot longer to sell as buyers no longer wish to compete for them. Right now they are generally offering much greater value and the buyer is in the box seat when it comes to negotiating.

The other type of property that really suffers in a soft market is the one that sold for too much in a hot market. In a sellers market nearly every property generates competition. So buyers end up competing for good and bad properties alike. When the market flattens we see that quality property often still attracts competition while lesser homes take longer to sell and those that do sell tend to be very price driven. Thus, inferior properties that sold for too much in the first place can dramatically fall in value if offered again for sale in a buyers market. But beware. Just because someone once paid too much, this does not now make this a bargain.

While we may recommend buying an unrenovated house in a slow market, we are unlikely to encourage buyers to pursue an inferior property that is offered at a low price unless there are some simple fixes to turn the sow’s ear into a silk purse. We believe that property “bargains” are almost non existent as the secret to buying well is to identify a piece of real estate with a level of scarcity and characteristics that are desirable to buyers under all market conditions.

How to give yourself the best opportunity for capital growth in a flat market.

Wed, 26 Oct 2011 13:03:00 GMT

In order for a property to grow in value you need to get it for the right price and then it needs to attract interest from buyers when you go to sell it. The secret to capital growth, then, is to identify a property with the characteristics (or the potential) to generate this interest in the future.

The first rule is don’t pay too much in the first place! So don’t fall in love with a property and let good judgement fly out the window. Do your research so that you can understand property values in your chosen area and make sure you pay no more than a fair price. The thing to remember in a buyers market is that there will continue to be opportunities until the market heats up again.

The second rule is to be very selective with the property that you buy and do not let the idea of a “bargain” cloud your vision. Most bargains are heavily discounted because nobody wants them. And nobody wants them because they are sub-standard so getting them at a low price is really a false economy as their rate of capital growth will be lower than that of superior properties. There is a difference between a bargain and being opportunistic, however, and being opportunistic requires fast action, as opposed to a bargain, which has probably sat on the market for some time.

Keep in an accessible price bracket. Find out the median price for the area you are looking to buy in and aim to spend a maximum of 10% over that figure. This way you will ensure that the property you buy will be in the more affordable price bracket when it comes your time to sell. (Unless, of course, you are preparing to do major renovations.). There are more buyers with a budget around the median price range than there are in the top 30th percentile, therefore there is more chance for competition. And it is buyer demand that ultimately drives up prices.

Choose a prime, proven location. You can usually improve a property but you can’t fix a poor location. A desirable street will always attract buyers. So this is the safest way to give you the best chance for capital growth.

If you have a long term plan you can try to pick an up and coming area. This is a riskier strategy, however, because there are no guarantees. Wooloomooloo and Waterloo, for example, are both in an extremely convenient inner city location and bordered by some prime suburbs. Surely they would have to be the next hot spot! However there is a crime element in both suburbs and big things would need to happen in terms of the social mix before the balance is likely to change. But if it does change, you can expect values in these areas to rocket.

Choose the type of property that will appeal to the largest group of buyers. For example, young professionals love the buzz in inner city areas like Surry Hills and family buyers prefer a quieter existence and larger land size in areas like Haberfield. So buy a property that is appropriate to the dominant buyer in the area.

Stay away from high rental yield properties with limited capital growth prospects, like student accommodation. Any property that has a limited market is going to have limited capital growth opportunities. The best option is to go for a property that appeals to owner occupiers and investors alike.

Don’t overcapitalise on renovations. But do make sure you renovate to the required standard in your suburb. Get out and about and see what sort of finishes buyers like. If laminate kitchen benches are the norm, don’t waste money on stone. Conversely if top brand kitchen appliances are a must, don’t scrimp and go no-name. The trick is to keep your personality out of the equation, keep it neutral (without being bland) so as to appeal to the widest group of buyers.

Finally, don’t rush your purchase. Time is on your side in a buyers market. If a vendor has unrealistic price expectations, ride it out and wait until they are read to accept what the property is worth. Maybe you will get it for even less as the longer their property sits on the market the more the perceived value drops in buyers’ minds. If the property you are looking at falls short of your criteria, don’t feel pressured to make compromises. You can afford to wait for a better property.

