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The THREE prices for your property

When you are selling your property, there are three prices to be acutely aware of:

  • Marketing Price
  • Current Market Price
  • Best Selling Price

Marketing Price is the price the agent markets the property at to buyers. Legally and practically speaking, the final selling price may be higher, lower or equal to the marketing price. Some agents may deliberately price above or below the current market price creating either a frenzy or a standoff with buyers in the process.

Current Market Price is the fundamental value of your property. When an agent or valuer assesses your property’s current market value, they are not stating that you can’t or won’t achieve more. It’s more a case of stating the fundamental value at that point in time.

The Best Selling Price is the price the best buyer in the market is prepared to pay for your property, at the end of a well-run campaign. This is an unknown figure at the time of listing, but some vendors and agents may engage in (futile) guesswork in anticipating what the best selling price will be. However, until a campaign has been run and a buyer has been sourced, it will only ever be guesswork.

The key to ensuring your agent delivers the best selling price in a timely fashion is to use the right marketing price.

The marketing price is sometimes determined by the vendor, sometimes by the agent and often between both agent and vendor.

Generally speaking, agents want a lower marketing price and vendors want a higher marketing price.

The best marketing price to ensure buyer engagement throughout your campaign is the current market price.

In recent years as the market boomed, even overpriced homes were soon correctly priced as prices rose to meet vendors aspirational number. Vendors could get their marketing price wrong and still achieve best selling price.

Now that the market has stopped booming, vendors risk damaging their campaign if they overprice. Therefore, being pragmatic and understanding current market price, which becomes your marketing price will help deliver you the best selling price.

The winners and losers in all markets

There is a simplistic thought pattern that rising property markets are good and falling markets are bad. Supporting the point, transaction volumes historically increase in rising markets and decrease in falling markets. These fluctuations in volumes are sentiment based as much as they are practical decisions by the respective buyers and sellers. Rising markets feel good whilst falling markets don’t. Whilst there may be more winners in a rising market and vice versa, it is not a universal principle.

When you understand how a rising market can actually work against your best interests and a falling market can be used to your advantage, the property market takes on a whole new persona.

Depending on what your goals and objectives for trading real estate are, you will be better positioned to act decisively or remain patient when you are conscious of the winners and losers in all market conditions.

First homebuyers – rising and/or fully priced markets benefit those at the top and disadvantage those look to enter the market. First home buyers find the level of entry difficult in booming markets and are best served looking to enter the market when real estate is flat. Many people think that first home buyers are permanently locked out of the market which is an overstatement. There is no doubt that current conditions are difficult in Sydney for them, but an opportune time will come again. Indeed it was first home buyers that created the post-GFC boom as they took advantage of declining prices (and Government grants). First home buyers who were brave enough to venture into the market in 2008 are now on the property ladder and climbing.

Upgraders – if you own a property and intend to sell it to purchase another one in the same market, you are more likely to sell in a rising market. But you are quite possibly better off upgrading in a falling market. If you sell a $1 million home and intend on upgrading to a $2 million home, a 10% rise in the market will provide an extra $100,000 on the sale but take $200,000 more on the purchase.  Conversely, a 10% market decline on the same transaction wipes $100,000 off the sale but a whopping $200,000 off the purchase.

When you consider that a lot of fees and services such as stamp duty (& agent’s fees) are based on percentages, the lower the price the better when upgrading.

Transitioning into a different market – if you are selling out of a booming Sydney market to buy into a sleepy seaside village with flat to declining property prices, you win on both sides of the ledger. You sell high and buy low. The Perth market, for example, is severely depressed at the moment. If you were to sell in Perth and move to Sydney or Melbourne, you will sell low and buy high. As important as it is to sell at the right time, if you are transitioning into a different market, picking the right time to buy is equally important.

Negatively geared investors – creating a deliberate weekly loss to gain some tax advantages may seem like a sound and plausible strategy whilst prices are rising. When prices are flat or declining, the investor loses twice – a weekly loss plus declining asset value. Investors who are negatively geared need a market that rises faster than the accumulated losses through the negative gearing, to stay in front on the investment. Sharing a profit with the tax man is preferable to keeping a loss to yourself. Many property investors have lost sight of this one. If you get yourself into a position where you are positively geared, capital growth is yours to keep rather than compensation for carrying a weekly loss over a number of years.

