Monthly Archives: October 2015

WHAT SHOULD WE OFFER? Defining good value, fair market price and expensive

Once you have finally found a suitable home, you inherit a new challenge. What to offer the vendor? There are so many variables when it comes to making the owner an offer. Quite simply, there are more questions than answers once you find a property that meets your needs.

Do you make a one off, best offer, with a take it or leave it attitude? Or start low and work up to your maximum price? Maybe wait for the auction? Once you make an offer, how long do you leave it on the table?

Indeed, the questions keep coming as you ponder how to secure your dream home. If you are purchasing an investment property, maybe you are emotionally detached from the home. But the home buyers you are bidding against may be emotionally engaged. Setting a game plan is the key to success when making an offer.

If you have found a home that you are unable to let go of, you are at risk of being left devastated should you miss it, or at risk of over-paying. Indeed, it’s okay to over-pay to secure your dream home, so long as you know that you are overpaying and can afford to do so. Admittedly this logic does not quite stand up for investors. Many people who ‘over-paid’, 10 years ago in 2005 now look back on the purchase as a bargain.

If you focus on the competition when buying, you will find yourself being drawn into games. Whether the games are played at the auction or you are trading information through the agent, games will be played. If you focus on what other buyers are prepared to pay as a means of determining what you offer, your desire to purchase the property can be overtaken by a complete stranger’s interpretation of value.

Buyers who have an extreme focus on the competition end up dazed and confused. The key is not to work out what the property is worth to the competing buyer. The key is to work out what the home is worth to you! The best way to enter a negotiation for a property purchase is to accept that there are 3 prices. Those 3 prices are good value, fair market price and expensive.

By being conscious of the 3 prices for every property, you can allow them to act as your guide through the negotiations. In recent times, not many homes have sold for what could be termed good value. At times, the market has been rising so quickly that expensive on the day of exchange is good value at settlement. In a falling market, this works in reverse too.

A purchase that seems good value when contracts are exchanged suddenly looks expensive when the buyer collects the keys at settlement. Aside from abnormally sharp movements in the market, you can only ever transact on the available information. Whether you are buying the market often continue to languish, even once they are priced correctly. They often need to be priced below market value to ignite interest.

If you do find a home that is languishing on the market below market price, judge the home on the price, not the length of the selling campaign. Agents claim they got $200,000 over reserve and the buyers claimed they got a bargain. So what really happened? It probably sold for fair market price. The majority of transactions occur at fair market price, with a 5% variance. Buyers who are prepared to pay a fair market price will always end up securing a home, unless they are buying in a rapidly rising market.

In being able to secure a home, that’s not to say they will always secure the one they really want though. Murphy’s Law states that if you really want a particular home at fair market price, others will too. or selling, it’s best for your sanity not to study the market once you have transacted. It won’t change anything. Good value is what many buyers love to claim they bought – a bargain. In reality, only about 10% of all transactions would fit into the good value category.

Good value is any property that sells for below market price. The value that was left on the table may be due to a desperate vendor, a poorly run sales campaign or a hidden feature that everyone missed (such as development potential), except for the buyer. Even if you find a grossly incompetent agent that compromises the vendor’s position, it’s worth noting that you are still negotiating with a vendor that just wants fair market price for their asset. Buyers who prey on weak agents with weak vendors carry bad karma.

Everyone loves to criticise David Tweed, the stock trader who offers unsuspecting people below market price for their shares, in the hope they don’t know the value of their shares. The real estate market is full of people with the same mindset that Tweed displays to the vulnerable in the share market. If you are aiming to purchase below market value, ensure that you don’t buy a compromised/flawed property thinking you have nabbed a bargain.

This is more common than buyers actually buying a bargain. One of the most common (and fair) ways to buy good value is with stale properties that were initially overpriced. Over priced properties that languish on the market often continue to languish, even once they are priced correctly. They often need to be priced below market value to ignite interest.

If you do find a home that is languishing on the market below market price, judge the home on the price, not the length of the selling campaign. Agents claim they got $200,000 over reserve and the buyers claimed they got a bargain. So what really happened? It probably sold for fair market price. The majority of transactions occur at fair market price, with a 5% variance.

Buyers who are prepared to pay a fair market price will always end up securing a home, unless they are buying in a rapidly rising market. In being able to secure a home, that’s not to say they will always secure the one they really want though. Murphy’s Law states that if you really want a particular home at fair market price, others will too.