How to be a smart first home buyer.

Fri, 16 Sep 2011 01:27:00 GMT

There is possibly no buyer more nervous than a first home buyer. Not only are you scared about what having a mortgage is going to do to your quality of life, but there are high stakes in getting on the first rung of the property ladder. After all, a bad move can cost money if the property’s value drops. Almost equally disastrous is the opportunity cost of a property that does not grow in value, or doesn’t match the median growth rate for that suburb. Not only are you looking for a home, but something to leverage off in the coming years when your growing family demands a larger abode.

So, how do you buy a property that is going to out-perform the median growth rate for the area? The obvious answer is to engage professional help. We hand-hold many first home buyers through this exciting phase of their lives and find it extremely rewarding. But budgets are usually tight and there are many young people out there who we cannot convince to part with the funds required to engage our services. So, if professional help is not an option, you will need to do the research yourself. Really get to know your chosen market and see for yourself which properties attract a lot of buyer interest and which ones don’t. You will probably have to compete harder for a property that will perform above the median. The duds will be pretty easy to buy…

Basically if you look at any ladder, the goal is to get as high as possible. If you can reduce the steps (by making the rungs further apart or by taking two at a time), then you are going to save money in the long term and climb higher in a quicker timeframe. The costs of buying and selling are so high that it makes sense to reduce the amount of property transactions over your lifetime. So the longer your first home will suit your needs, the better.

We often hear advice given to first home buyers to stretch yourself as far as you can afford (get used to being uncomfortable!) as the time before you have kids is the best time to build a solid foundation in the property market. This could set you up to be much more comfortable in future years for two reasons. Firstly, you may not need to upgrade so soon if you buy the largest home you can afford now. But you need to make sure it is in a good area. Alternatively, if you stretch to buy in the best area that you can afford, then you will have a greater chance of higher capital growth than if you compromised and bought in a lesser area. Sometimes, however, you will need to buy a smaller property in order to achieve this.

In his “Property Watch” column in last weekend’s Sun Herald, Mark Armstrong gave some advice along these lines. “Your first property is arguably the most important because, if you choose wisely, this asset will be the one that will set you on your way to building substantial equity through capital growth… When affordability is a pressing concern, it’s far better to buy a smaller property in a high capital growth area, than a larger property in a lower capital growth area.”

We firmly agree.

Does renovating really add value?

Mon, 05 Sep 2011 13:15:00 GMT

A lot of inexperienced property hunters think that renovating is a sure-fire way to add value to a property.

But this is not always the case. The first question that needs to be asked is whether you intend to live in the home for the long term or whether you are renovating for profit.

If you are hoping to add value then sell the property you really need to research the market and see what sort of end result is likely to sell well. We see many properties where the owners have over-capitalised or made such unique choices in their renovation that they actually make their home less appealing to everybody else and therefore less valuable. We see other examples of where first time renovators cut corners or do not consider their potential buyers when choosing finishes and end up with an end result that just doesn’t meet market expectations. There are so many issues to consider when renovating.

Even with a limited budget, there are some smart ways to add value without doing a complete renovation.

Of course, this really depends on what you are starting with. We have seen many homes with cedar or pine paneling that have been quickly brought into the “noughties” via a lot of white paint. Maybe you can simply knock out a few walls to improve room flow, add natural light and bring the outdoors in. If the floorplan fundamentally works, a good clean, a lick of paint and a new bathroom and/or kitchen can work wonders. If the house is dark and you can install skylights or enlarge windows, then this is a great way to transform a home. As a general rule, any improvements that increase natural light, create a functional floorplan or update a colour scheme, can have immediate impact on the value of a property.

Strata levies - low levies can be a false economy.

Thu, 25 Aug 2011 23:10:00 GMT

Sometimes when pensioners or investors dominate the ownership of a building or complex we see historical pressure to keep strata levies low. The discretionary portion of the levy is the sinking fund contribution, so when building issues arise, or upgrades are required, there is no money in the pot.

So, what happens next? Either the issues are ignored, the building begins to look shabby, or a special levy is struck. And, if you are interested in capital growth, all these outcomes can negatively impact the value of a unit or townhouse.