Investors – it is possible for investors to benefit in both flat markets and booming markets. The key is to transact accordingly. There are two types of investors, incoming and outgoing. Savvy investors know there is a right time to enter a property market and equally an appropriate time to exit.

A crude yet timeless real estate cliché such as ‘when rates are high it’s time to buy and when rates are low it’s time to go’ is worth keeping in mind. This should not be your sole guiding light but it is worth keeping in mind. Sure, every expert says ‘sell high, buy low’ but how many actually act on this advice? Prices are currently high in Sydney and low in Perth. How many investors are brave enough to buy in Perth at present? Yet in 2011/12 when interest rates were much higher and the mining boom was ticking along, Perth was fully priced and Sydney was in a severe lull. Sure, hindsight is 20/20, but so is research coupled with long-term planning.

Last time sellers – if first home buyers are the losers of a boom, then last time sellers are the recipients and vice versa in both instances. From a demographic perspective, there are a lot of last time sellers coming through the system in the next 15 years as baby boomers sell down their assets to fund their retirement. The family home will be increasingly sold down by baby boomers who are looking to unlock equity and move into smaller more manageable properties in lifestyle locations.

Baby boomers in Perth feel hard done by given the market has crashed there whilst last time sellers in Sydney feel as though they have won lotto. Particularly if they selling up to leave town. Just as first home buyers could be well advised to hold off on purchasing at present, last time sellers should give considered thought to exiting the market whilst times are good. We may not be in the midst of a full boom as we were in 2015, but is anyone going to really suggest that house prices are currently anything but high?

Knowing what you now know, you may decide to act ahead of time or delay transacting until the market environment suits your agenda. There are winners and losers in all markets. If you plan intelligently and sensibly, you increase the chances of being on the right side of the ledger.

*Extracted from Peter O’Malley’s latest publication, Inside Real Estate –  Buy, sell and profit in any property market.

Inside Real Estate is available now at all good bookstores or online via Dymocks.

The toughest offer to accept

Contrary to what you may think, the toughest offer to accept is not the offer below your desired price. The hardest offer to accept (albeit begrudgingly) is the offer that is less than what you have previously rejected.

In the past 5 years, selling has been relatively easy. Pick a number and wait for buyers to meet and exceed it.

Now that the market has moved into a more balanced phase, it is frighteningly easy to undersell.

Scenario: Vendors Bob and Sue receive a solid, but not spectacular, offer from a buyer early in their campaign. The offer would be acceptable at the end of the campaign but they are ‘not in a rush’ and decide they would like to see what other offers come along.

In the meantime, that same buyer has an offer on another property accepted. Bob and Sue’s agent was unable to find any buyers at, or above, the price which had been previously offered. Consequently, Bob and Sue need to go back to the open market.

Over the next 2 months, Bob and Sue’s price expectations come down as their motivation to sell increases.

The agent is doing the best they can, Bob and Sue can see that. Unfortunately, the market doesn’t seem to be as strong as it was earlier in the year.

The next offer that comes in is respectable albeit lower than the very first offer that Bob and Sue were presented with. In their desire to ‘move on’ they accept the offer and put the shortfall down to experience.

At present, versions of the above scenario are being played out across the marketplace; as buyers, sellers and agent’s transition from a booming market to normal trading conditions.

To ensure that you accept the right offer, it is crucial that you look at other properties on the market as well as recent sales. When you are selling, recent sales are history. Stock on market is your competition for a buyer. All scenarios should be explored with your selling agent prior to responding to an offer.
This is a great market from a historical perspective but it has cooled since the beginning of the year.

Remaining calm and pragmatic will lead you to the right decision when selling.

APRA’s power increased. Policy options now set by postcode

The Federal budget always seems to throw up plenty to discuss. The media understandably pounce on the headline elements of the budget.

Sometimes budget measures which are the least discussed can be the most intriguing.

The Government has upgraded the ability of the Australian Prudential Regulation Authority (APRA) to curb excessive and poor lending into the housing sector. APRA now has the authority to limit bank lending on a regional basis and even postcode basis, if need be.