 

Intense buyer competition is what usually causes properties to sell above the market price. Even though the home is desirable, the recent sales evidence of similar homes does not support the sale price. Buyer emotion took it past fair market price, making it an expensive purchase.

Agents often claim to have beaten the market by so much when interviewed after an auction. The reality is they quoted below market price and sold for fair market price, creating an illusion of the sale being stronger than it really was. That’s not to say that there have not been some outstanding results across Sydney in recent times. But it takes a savvy market watcher to decipher agent spin and reality. If you are buying real estate, you owe it to yourself to pragmatically establish the 3 prices for your target property before commencing negotiations.

In doing so, it will help you accept the outcome, whether you are the successful buyer or not.

Diminishing Yield: Returns headed to record lows

Yields on Sydney real estate are at all time lows. The gross return on many Sydney properties is down to 3.5%, meaning a net yield of less than 2% in many cases. Given interest rates are at record lows, it’s not a great surprise that investors have driven yields down by the same degree.

The under reported story of the property boom has been the decline in the rental market. In turn, yields have been decimated as investors have been asked to pay more, to receive less. Add to this equation APRA’s toughened stance toward investors and it’s no wonder new-coming investors have backed off entering the market.

A healthy market always has incoming investors to support prices. However, incoming investors seem to have taken a break from the Sydney housing market in recent months, digesting the many challenging factors.

The great challenge facing investors in the current market is where to invest cash. Sydney offers capital growth but low yield, whereas interstate markets offer yield but have barely increased in price, even though interest rates have been slashed in the past 3 years. Brisbane has been the huge underperforming market to date, with many continuing to predict it will be the recipient of excess money from Sydney and Melbourne investors.

Sydney investors already in the market have been duly compensated for their weak yield with increasing capital value. Their annual return on investment (net yield + capital growth) has them comfortably in the black in recent years.

In the next few years, the Sydney market is about to experience thousands of new apartments under construction being completed. As these apartments are finished, many will be listed on the rental market. Such an enormous injection of supply is likely to keep downward pressure on rents. Good for tenants, not so for landlords.

Investors entering the Sydney market have a clear choice to make. Do they believe the Sydney boom has further to run? Given the yields are at record lows, buying a Sydney investment property is buying into the story the boom still has legs in the years ahead. Whilst investors may be backing off the market, other segments of demand stand ready to act.

If apartment prices show any sort of value, rest assured, first home buyers will jump in and take advantage. Add foreign investors being attracted by the lower Australian dollar and Sydney’s property market is sure to experience strong support even if local investors back off.

Regardless of forecasts, predictions and analysis, ultimately, markets do what markets do.

How’s the market? Spring market holding up

Despite pessimism in some quarters of the media, the property market held up well in September, particularly given the volume of stock. It seems agents were unnerved by declining clearance rates and falling numbers of bidders per property.

Whilst clearance rates and bidders per property were down, properties continued to sell. Even those that passed in at auction sold shortly afterwards. A market where most failed auction campaigns sell, within a week or two of the auction, can still be considered strong.

In a truly soft market, failed auction campaigns languish. This is clearly not happening in the current market. The unprecedented boom that peaked in the first half of 2015 may have passed but selling conditions are still very good. Maybe not the best of times when compared with earlier in the year, but still very good.

If vendors are accepting that the market is running very close to full value, it makes the decision to sell easier. Anyone who claims to know when the real estate market has peaked is either lucky or lying. Prices for 2015 are still well up on where they were in January.

Two highlight sales in September were 58 Glassop St Balmain that sold after 19 days on market and 4/7 Day St Drummoyne that sold for $1,250,000 after 5 days on market. Both sales demonstrated that buyers are still prepared to act decisively and pay a good price for real estate that meets their requirements. Furthermore, 47 Horden St Newtown (pictured) sold for $2.2 million in a bullish sign for the Newtown market.

The market is likely to experience elevated stock levels until late November. This will even out the ratio of buyers to sellers. Expect clearance rates to remain high, but maybe without the same vigour amongst the competing buyers as there was earlier in the year.

HOW’S THE MARKET Spring market holding up Investor interest has declined since APRA toughened lending to residential investors. The other contributing factor to declining investor interest may be the sluggish rental market. Whilst property values have skyrocketed, rents are stagnant if not falling. For some time we have felt that this was the great unreported aspect of the property boom that swept Sydney.

It’s worth noting that expat enquiry and buying is increasing, which offers an area of support for the market.