It is now mandatory for owners’ corporations to undertake a 10 year maintenance plan and levy forecast. Those buildings with low levies will face sharp rises if the recommendations in their report are adopted. Those buildings that have been responsible in their financial management and avoided the temptation to keep levies too low will see much more modest increases.

Strata reports - Often a long list of repairs is a good sign.

Thu, 25 Aug 2011 23:11:00 GMT

When you read a strata report that documents a litany of building issues it can be easy to be scared off a property. And sometimes it is a warning of impending inconvenience and cost.

However, it can also indicate a pro-active strata manager and an owner’s corporation that cares about maintaining their investment. In addition to the list of problems, look for a concerted and continued effort to address the issues. And keep an eye out for potential special levies. This is a sign that there has not been sufficient sinking fund levies in the past to cover these expected repairs.

What to check at a pre-settlement inspection.

Fri, 12 Aug 2011 02:31:00 GMT

When you buy a house or apartment you have the right to a pre-settlement inspection before giving your solicitor the go-ahead to hand over the balance of the money.

Some buyers don’t bother to do a presettlement inspection (or perhaps neither their solicitor nor the selling agent mentioned it to them) but we insist all of our clients have one done.

So what are we looking for at this inspection?

The first thing we check is whether the vendors (or tenants) have in fact moved out. You do not want to be handing over money if they are not ready to hand over the keys!

If they haven’t finished moving at the time of the settlement we make sure there is clear evidence that they are preparing to move and intend to be out in time for settlement – packed boxes and a removalist truck outside would be ideal.

The next thing we check is that all the inclusions as listed on the front page of the contract have been left in the house. You paid for the dishwasher, light fittings and fixed floor coverings, etc so unless you were planning on replacing them straight away you want to make sure they are still there.

Lastly we make sure they have not left anything behind that you don’t want to be included. Like piles of junk under the house, or old paint tins that don’t match the current colour scheme.

Unfortunately we aren’t checking whether the place has been cleaned, since there is no obligation (other then common decency) for a vendor to have cleaned the house and tidied the garden.

If you find that things are not to your liking, speak to your solicitor or conveyancer immediately. Often they will negotiate an amount of money to be withheld from the vendor to cover the cost of replacing or rectifying anything that you weren’t expecting.

Don’t underestimate your property knowledge (but know when to get help)

Fri, 05 Aug 2011 00:13:00 GMT

When I was a selling agent I learnt that buyers become experts in their price bracket for the period of time in which they are seriously looking for a property. They have an intimate knowledge of what they can get for their money in a way that a local real estate agent can’t. The agent has to be abreast of all property types in their geographical area, and across all price points and as a result, their knowledge will always be a little more general than that of the avid property hunter.

You, as a buyer, will most likely have personally inspected every property that vaguely suits your requirements, including those slightly above and below your budget. After a period of intensive property searching, you will probably know instinctively a property’s value immediately upon entering the front door. You will also get to know the most active selling agents in your area and begin to glean additional information from them.

But this knowledge does take time to accrue. It can be extremely useful when it comes to negotiating a deal and can help you to avoid making a poor property purchase. Our advice is to always make a decision after acquiring as much knowledge as possible about your chosen market. But if time is not on your side and you have found the perfect property, be aware that the lack of knowledge may cost you – either by missing out on your dream home or you by succeeding in securing it by paying a premium price. Maybe time to call in the professionals…

The agent isn’t always lying!

Fri, 29 Jul 2011 06:18:00 GMT

You found a place you want to buy and the agent is telling you there is another offer on the table. You don’t know whether to believe them or not.

You don’t want to be so gullible that you just believe them and pay the asking price. But you don’t want somebody else to buy it.

More times than not the agent is telling the truth.

The real question you need to ask yourself is whether you would be prepared to lose the property for the amount extra the agent is saying you have to pay. If you are, then move on…

Don’t buy the rebound house.