The Australian economy is a tale of depression and boom. The Reserve Bank of Australia (RBA) would probably like to cut interest rates further to assist and stimulate the WA & SA economies. Conversely, they would probably prefer to see rates rise in Melbourne and Sydney to curb the booming housing market. Alas, interest rates are a blunt instrument, as it is for one it is for all.

Reports and commentators are now warming to the fact the RBA may need to cut rates again – in late 2017 or early 2018. This is far from certain but the next move is likely to be down more than up if we examine current data. Unlike previous rate cuts, the benefits of future interest rate cuts are less likely to flow through to the Sydney or Melbourne housing market, as APRA will tighten on behalf of the RBA where required.

The housing boom was never the intention of the RBA. It was a side effect of the RBA cutting rates to lower the AUD and offset the mining downturn.

These budgets measures that enhance APRA’s influence on the banks and non-bank lending is intelligent on the one hand and too late on the other. The Sydney market is already showing signs of cooling after property prices have risen 70 – 80% in the past 5 years. These gains were a direct cause of foreign buyers and cheap money.

The market has begun to cool as a result of several measures introduced by the APRA. The most recent was a crackdown on interest-only loans, which have been some of the riskiest, historically.

As aggressive lending or price bubbles show up in the data APRA will now be able to step in and enforce prudent lending, even if the lenders are not. The Government did not provide these powers for them to be ignored, so expect it to play a role in the property market going forward. In the past, lower interest rates meant higher property prices. Provided APRA enforces its power, lower interest rates won’t necessarily have the same stimulatory impact on property prices as it has in the past.

Hot locations within a booming property market or locations deemed to have an apartment oversupply risk are the most likely to be the first targets of the APRA’s new powers. Non-bank lenders have also had additional regulation heaped on them to ensure they don’t step to fill the bank’s void.

Smart policy. Let’s just hope it’s not too late.

What’s the kicker?

When negotiating commission rates with a real estate agent, be very careful about incentive schemes, particularly in rising markets. On the surface, incentive schemes seem sensible enough – identify fundamental market price and offer the agent an incentive above that.

Agents call incentive schemes ‘kickers’. It’s common for kickers to be 10% to 20% above the perceived market value. The owner pays the agreed base commission rate PLUS the kicker!

As an example,  if you have a property that you feel is worth $1 million, an agent may agree to a lower commission rate at $1 million but a higher percentage of everything ‘over $1 million’.

The agent may ask for a commission of 2.2% on $1 million. You suggest 2.2% is on the high side compared to other agent’s quotes. The agent floats the suggestion about a lower commission rate up to $1 million of say 1.5%, and 10 to 20% of everything over $1 million, payable to the agent. This seems fair on the surface, everyone wins together.

The trap for home sellers is the agent knows from the beginning of the campaign that the price is highly likely to exceed market value – assuring them of an excessive commission.

The owner takes false comfort in a kicker fee arrangement protecting their commercial interests when it simply exposes them to a large commission.

Every Sunday morning, you read newspaper articles about homes selling for $100,000 or $200,000 and even $500,000 above the seller’s reserve price. The kicker, for example, on $200,000 means that you pay the agent a commission premium of $20,000 to $40,000 for simply doing their job – selling your house.

Admittedly, the best agents can have a positive influence or impact on the final sales result, but not by $200,000?

At a public auction, the success is largely determined by what the under bidder bids to, as opposed to any negotiation efforts of the agent. The only reason that so many houses sell excessively above the reserve price is the reserve price is set too low, to begin with.

The reserve price should be set relative to the market feedback and offers, not relative to the sale down the street last month. In a rising market, the worst way to set a reserve price is based on past sales. If you do, you are likely to set it too low. A low reserve price with a kicker in place means you will unknowingly overpay the agent on the commission and thank them for it in the process.

If the sales price of your home exceeds the market price, that’s your good fortune.

Most agents ‘value offering’ is that they can achieve a high price for your home. Paying an agent a kicker is simply giving your premium price to the agent as a commission premium.

