Monthly Archives: May 2014

That sounds good. Can you put it in writing?

When it’s time to sell, like most people, you will more than likely speak with a few real estate agents to get their views on how best to market and price your property.

Like most people, you will probably get a large degree of variance from the agents on the expected price your property may achieve. It can be quite confusing trying to identify which agent has priced your property correctly.

The agent who quotes the highest price is usually the most appealing. But they can also be the most dangerous, particularly if they want you to invest in their ‘premium’ advertising campaign. This investment is always paid in advance, regardless of the outcome of the campaign.

Only if your property sells at or above the sale price the agent quoted you, can the campaign be considered a success.

Insist that your agent signs a price guarantee in writing.

A guarantee that if your property sells for less than your agent quoted you: (1) you pay the agent nothing for advertising; and (2) you pay them no commission.

Many people call this price guarantee a lie detector test for real estate agents. If the agent is confident of achieving the price they quoted you, they won’t mind getting paid for the advertising on delivery of the promised result. If they refuse to sign such a price guarantee, you too should refuse to sign their listing agreement.

Damning digital foorprint

The internet has been a game changer when it comes to the way real estate is transacted. Most of us are aware of the benefits the internet has bought to the marketplace.

However, there are pitfalls too. If you are unaware of these pitfalls, then your position can be compromised.

Every home now has a digital footprint. Every time a property is advertised for sale or rent, the price and the date are recorded against the property’s history. This information can be sourced by anyone now and into the future. If you fail to sell at auction, this event is recorded against the property’s history. Likewise, if you overprice and leave your home languishing on the market, this is recorded against the property.

Buyers are savvy and regularly access such information. Overall the availability of such data is not positive or negative, its existence is just a reality. It’s imperative that you protect the online reputation of your most valuable asset. In Real Estate Uncovered, an entire chapter is dedicated to protecting yourself against a damning digital footprint on your home.

Yield Drops So Landlords Sell Out.

The real estate market has moved upwards of 20% since late 2012. This growth has directly tracked interest rates going down. Some will argue that low interest rates were the sole cause of house prices shooting up, but others suggest that factors such as insufficient supply and an improved economic outlook were the cause of rising prices. Whatever the cause, no one doubts that there has been a significant growth in house prices.

Amid the noise about price rises, little has been made of the fact that rents have stagnated or even slipped. Although the end result has left many investors with decent capital gains, this has caused rent returns to be lower, relative to the new and improved value of their asset.

Whilst low interest rates pushed an initial wave of investors away from cash, term deposits and self managed super funds and back into property, there are now signs that many long term investors are selling up and cashing out. Recent talk of the boom having peaked have seen a number of investors gearing up to sell, attempting to take advantage of good prices whilst they are on offer.

Only time will tell whether now is the right time to lock in a sale though. There is no suggestion that an excessive amount of investor selling relative to demand is occurring, but there is no doubt more landlords are exiting the market than entering.

When rates were first slashed in 2012, rent returns were stronger and purchase prices were lower, making the dividend yield appealing. It was only in this environment that incoming investors comfortably outnumbered those going out.

Who is selling and buying?

Many baby boomers who invested wisely and prudently in the 80s and 90s are now sitting on substantial paper gains. For many, the option of taking on more real estate investment debt against the increased equity they now enjoy as they near retirement, is unappealing.

Even though prices could edge higher, they may not. Only the most bullish analyst would suggest that the best price growth is yet to come for the housing market. Against this backdrop and still smarting from the GFC, it is understandable that many baby boomers have selected ‘now’ as the time to sell.

Sue and Robert owned their Numa St, Birchgrove apartment for over 20 years. They decided to sell given the market’s current strength. They received 4 offers in 14 days on market, mainly from owner occupiers. Based on the rental return and the sale price of $926,000, their net return would have been around 2%, making the decision to sell a no brainer.

The Inner West has seen owner occupiers quickly out-bid and out-number investors. It has been owner occupiers who have driven prices higher and there are many who believe they will push prices even higher still. Infrastructure such as the light rail extension and improvements of amenities such as local parks has seen the Inner West become a destination of choice for young families.