Fri, 22 Jul 2011 00:13:00 GMT

Oh dear, the poor person who realises they married the rebound guy or bought the rebound house. It’s a surprisingly common mistake and a very costly one. When you are suffering the disappointment of missing out on your dream home (as so often happens in Inner Sydney), you are at your most vulnerable. It is at this time – when your mind is in buying mode, when your finances are ready, when you are at your most motivated to move – that you are most susceptible to the lure of an available, often inadequate, piece of real estate.

Selling agents see you coming – they can smell the desperation, the panic and disappointment and rub their hands together in glee! You are not thinking clearly, you have momentarily forgotten your property checklist, you just want this nightmare to be over. And they see a chance to shift some stock that has been taking a while to sell… No other buyer will be so blind to the shortcomings of this particular property.

So often we seek to immediately salve the pain of a loss. But if you try to do so by leaping into a desperate purchase you may just find that the long-term grief is so much harder to bear. You don’t want the pain to wear off only to realise that you have committed to buying a property that is less than ideal. There is too much at stake to use emotion as your only decision making tool.

Sydney suburbs within 5 kms of CBD that take the longest via public transport.

Thu, 25 Aug 2011 23:12:00 GMT

We looked at a map of Sydney and selected a range of suburbs that sit just 5km from the CBD. We randomly selected streets that sit on the 5km radius and checked the time it would take to get to Martin Place via public transport by 8.30am on a weekday morning.

The clear winners are Bondi Junction and St Peters, pretty much because they are on a good train line. Other suburbs with a train station also generally recorded better times than those without. The longest trip by far is from Woolwich, probably due to it being on the tip of a peninsula. Some of the other North Shore suburbs also came in towards the bottom of our list.

Here are our findings:

Bondi Junction	17-22 minutes
St Peters	18-27 minutes
Beaconsfield	21-30 minutes
Stanmore	22-34 minutes
Kensington	23-27 minutes
Alexandria	23-35 minutes
Rose Bay	24-30 minutes
Leichhardt	26-32 minutes
Enmore	26-36 minutes
Bellevue Hill	28-30 minutes
Cremorne	28-31 minutes
Crows Nest	29-38 minutes
Drummoyne	30-34 minutes
Greenwich	31-36 minutes
Mosman	39-44 minutes
Woolwich	42-35 minutes

An interesting point to note is that the shortest trip option often required one or more changes (train to train, or bus to train, for example) plus a bit of a walk. The simplest routes (a single train or bus trip) often (though not always) took the longest.

As a general rule, property becomes increasingly affordable the further out you move from the CBD and one reason is that people will pay a premium to spend less time travelling to work. This exercise has shown, however, that not all suburbs are equal when it comes to travelling times. So if you want to spend less time on public transport, you will need to pick the eye teeth out of the Inner West and the Eastern Suburbs – leave the North Shore to people who like to read on the way to work.

Sources:
http://www.freemaptools.com/radius-around-point.htm
http://www.131500.com.au/plan-your-trip

Aim to buy quality property for a fair price rather than a lemon for a steal.

Thu, 07 Jul 2011 23:39:00 GMT

"It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price." Warren Buffett

The same principle applies to buying property. Many of our clients come to us initially expecting to be able to buy a bargain. And while we are always on the hunt for bargains, often what may appear to be a great deal on the surface actually turns out to be a lemon.

If a property seems cheap in comparison to other real estate in the area, there is probably something very wrong with it. Whether it be the location, fundamental building problems, bad aspect or simply a poor design, these “wrongs” will ultimately compromise capital growth and rental return.

That’s not to say we don’t uncover the odd bargain, but these are usually available only with a small window of opportunity and as a result of a sudden forced sale, or a poorly handled sales campaign, perhaps an initially unrealistic vendor who missed their opportunity to maximise their price or simply terrible presentation for sale. Basically you need to be in the right place at the right time to take advantage of one of these situations.

Those buyers who focus their attention solely on “bargains” often don’t even notice great properties that may be available at a fair price. And in the end, this focus on the poor quality end of the market will probably cost them a lot.

Price is what you pay. Value is what you get.

Fri, 01 Jul 2011 02:33:00 GMT

"Price is what you pay. Value is what you get." Warren Buffett

Warren Buffett is an American investor, industrialist and philanthropist. He is widely regarded as one of the most successful investors in the world (reference Wikipedia). And he has come up with some pretty wise sayings over the years.