Commission incentives work best in slow markets where there is downward pressure on price, this ensures the agent is not just focused on a quick sale to maintain turnover. In a rising market, the price is high and the days on the market are minimal – therefore the market is doing the hard work on the agent’s behalf.

Employing a selling agent

Before employing an agent to market and sell your home, ensure you are clear about what you expect in an agent. Real estate agents often spruik their clearance rates or their profile in the marketplace.The true determinant of a good agent is their ability to deliver a premium price – in a risk-free and stress-free manner.

The true determinant of a good agent is their ability to deliver a premium price – in a risk-free and stress-free manner.

You will only sell your property once. Therefore, it is crucial that you get the right price when you go to market.

Agents that constantly focus on getting the property ‘sold’ as opposed to achieving you the ‘best possible price’ are signalling their intent.

The best sales people are not high pressure ‘closers’. They are calm, professional and supportive in providing you with the right information. They are assertive but they are not aggressive. Before employing any agent to sell your property, meet with them several times to gain a sense of their style.

Before employing any agent to sell your property, meet with them several times to gain a sense of their style.Your selected agent is going to be your guide throughout the campaign. Therefore, it is crucial that there is mutual respect and trust.

The most expensive market

A lot is made of how expensive the Sydney property market is on a global scale. There is a second market that Sydney is a world leader in when it comes to expensive – real estate internet advertising. Homeowners pay more to market their homes on the internet in Sydney and Australia, broadly speaking, than just about anywhere else in the world.

In the days of newspapers, agents became addicted to a model called VPA. That’s Vendor Paid Advertising. The agent convinced the client to spend excessive amounts of money on advertising their home, using the ‘old chestnut’, more advertising equals a higher price.

Homesellers collectively ‘invested millions of dollars’ each year thinking they were selling their home when they were actually buying advertising. The seller inadvertently paid to build the agent’s profile and branding, regardless of the success of the sales campaign.

Then the internet became the dominant marketing tool and essentially wiped newspaper advertising out. Now everything old is new again as VPA has returned with a vengeance and a digital veneer. Agents are now looking to outspend each other on the internet with bigger ads at the owners expense. That would be fine if the homeseller and agent gained a joint benefit from all this advertising. Alas, homebuyers are interested in the property not the size of the advertisement.

Real estate internet advertising expenditure has exploded in the past 20 years from nothing to being billon dollar companies. Some individual web ads cost as much as $2000. On a global scale, this puts Aussie home sellers at the top of the heap when it comes to outlay for real estate advertising on the internet. One stockbroker made insightful comments prior to the release of the recent Fairfax results. The firm was looking for ‘any indication that real estate agents were beginning to resist price increases’ from Domain.

While everyone is asking, how high can house prices go? Others are asking, how high can these advertising rates go?

Agents may be showing subtle signs of stress at the price increases. Off market transactions are increasing as agents aim to use their database as opposed to chase excessive VPA. Neither consumers or agents are showing an appetite for annual price increases three times the rate of inflation.

Opportunists sense the gap in the market too. This is why your television and radio is awash with discount agents and referral firms promising the ‘same for less’ as full service realtors.

The key when assessing the right campaign for your home is the outcome you desire. Once you are clear on that, pick the most economical and efficient path to that outcome. If a total marketing campaign delivers genuine buyers to your doorstep for $2000, why spend $5000 or $10,000? If someone, asks you to spend $5000 ensure they justify the extra expense. If expensive internet advertising is such good value, let the real estate agent pay.  They’re the party getting the most benefit from it.

Battle of the disrupters – No agent v cheap agent

The traditional real estate agent is under attack from the left and the right. On the one hand, companies such as Buy My Place are teaching consumers how to sell without a real estate agent. On the other, UK outfit Purple Bricks hit Sydney in recent times to offer home sellers a real estate agent whose total fees are under $6000.

The traditional full service, full fee agent is coming to realise the real estate office next door and down the road is not their only competition.

Removing the traditional agent from the equation, it does set up a very interesting discussion. Are consumers better off giving their listing to a cheap agent or doing it themselves and no paying no fees?