Historically, young families tended to upgrade further away from the CBD, chasing large houses and garden space. That now seems to be less of the case as young families look to upgrade within the Inner West.

Significantly, in a reversal of trend, many young families are moving from the suburbs back to the Inner City.

Maintaining Composure.

Why due diligence still matters

Good times can breed bad practices. You know the real estate market is strong when buyers submit unconditional contract offers whilst forgoing due diligence such as building inspections. Or when un-renovated properties sell for comparable prices to renovated properties. Such displays of buyer aggression can be explained as taking a ‘risk on’ trading conditions.

Buyers have a higher appetite for risk given they believe the overall upside in the current market comfortably outweighs any risk of undetected property defects. Even though this buyer psychology is common in the current market, that’s not to say it is wise behaviour.

In contrast to ‘risk on’ behaviour, when confidence is slow and prices are stagnant or falling, buyers take a ‘risk off’ approach to purchases when it is hot. The property market was operating just like this only 18 months ago in 2012. How quickly things can change.

In hindsight, many buyers played it too cautiously back in 2012, passing up buying at great value. Anyone who was brave enough to have made a purchase then, effectively bought at the bottom of the cycle, whether by design or default.

Now there is a risk that some buyers may be being too aggressive for their own good. Paying for due diligence on multiple properties that you will inevitably miss out on, can cause you to question the value of doing due diligence. The temptation to pass up on due diligence also increases when reports are written up with multiple disclaimers and cautionary tales that do little to guide you in the right direction.

Even though the benefits and information gained from these reports may be minimal, they can act as safeguards against the discovery of post purchase structural defects, possibly saving you tens of thousands of dollars later. Therefore, they are a very worthwhile investment, particularly when their small cost is weighed up against the overall value of the transaction being made.

A Penny Saved is a Penny Earned.

There are a few ways to ensure that money is not wasted on doing due diligence on a property you may not ultimately secure.

 ‘The only thing worse than missing out on the right property is buying the wrong one.’

Firstly, if the price guide seems too good to be true, it probably is. Everyone is fully aware that bait pricing is rampant. Maintain pragmatism when assessing what a property is likely to sell for. If it’s likely to sell above your budget, don’t spend thousands on inspections, strata reports and contracts being read etc. This will prove fruitless.

Secondly, ask the owner via the agent or the owner’s lawyer what price they would be prepared to sell for today. If you can meet that price, then by all means, conduct some due diligence in a rapid time frame, knowing that it won’t be a wasted effort.

Thirdly, see if other buyers have paid for a pest/building inspection. If so,ask if the company that did that report will sell you a copy at a reduced rate, or offer you a rebate should you miss out on that property. Many companies are happy to do this at present.

Lastly, don’t ignore the obvious. A building inspection report on an un-renovated and unlivable property is going to tell you that the property is unlivable. Don’t pretend it’s something it’s not. If your budget is unable to oversee a total renovation project, don’t engage in one to begin with.

If a property is newly built or just renovated, a building report should still be done prior to purchasing it. Making a profit from developing is hard work. Disregard what you think you saw on The Block. Many people who attempt to renovate for profit lose money or at best, merely break even.  As this reality starts to dawn on them, they begin to cut costs to meet their budget. A trained building inspector will pick up on any issues this may cause, if any exist.

To get full value from a building report or inspector, turn up on site when they are doing the inspection and talk through any practical issues they raise, with them. This often offers more value than just waiting for a written report.  Some reports are full of disclaimers and alarmist language, yet tell you little about the true state of the home. A conversation with the inspector can add great context and value to their written report.

Strata reports are often a great source of information for apartment buyers. Projected works or increased fees, neighbour disputes and structural issues are all contained in strata minutes. Don’t just read the minutes of the most recent meeting, go back several years to ensure that there are no  festering issues. An unexpected special levy shortly after purchasing an apartment for top dollar, can set your finances back a long way. If you do this type of research, at least you will know if there are any impending levies prior to buying. They can then be factored into your offer/plans.

Paying for due diligence on multiple properties in a competitive market environment can be frustrating. If you are considering passing up on this pre-purchase research, please note that you may be taking an unjustified risk. The only thing worse than missing out on the right property, is buying the wrong one.