Where value differs from the price of a property is where one property performs over and above another.

For instance, you can choose a lot of apartments to buy for, say, $600K. But the value comes into it when you consider that many will be average performers when it comes to capital growth, while some will be poor performers and a small percentage will out-perform the market. So, in 5 years time, one apartment may be worth $700K and another may be worth $1M. That’s where the difference between price and value really hits home.

Often it is worth paying a premium for a property that is more likely to perform ahead of the median growth rate for its suburb. Many people get bogged down on the purchase price and forget the bigger picture. You always need to ask yourself “does this property have more of the characteristics that buyers in this area like?” If the answer is yes, it may be an overachiever. If the answer is no, then you do need to be very focussed on the price you pay, as the value could really suffer over time.

Making the knock-out bid

Sun, 26 Jun 2011 12:53:00 GMT

In a hot market we often hear buyers talk of using a knock-out-bid strategy at auction. It is a scary thing to do in any market. And there are certainly times we employ it – even in a softer market if conditions are right for the individual property and client.

But this is an auction tactic that only the very brave will ever attempt. We even find it stressful and it’s not our money we are spending!

As a result, it’s not a tactic we use willy-nilly, it is only put into play after rigorous pricing research and assessment of the likelihood of competition – when we have come to the conclusion that if we allow competition to build up, the price could go even higher. And if you are considering using a knock-out-bid to secure your dream home, we encourage you to make your own assessment on price and competition BEFORE the auction.

Part of the benefit of really knowing property values is that you can make a confident bid at the outset, rather than let momentum gather by opening the bidding at a lower price, which often has the result of many people bidding beyond their limits. In an uncertain market, a confident buyer can quite easily put other buyers off their game. If you allow other would-be buyers to make small, regular bids, all you are doing is encouraging them to verify the value of the property in their minds as the auction progresses. “They just bid that, it must be worth it”.

We know from experience that it spooks you when you make a strong bid and there is total silence. But it is can be worse for our client when someone takes us on!! Our job is to put a stop to competition that could likely take it over a sensible level and potentially have our client miss out on it. We love nothing more than a disappointed agent or auctioneer saying: “well girls, you really knocked the wind out of that auction”.

Quote it low watch it go, quote it high watch it die

Thu, 16 Jun 2011 12:37:00 GMT

There is a common expression amongst real estate agents: “quote it low watch it go, quote it high watch it die”. This refers to auction sales campaigns and this thought process leads to frustration on the part of property buyers.

Talk to any buyer in an auction area and they will be able to regale you with many tales of woe, where an agent underquoted the expected sale price and the property ended up selling for more than they could afford.

I have written many Buyers Tips on the topic of underquoting, so I won’t go into the technicalities of what is right and wrong in this tip. But it is important for buyers to know and understand that a selling agent will quote the lowest price they can get away with. They do this because buyers unfailingly respond by competing for property that is underquoted and rarely fight over a property that has been promoted with a realistic (or high) price expectation. And remember that a realistic price can be perceived as high if you are comparing it with other properties where the agent is low-balling the price guide.

As buyers, however, I believe we need to take responsibility for our participation in this dance. Put quite simply, if we didn’t behave like sheep there would be no motivation for the agent to underquote. A buyer who has a good understanding of the market and relative prices should not fall into this trap. But emotion and wishful thinking often get in the way of rational thought and it never ceases to amaze me how many people behave in this way.

So next time you hear a price expectation and you think “tell ‘em they’re dreaming”, stop. And think carefully. Is the quoted price that unrealistic? If so, you can pretty much guarantee that there won’t be many (or any) buyers competing for this property. So here’s your chance. If you end up being the only buyer ready to buy at the auction, you may get to negotiate yourself a great deal.

Fix those irritating things in your new home before you get used to them!

Fri, 10 Jun 2011 00:39:00 GMT

It’s a common story. You bought a home with some decorating feature that you thought you couldn’t live with and intended to change immediately.

But life got in the way and 5 years down the track you still have those gaudy orange sunflower tiles in the bathroom, or that hideous forest green laminate bench in the kitchen. In fact, it’s now your forest green laminate and not so unbearable.

