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.

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.

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.