Monthly Archives: August 2016

How much will it lease for?

Investors entering the property market need to protect themselves against overzealous rental quotes. Often the agent spruiking the proposed rental return is a sales agent and not a property manager.
To protect yourself against an unwanted and unexpected shortfall in the income on your new investment, disregard a selling agent’s rental assessment.
That’s not to say that every agent will inflate the rental estimate to make a sale. The reality is that there is an incentive to do so, though.
To get a true read on the market, have an experienced independent local property manager assess the property’s respective rental value, before you buy it.
Property investors often make purchasing decisions and value assessments on the return a property produces. This is particularly relevant in the commercial property market and a common theme in the residential market.
Any time a real estate agent can inflate the good news in order to make a sale, there is a risk for the consumer on the receiving end of that promise.
In the commercial property market, the lease arrangement has a huge bearing on the likely sale price of the property.
A vacant property will often sell for 10% less than fair value. A leased property to a quality tenant on a secure fixed tenancy with lease extensions will sell for 10% or more above fair market value.
Commercial tenants are much harder to secure than residential tenants. The upside being that commercial tenants tend to stay a lot longer than residential tenants.
The impact of the rental return on the asset’s value is not as extreme with residential property, but it is still a component of the value offering.
Given finding a return on cash is so difficult in the modern world, many investors will and are taking cash out of the bank to invest in property. Investors are likely to play a crucial role in supporting the market against a severe price drop as the market eventually cools in the years ahead.
The most common trick used to dupe investors in the market is developers offering fixed guaranteed rental returns. Investors are reassured about the merits of the apartment in the high rise due to the developer’s promises to lease it back for 2 years, at a very generous price.
The apparent security of a high rental return compels the investor to pay a purchase price relative to the inflated rental income.
Two years after completion of the apartment block, all the rental guarantees expire, leaving the investors exposed to the open market.
Unsurprisingly, the open market is significantly lower than where the developer’s price guarantee was set at.
While this happens in the world of off plan apartment sales, investors looking to buy in the open property market also fall victim to rental over quotes. It is common for properties to lease for $100 to $150 per week, less than what the sales agent told the buyer.
The loss goes beyond the weekly shortfall though. If you buy a property believing that it will lease for $800 p/w and its true value, unbeknown to you, is $650 p/w, it takes time for you to discover the disconnect.
The property will undoubtedly sit vacant for whatever period you leave it priced at $800 p/w. This vacancy period can quickly run into thousands of dollars in lost rent if you wait a month or two looking for that $800 p/w tenant.
At a time that feels as though everyone is making pots of money from property, it pays to remain clear headed and prudent.

Mystery shop the agent

The selection of the selling agent is usually decided upon from an interview and/or a sales proposal process.  Whether it’s an interview or a sales proposal that you are using to determine your agent, neither actually shows the agent in action. Agents are fully rehearsed with scripts and dialogues to ensure a slick presentation when they are being interviewed by sellers.

Given you are employing an agent to market, sell and negotiate the sale of your home, it is worth seeing them in action.

To gain a true perspective of the agents you are considering, mystery shop them as a buyer.

When you mystery shop the agent, ask a few probing questions. You will quickly gain an insight into whether you want that agent representing you.

Questions such as ‘why hasn’t the property sold yet?’ or ‘do you have sales evidence to justify the price guide?’ can garner surprising answers.

Every agent will find it easy to hold the line with a new listing that has a lot of interest in it. But you will get a better perspective of the agent’s ability if you mystery shop them on one of their failed auctions or struggling campaigns. Look for clues as to whether the agent is protecting their client’s interests or breaching confidence.

The best agents are the best at protecting their clients, even when the campaign is not going to script. A dangerous agent for the seller is one that becomes desperate when the campaign does not go as expected.

All agents look good when there are 3 buyers trying to buy 1 house. How does that same agent look when the property has failed at auction, the advertising money has been spent (wasted) and the crowds have stopped turning up to the open inspection?

What you want to see when you mystery shop an agent

Available and follow up – in order to mystery shop an agent, you first want one that is available. Does the agent respond to messages? It is a phenomenon in real estate that the stronger the market, the worse the service buyers receive from agents. Essentially, in a boom, service to buyers goes down as agents advertising for buyers goes up!!

Does the agent follow up and follow through. If you asked for information, did they get it to you. Were you followed up after the inspection for feedback and a second inspection? Were you informed of similar properties being listed the week after you inspected? Is a senior or listing agent handling your enquiry or was it the office junior that started in real estate last week? Once you mystery shop an agent, what happens from that point can offer all of the information you need to make a listing decision.

Enthusiasm – Was the agent enthusiastic about the property and you as a buyer?

Knowledge – The best agents have thorough knowledge of the property and the local area. If there is a question the agent cannot answer on the spot, the agent chases the answer and responds.

Assertiveness – Look for agents that are pleasant but assertive. When you ask probing questions to test the agents, they confidently and assertively protect their clients. A pleasant pleaser won’t help you when the negotiating gets down to the pointy end of proceedings.

What you don’t want to see when you mystery shop an agent

Personal details disclosed – if you walk into an inspection and leave feeling as though you know the owners life story, because the agent divulged all, that’s not a good thing. It is a terrible betrayal actually. When you are mystery shopping agents, ask probing questions of the agent to see how they handle them.

If you find out that the owners are selling because ‘the job loss caused financial difficulties that led to stress in the marriage, that saw one of the owners begin an affair which was the cause of the divorce’ then don’t hire the agent.

Short, rude or unavailable – the best sales people know that the next enquiry could be the best buyer. Conversley, if the agent is abrasive and pre-judges buyers, they are likely to turn buyers off the home.

What other buyers have offered – some agents will freely disclose the offers that have been made by other buyers. This breeds instant mistrust in buyers. If offers are disclosed to you, expect yours to be disclosed to others. An agent that freely discloses offers during the campaign is effectively running a ‘Dutch auction’. The property will be ‘sold to the buyer that offers the best price’ is a simple and assertive response that negates a messy Dutch auction.

There are many elements to selecting the right agent. The most dangerous (and lazy) selection method is to request 3 agents inspect your home and send a written sales proposal through. Given $50,000 or a $100,000 can be easily made, won or lost by the agent during the campaign, it is worth finding the right agent.