It is amazing how easy these things become to live with once your boxes have been unpacked. I think the saddest thing we see is when home owners end up being blind to these features, only to be reminded of their unsightliness by their real estate agent when it comes their turn to sell. So they finally make those cosmetic changes, just in time for the new owners to enjoy!

Don’t have your new home look its best just before you sell it. Make the changes straightaway and enjoy the extra value that you have created.

Signs that the property market is dropping

Fri, 03 Jun 2011 00:43:00 GMT

There is a lot of press at the moment about falling property prices. Certainly in some price brackets we are seeing evidence of a cooling market, though there still seems to be plenty of competition in the lower price range in our target areas.

So what are the signs that show the market is slowing down in your target market? Other than the obvious clue when you see a lot of property for sale…

One of the first indicators is a drop in auction clearance rates. When the market is booming it seems that buyers will compete for practically anything as they are desperate not to get priced out of their preferred area. The first thing we see in a cooling market is that buyers finally become discerning and refuse to compete for property that they haven’t fallen in love with. So they will often set a price in their own minds and then wait until the property passes in before making their interest known to the selling agent.

So there could be some great opportunities for buyers who have done their homework and are prepared to buy on auction day. If you are the only buyer ready to buy, you may be able to negotiate hard with a vendor who has been discouraged by an unsuccessful auction campaign.

One thing to be aware of, however, is that great property in a good location (and with a realistic price expectation) will generally generate competition regardless of market conditions. So if you have fallen in love with a property, there is a fair chance somebody else has too, and you may need to still be prepared to fight for it.

Another sign of a cooling market is the drop in interest in unrenovated properties. In a boom, buyers see these properties as an opportunity to get into a market that they are otherwise priced out of. As a result, a “renovator’s delight” can be so popular that they can end up fetching a price not that far under their renovated counterparts. When the market slows, however, these are the first properties to show it and all of a sudden they become difficult to sell. Buyers quickly realise that there is no value in undertaking a major renovation when they have choice in available renovated homes.

So if you are a bit handy on the tools, there could be some good buying in coming months…

There are many lessons to be learnt in a cooling market. Over the years we have seen plenty of people both make and lose money in such times. A keen real estate observer will notice which properties attract interest and which ones don’t. The true secret in making money in property is to avoid buying those properties that “die” when the market cools and only buy the style of property that attracts buyer interest in all conditions.

Be wary about positive cashflow property investment strategies

Fri, 27 May 2011 04:06:00 GMT

We come across many property spruikers in our line of business. One recurring theme is the quest for positive cashflow property investment. These seem to appeal to people who don’t have a lot of cash to splash about yet see themselves as would-be property moguls. This is a very vulnerable segment of the market and we appeal to them to exert caution.

Basically the premise is that the rent you receive from the property, along with the tax refund you get, needs to pay the mortgage with some in reserve – hence the result… “positive cashflow”. Sounds reasonable so far. But if you are getting a 4-5% return, which is an accepted norm in Sydney at the moment, you are unlikely to be covering your mortgage payments with rent alone – unless you have a very big deposit and are only borrowing a relatively small proportion of the purchase price.

Most investors, however, prefer to keep the borrowing on their own home at a low level and leverage themselves as high as possible on investment property so that they can maximise their tax benefits.

In order to have positive cashflow on a highly leveraged property, the rental yield needs to be way in excess of that 4 or 5% mark. This high rental return usually comes at the expense of reliable capital growth, which means that the property can’t be guaranteed to increase in value and you won’t be building any equity in this way.

Now, to keep outgoings to a minimum, these strategies tend to rely on interest-only repayments. So no equity is being gained by paying off the principal of the loan.

So if it doesn’t sound risky enough already, these spruikers recommend that you borrow as much as possible – 100% of the purchase price + costs, if the bank will allow you.

By going down this path you are likely to “own” a property that is worth less than the amount you owe on it. There are no means to increase your equity in that property (or conversely, to decrease the proportion that you owe) as you aren’t paying off any of the principal of the loan AND you have probably bought in an area that is not experiencing healthy capital growth – or even worse, as many of these high yield properties are located in regional or secondary locations, there is negative capital growth. Let me spell it out: that means the value of the property could very easily go down.

