Monthly Archives: January 2015

Auctions and the three-card trick.

In order to persuade sellers to sign up to an auction, agents use the equivalent of the three-card trick (they call it a ‘three-phase selling process’). You can sell before the auction, at the auction or after the auction, they reassure you. If your home fails to sell at the auction, they will tell you it’s normal because failing to sell at auction is just ‘a part of the process of determining the market price’.

Phase 1 — Selling before the auction

Unfortunately, not much effort goes into trying to sell your home before an auction. If an enthusiastic buyer happens to inspect your property before the auction and wants to make an offer, there is a chance to secure a sale before the auction goes ahead. This doesn’t happen very often. Some agents may even advise the buyer to wait for the auction date. In general, agents don’t like selling beforehand because they get very little publicity from this kind of sale. They love to build their profiles through the auction process as often as possible. Be wary of the agent whose listings are loaded up with auction campaigns.

Phase 2 — Selling at the auction

In reality, the public auction system is all about forcing or conditioning the seller down to a price where the property sells within the shortest period of time. Behind closed doors in agent training meetings and seminars, agents refer to auctions as ‘the fastest and best conditioning tool’ they have at their disposal. The reason agents push auctions in weak or turbulent markets is because the transparent bidding process gives owners a ‘reality check’ if they need it. When the auction publicly stops below the reserve price, agents say: ‘It’s the buyers telling you your price expectation is too high, not me’. This takes the pressure off the agent and transfers it neatly to the seller. Often the agent’s real motive in selling an auction campaign to a vendor is to allow the auction process to push the vendor down in price so a quick and easy sale can be achieved. If you doubt this, ask the agent why all auctions start the bidding process below the reserve price. Less than 50 percent of auctions achieve the reserve price which causes the seller to either pass the property in or drop the reserve price during the auction.

Phase 3 — Selling after the auction

Any hope of achieving a high price for passed in properties is dashed as many buyers view properties that fail at auctions as damaged goods. After a home is passed in, the seller often reluctantly commits to selling their beloved home for a lower price post-auction. Unfortunately, only the agent and the buyer are happy.

When the seller refuses to believe what the auction process is telling them, a sale by private treaty is likely to occur a few weeks later at a higher price. If you sign up for an auction envisioning a big crowd of buyers in your backyard ferociously bidding to secure your home, that is your fantasy, not the agent’s. Your agent will have a different motive behind convincing you to go to auction. Instead of signing up for a successful selling campaign, you may have signed up for the classic three-card trick.

5 Questions for Investors in 2015

What is the net yield?

Frighteningly, many residential investors don’t know how to calculate net yield on their investment. They see that the property leases for $1,000 per week and do modeling around $52,000 a year income. The only figure that counts for investors is the amount left over after all costs have been covered. Strata rates, council rates, water rates, land tax, vacancy, agents fees and maintenance are all costs that can take 20-30% off the gross yield. The $52,000 you thought you were getting just turned into $36,400.

Are you chasing yield or capital growth?

Many investors in their search for growth disregard the importance of a strong yield supporting the investment. The best investment properties provide good yields that continue to appreciate. The predictable and growing yield ensures that capital growth follows. A property with a weak return tipping you into negative gearing then needs to experience strong capital growth just to offset the negative gearing. Buying on the basis that a property has sound income fundamentals is investing. Buying on the basis that hopefully someone will pay a higher price than you just paid in the future is speculating.

Is the investment decision tax based or performance based?

If you ask your accountant how to save tax through negative gearing, they can certainly help you. A good tax saving property can be a dud investment though. The goal when investing is to profit.

Negative gearing is a fancy term for weekly loss. Many investors sell out of positively geared properties because the property is creating a ‘tax problem’. If you are paying tax, you are profiting.

If you are negatively geared, you are losing. Even though the tax man splits the loss with you, half a loss is still a loss. Buy good real estate and capital growth and yield growth will come.

As a wise man once quipped, ‘you are better off sharing a profit with the tax man than keeping a loss to yourself.’

Where do you think we are in the current cycle?

Rents are down, prices are rising, interest rates are set to go down further and Sydney has its mojo back. Credible forecasters and economists contradict and conflict daily on what will happen with the property market in 2015 and beyond. Absorb all the key messages and form your own view prior to purchasing an investment property.

Take a long term view (10 plus years) to quality property and you should do well. If you take a punt on a quick profit in the market understand the risk you are running.