Selling with a cheap agent

The main benefit in dealing with a cheap agent is you save on the commission. However, consumers must first and foremost decide if they are getting value for money in their $6000. If the agent undersells the home, the commission savings are simply transferred to loss in sale price. It is completely in correct to suggest Purple Bricks are the Uber of real estate. It sounds catchy, but the facts don’t support it.

Uber is an automated web transaction that competes in service and cost with the humble taxi driver. The risk for a consumer is essentially zero. Conversely, Purple Bricks take their fee upfront regardless of the result. If you drive the car from west from Balmain on Victoria Rd you will get to Drummoyne, guaranteed. If you list your house on the market, it may or may not sell for a price that you are happy with. Last year in a boom, the auction clearance rate was 80%. That means 1 in 5 failed. There are no guarantees in selling anything. Ask a fruit shop. So the risk is $6000 before the starters gun has gone off.

Finally, good real estate agents don’t work for $6000 a sale. If you are selling a home, its nice to think you will get a high level service for $6000, but you won’t.

Selling without an agent

A great way to look at the difference between selling without an agent v a cheap agent is to run the maths. On the one hand, you have a self acting, self interested home seller looking to save $20,000 to $50,000 in commission. Aside from the sale proceeds, that is the reward if the owner achieves a sale.

On the other hand, you have a real estate agent that will get about 35 to 40% of the $6000 fee in their hand after the costs and split with their boss.

A self-acting owner is saving $20,000 to $50,000 in commission and acting from self interest aligned with the sale.

The cheap agent is relying on a low fee with high turnover in a small time frame.

Time will tell whether Australians adopt the sell without an agent strategy. The cheap agent strategy has been tried many times and failed miserably.

Signals and signposts. The key indicators that will determine the 2017 market

The 2017 property market could see a continuation of the boom. Predictions across a range of analysts predict growth anywhere between 5 and 15%. Conversely, the correction that many have felt was imminent for the past few years could occur.

The key to anticipating the market whether you are buying or selling is to follow the relevant signals and signposts that are likely to determine the market.

Interest rates – there are two interest rates to follow. Firstly, the Reserve Bank of Australia’s (RBA) cash rate, which is currently set at an all time low. Make no mistake, the RBA cash rate is at a record low and house prices are at an all time high. There is a direct correlation here. The second key interest rate setting is the retail banks rate movements. In the past few years, the retail banks have moved rates, up and down, independently of the RBA.

Employment/Unemployment – The national economy is struggling, the NSW economy is booming. In the short term, following the NSW unemployment rate is more important to the Sydney housing market than the national unemployment rate. The respective state economy is a better immediate indicator of how the property market is likely to perform that the broader national economy.

Rents – If property prices continue to rise as rents stagnate, investors will shun the Sydney market in favour of regional centres and interstate capitals. Newcastle and Hobart are just two examples of where investors have looked to in recent times in favour of Sydney. All stable property markets appeal to a broad range of buyers. Low yields that fall further will cause Sydney investors to focus solely on capital growth. After 5 years of strong growth, that’s a big call.

Time on market – how long does it take for a property to sell? In a strong market, sales occur in a rapid timeframe and vice versa. By anecdotally following time on market for properties in your immediate area, you will gain an insight into how easily (or not) buyers and sellers are coming together on price.

Apartments – for the first few years of the current boom cycle, apartments performed equally well as houses, in terms of price growth. As high rise after high rise came up for completion, apartments subtly begun to underperform houses. Sydney does not seem to have the apartment oversupply that Brisbane and Melbourne does. But if rampant oversupply of apartments were to occur, it could easily weigh on rental returns and house prices. It is worth noting that the new NSW Premier Gladys Berejiklian plans to address the housing affordability crisis through development/supply. The

Black Swan event – Regardless of the apparent strength in the property market, its wise to be aware that Black Swan events occur. They are rare but they exist. A Black Swan event is usually rapid (like the collapse of Lehmans Brothers in 2008) and have dramatic knock on effects. Given the amount of debt swooshing around the world at present, systemic risk is real.

Bidders per property – the market depth is more accurately reflected in bidders per property as opposed to buyers at open inspections. It costs nothing to walk through an inspection. To place an unconditional bid on a property means the buyer is serious. The more bidders per property, the stronger the market and the deeper the buyer pool. Attend auctions and see for yourself the vigour in the bidding.