What you have done, in effect, is purchased a debt and the income to repay the interest on that debt but there is limited value being created by that debt.

And then what happens if the rental market crashes???

It may sound tempting as a method of starting your property investment portfolio. And our approach, by contrast, may sound terribly old fashioned. But we believe that firstly you should buy a home in a good area to live in, then pay as much off the mortgage as you can afford.

When you have created enough equity in your own home, go to your lender and ask them how much you can borrow for an investment property. Look at the repayments and factor in whether you could afford to pay the mortgage should you ever find yourself without a tenant. Then work out what you can comfortably afford and buy as close to the CBD as you can. Our goal with investment property is to stick within a 10km radius of the city centre (5 if possible!) as this is where you are most likely to find that magical combination of reliable capital growth and tenant demand.

There is security in owning an asset that will be easy to sell if you need to, where the proportion of equity to debt is growing in your favour and where you can manage the repayments should the property be without a tenant for any period of time.

Should I sell first or buy first?

Thu, 05 May 2011 23:13:00 GMT

Let’s face it, buying and selling real estate is a stressful exercise. Especially when you add into the equation the dilemma of whether to sell your existing home before you buy your new one, or visa versa.

The simple answer is to do what is going to be easiest. This may sound like a “der” answer but when faced with such a big decision it may not be that easy to work out the best way.

After all, the prospect of having to fund two mortgages can be very scary for many people and the idea of being homeless can be unbearable for others. For some people the worst case scenario would be to buy their dream home and then face the nightmare of selling their own for much less than they were counting on and it taking a lot longer than they anticipated. An equally daunting outcome could be a lengthy time spent off the property ladder as your dream home turns out to be an elusive fantasy.

Fundamental to your decision is whether the market conditions at the time favour the buyer or the seller.

In a buyers market you will find it harder to sell than you will to buy. The price you can expect to get for your current home will be less certain so you will find it difficult to know exactly what the budget should be for your new home. By selling first you will know precisely how much money you will have to spend and be able to turn the market conditions to your advantage as you can expect plenty of property on the market to choose from when you are ready to buy.

In a sellers market, however, it stands to reason that you are going to find it easier to sell. But when you look to buy there will be a scarcity of property to choose from and fierce competition from other buyers. If you sell first you run the risk of a long lead-time before securing your next property. As well as having to rent in between transactions, many buyers in this situation find themselves tempted to make a panic purchase, which they could live to regret all too quickly.

Over and above these guidelines it is essential that you have a clear understanding of how much money your bank will give you access to and what the associated costs will be. And then you need to know what level of debt you are comfortable with. This information will determine whether buying before you sell is even an option!

How important is parking when you live close to the CBD?

Fri, 15 Apr 2011 00:05:00 GMT

Despite the push for a greener world and various initiatives to reduce the amount of cars in the CBD, those of us who choose to live in the inner suburbs still have a high reliance on our own car as a mode of transport.

Unfortunately many of these suburbs came into existence long before Henry Ford invented the motor car and early town planners did not take into account provision for parking for the residents in the Noughties. We see properties in all price brackets without parking and we estimate that some of the inner suburbs (Darlinghurst and Newtown, for instance) as little as 25% of the houses could have parking. So when it comes to purchasing property, it doesn’t take a genius to work out that a carspace is a definite asset! The existence of a carspace has been estimated to add as much as $200K to the value of an inner city property and this figure drops to around $50K in areas with more available on-street parking.

But the reality is that despite the limited availability of off-street parking people desire to live in suburbs close to the city. As a result, there is distinct competition for on-street parking spaces and all local councils have a parking scheme designed to give favour to its residents.

These schemes all generally work on similar lines. If your property has no off-street parking you will usually be eligible for the maximum number of permits. If you have one carspace, you may be eligible for a reduced number of permits. If you are lucky enough to have two or three carspaces on your property, you won’t be getting any additional permits from your local council.

All councils charge a fee for their permits. But if you live in Leichhardt Municipality you won’t be paying anything unless you lose your permit and need to replace it.

The City of Sydney council area probably faces the most fierce competition for on-street parking and they also have the most complicated residential parking scheme, compounded by a development control plan that means some residences are not eligible – I guess they are trying to make developers include parking in their plans as well as discourage individuals from owning cars.

See below for a brief overview of each council’s maximum permits and links for more information.

City of Sydney Council

http://www.cityofsydney.nsw.gov.au/AboutSydney/ParkingAndTransport/ParkingSchemes/
A maximum of two permits are available per eligible property. This entitlement is reduced by the number of on-site parking spaces available for the property, within the property.
Fees apply
Residents of many newer properties are not eligible for permits, or are eligible for only one permit.
In Ultimo and Pyrmont, certain residential developments approved after 2 November 1998 are ‘Restricted Properties’. Residents are generally entitled to only one permit per property, reduced by the number of on-site parking spaces available for the property. Contact the City for more information.
In the City East and City South precincts, residents of multi-unit developments approved after 8 May 1996 are not eligible to participate in the resident permit parking schemes.
In the CBD precinct residents of all developments approved after 1 May 2000 are not eligible to participate in the resident permit parking schemes.
There are also a number of other newer properties in the City of Sydney that may not be eligible. Contact the City for more information.
Not all permit types are available in all City neighbourhoods. Visitor Permits are available only in Pyrmont, Ultimo, Glebe and Millers Point, while Business Permits are only available in Glebe, Ultimo and Pyrmont.
The City of Sydney is developing a standard permit parking policy that will address this inconsistency.
From a buyer’s perspective, this is important: It is a condition of development consent for new developments that residents will not be eligible for resident parking permits. This helps to limit the increase in parking demand and traffic from new developments. The restricted access or ineligibility condition is recorded on Section 149 (5) Certificates for the affected properties, and must be notified to all prospective buyers and tenants.

Woollahra Council

http://www.woollahra.nsw.gov.au/services/parking/parking_permits
There is a maximum of two residential parking permits issued per property. The number of permits issued per household is reduced by every off-street parking space available at the property, nil off-street parking spaces – eligible for two permits, one off-street parking space – eligible for one permit, two or more off-street parking spaces – not eligible for a permit.
Fees apply

Waverley Council

http://www.waverley.nsw.gov.au/transport_and_parking/parking_services/resident_preferential_parking_schemes
A maximum of three permits may be issued to any residence. The maximum number of permits is reduced by the number of off-street parking spaces available.
Fees apply

Randwick Council

http://www.randwick.nsw.gov.au/Moving_around/Roads_and_transport/Parking_permits/index.aspx
The maximum number of permits per dwelling is three. This number will be reduced for every off-street parking space available at your residence.
Fees apply

Marrickville Council

http://www.marrickville.nsw.gov.au/services/parking_permits.html?s=1519182565
There is a limit of 2 permits per approved household and are only issued to permanent residents.
Fees apply

Leichhardt Council

http://www.leichhardt.nsw.gov.au/Permit-Parking-Scheme.html
Maximum number of permits per household is two + visitors permit in some areas.
Initial permit free of charge – payment required for replacement permits.

North Sydney Council

http://www.northsydney.nsw.gov.au/www/html/6359-resident-parking-frequently-asked-questions.asp
Maximum of three permits per residence.
Fees apply

Mosman Council

http://www.mosman.nsw.gov.au/residents/parking
Two permits per residence maximum provided there are two registered cars at the address.
Fees apply
As a nice touch for locals, the owner of each rateable property in Mosman is entitled to 1 free parking sticker enabling the vehicle to which it is permanently fixed to park without paying a fee at the following foreshore reserve carparks: Clifton Gardens, Balmoral South (adjacent to oval), Rosherville & The Spit – East, West and Ellery Park

Willoughby Council

http://www.willoughby.nsw.gov.au/Community/Traffic---Transport/Parking/Residential-Parking/
Each household can apply for a maximum of 2 permits. If the residence has one off-street parking space, the household can only apply for one permit. No permits will be granted to residences with two or more off-street parking spaces.
Fees apply