Demographic Disruption

The property market is always susceptible to disruptive forces of one kind or another.

The last two decades has seen constant digital disruption as websites and databases decimated print. The digital disruption changed the way real estate is purchased and sold forever more.

In 2014, there was an influx of foreign buyers into the Sydney and Melbourne markets. The presence of so much foreign money swooshing around those cities disrupted the market to the point many locals were priced out of their respective hometown. The Federal Government was forced to introduce restrictions and taxes to curb the demand.

As baby boomers reach retirement, their changing property needs will disrupt the market. Disruption should not be construed as negative. Disruption simply means to significantly alter the status quo.

Baby boomers are a demographic born between 1946 and 1964, as defined by the ABS. History has shown that whatever the baby boomer demographic does in unison it causes a boom. Given society experienced a baby boom in the past, it is understandable that one day it would experience a retirement boom and all of the adjustments that come with it.

Baby boomers are the largest represented demographic in modern society. Given their needs in the property market are changing, it’s worth taking note.

Before exploring what boomers are likely to do, it’s worth exploring what they won’t do. There was a theory that boomers would sell up and head out of town for the coast once retirement arrived. While many have done so, more are choosing to stay connected to cities and towns where family, friends and medical infrastructure are.

It’s not that the sea change (tree change for others) is entirely off the agenda, but the amount of boomers retiring in the city was somewhat unexpected.

To assist in understanding how the baby boomer demographic will impact on the market in the next 5 to 10 years, it is worth categorising their likely moves.

Selling the family home – There will be a mass and rapid transfer of large family homes to the next generation in the near future. The property market in Sydney and Melbourne is clearly overvalued (not to be confused with a forthcoming crash). Therefore, the time is right for boomers to begin downsizing from both a wealth and lifestyle perspective. Given the boomers numerical dominance as a demographic, if the selling is too fast, you may see oversupply in large family residences. A great question to ponder – is there enough demand from Gen X and Gen Y’s to support house prices at current levels once Baby Boomers sell down?

The answer will vary depending on whom you ask, but it is a segment of the market worth watching.

Selling the investment property/properties – as a result of the GFC, stock markets and superannuation has been poor for boomers in comparison to property. Since the 2008 GFC, the Sydney property market was in boom mode for 2009 & 2010, followed by a second boom from late 2012 to the present. Those fortunate enough to own investment properties will look to cash in while the going is good. Property has become the best superannuation for many boomers as they head into retirement.

Buying a property for the kids – many parents are delighted at property prices on the one hand and horrified on the other, when it comes to their children entering the market. Increasingly, boomers are assisting their children into the market. This phenomenon is certainly a secondary phase to the boomers wealth transitioning. But the key point here is that boomers are using their wealth to assist their children into property, not the stock market or new business ventures.

All general comments sure, but anecdotally, no one would suggest that boomers are passing on their wealth to children to enter into business ventures or money markets enmass. Boomers are clearly more interested in real estate than other asset classes when it comes to assisting family.

Therefore, even though boomers will be selling down their assets, expect the cash to be largely recycled in the housing market.

Buying a luxury apartment – If baby boomers are selling the family home, it is worth factoring in where they are going. Secure apartments close to the Harbour or beach have been popular. Luxury apartments for example in Drummoyne East along St Georges Crs that have great water views have skyrocketed in price in the past 3 years. In this segment of the market, it is safe to expect the demand will exist for the next decade.

Buying a single level house/property – the most desired yet undersupplied product in the inner ring of the Sydney marketplace is single level homes. This is true for many other markets too. Baby boomers primarily sell the family home to unlock wealth and downsize because the family home is too large. Escaping stairs is a secondary reason for selling yet a huge consideration on the purchase. Single level homes in popular locations will benefit from baby boomer demand, much to the chagrin of the aspirational young family. Make no mistake; baby boomers are formidable opponents in a bidding war.

As you can see, the boomers may leave an oversupply in large expensive family homes and create a shortage of luxury apartments near water. Hence the disruption that has already begun in the market. We are already seeing all of the above and more occur in the marketplace. This disruption is in its infancy and will accelerate into the near future.