Profitable Renovations – How to add value beyond cost

Once you decide to sell a property any money that you put into the property should be deemed as an investment. This applies even if you have bought an un-renovated property that you intend to sell.

The purpose of investing is to make profit. Therefore, each dollar that is invested into the property should be linked to profit. Many people make the unfortunate error of putting a brand new kitchen with high quality appointments into the home just before they go to market.

The brand new kitchen may improve the sales price, but if a $50,000 kitchen adds $60,000 in value, is the effort, cost and stress worth it? Often the $50,000 kitchen only adds $30,000 or $40,000 to the end price, making the investment of the kitchen a loss.

Television shows are full of people making renovations look fun. To prove the point that renovations are not all high times and high profits, take the results from The Block over the past 5 years. Whenever the properties have a commercial reserve price set, the auction often fails to meet the reserve. Only when they have an artificially low reserve does The Block look fun.

Let’s call a commercial reserve, purchase price & costs + renovation costs = reserve price.

Who will ever forget the devastated contestants in the 2014 series of The Block who gave up 3 months of their lives to win …. nothing. This happens every day in the real world. In the real world, renovators are not given free labour and subsidised product from sponsors either. Keep in mind that good television and renovation profits are separate events.

Profitable renovations fall into two categories. Works that can be done below retail costs and retail priced works that add value beyond cost.

Works below retail costs
Many renovations add around $1 for every dollar that is invested into the property. If you are undergoing a structural renovation, to create true and meaningful profit from the works, you need to be able to get the works completed at a lower price than what a builder would charge a client. The amount you save on the works will flow through as profit on the end product.

This is why many developers/builders do so well out of un-renovated/unlivable properties. There is a huge upside in the dwelling and they can get the works done at a price that produces profit. The disrepair of the property frightens most if not all homebuyers that plan to pay retail costs on the works.

Retail priced works that add value beyond costs

Paying full market price for works and profiting on those works is difficult but possible. If you employ a painter to paint the house for $15,000, it is very common to see the works add $30,000 or $40,000 in value.

As a general rule of thumb, painting, carpeting and landscaping are works that will create profit beyond the costs of works.
Market growth often masks the true impact of renovation costs. If your plan to do profitable renovations works out on paper prior to selling, any market growth in that time is a bonus.

Relying on market growth to fill the hole left by the renovation costs is not a fun space to be in.

Unless you are a builder, most profitable renovations tend to be of a cosmetic nature. Profitable renovations that involve DA’s and structural works are best left to the experts.

 

Managing the sale – Key indicators to watch during your campaign

The key indicators to watch during your campaign

During the sales campaign of your property, the agent will more than likely have to make some recommendations. Whether these recommendations relate to the marketing, the price or whether to accept or reject an offer, their significance cannot be understated. On average most people sell real estate every 7 or 8 years.

Being so relatively inexperienced in such an important transaction can be daunting. If you are aware of the key indicators that govern every transaction, it will assist you in determining the merit of your agent’s recommendation. Agents are not always in the luxurious position of being able to tell their clients what they want to hear. However, by schooling yourself on the key ‘on market’ indicators, you can objectively assess any recommendations as opposed to emotionally reacting. If you can remain calm and objective during the campaign, it will be of great assistance to you and your agent in delivering the best possible result.

There are four indicators that interlock with most campaigns:

Internet Hits/Traffic

Enquiries

Inspections

Offers

Every vendor wants to be at the point where offers are coming in, as quickly as possible in the campaign. But offers are less likely to be made by buyers if the preceding 3 indicators are not aligning.

Internet Hits/Traffic

In the days of newspapers, home owners would spend excessive amounts of money and have little to no idea of the impact of the expenditure.

Now, with websites being the dominant marketing tool, web traffic on each property on every day can be tracked in finite detail. Trends emerge to assist the agent and the seller as to the progress of the sale. Ensuring that your property is well presented and priced accurately will ensure web traffic is strong from the start.

Ensuring that your property is photographed well and priced to appeal to fair minded buyers is far more important than an expensive web ad on ‘page 1’. Effective use of database mining, the Internet and email alerts will see website traffic on your home peak in the first 14 to 21 days of the campaign.

There is an old advertising maxim that says, ‘good advertising kills a bad product, faster’. This statement predates the Internet but it certainly applies to advertising a house on the Internet. It is crucial that your home is priced accurately and presented well online on day 1 of the campaign.

You don’t get a second chance to make a first impression with buyers. Given the web traffic peaks early in the campaign it’s a preference and desire that enquiries, inspections and offers follow whilst the property is still fresh to market and in play. If you are on the market for 21 days or more, you will notice that your web traffic begins to tail off. This is not a preferred outcome but it certainly does not spell disaster either, particularly if you have a unique property or it’s a slowing market.

Enquiries

Good web marketing will instantly lead to further interest and questions from prospective buyers. It is crucial that all of these enquiries are recorded in date order to compare with the web traffic and inspection numbers for the same period. Attempting to send buyers straight from the web marketing to the ‘open for inspection’, can create disengagement from buyers.

One of buyers’ greatest gripes is being unable to speak with an agent about a respective property prior or just after the inspection. Ensure your agent is speaking with prospective buyers who enquire before and after inspections. An agent who says ‘just come along to the inspection’ is likely to have too many questions from too many buyers at one time. People that pick up the phone and enquire with the agent are serious.

Inspections

It is easy to fill a house that is on the market with a lot of people. But unless those people are active buyers in the market, their presence and feedback may not be worthwhile.

A good indicator that you are reaching the target market is a buyer that has just bid on other properties or is about too. This tells you and the agent that they are genuine and serious about buying. The buyer’s feedback is plausible too. You may not necessarily agree with it, but you can concede they have a plausible point of view. The genuine feedback from fair minded buyers should not be mistaken for the bargain hunter. The bargain hunter highlights every minor fault yet has reluctantly decided to make an offer, 40% below the list price! In summary, don’t judge the quantity of buyers at inspections, judge the quality.

Ignore all feedback from non-buyers and neighbours. Look for trends in buyer feedback. What do buyers like and what are they resisting? If the only feedback you are getting from your agent is negative, you are probably being conditioned, rather than receiving feedback. If you have priced accurately, the agent has engaged and followed up on all enquiries and the best buyers have inspected your home within the first few weeks, you are likely to move to the offer stage.

Offers

The more buyers that engage with your home and submit offers, the stronger your position in the ensuing negotiation. And vice versa. The key to getting a lot of strong offers early is to ensure that all of the preceding three market indicators are leading the sale towards a natural conclusion. Once the offers begin rolling in, it is in the agent’s hands to deliver the best possible result.

Disconnect

If any of the above indicators falls away, it suggests that something may need to be reviewed. The key areas to look into are marketing, agent, price, market conditions and the presentation of the home. The agent has some control of these keys areas, and so does the seller. When the sale does not unfold as hoped, this is where trust comes into play between seller and agent. The seller may feel the marketing is not effective and the agent feels the price is deterring buyers.

As the seller, if you methodically and pragmatically review the campaign through the prism of the 4 on market indicators, the answer will emerge.

 

Underquoting – Sellers risk being snagged by bait pricing

As the boom fades, the damage and pain caused by underquoting has shifted from buyers to sellers.

In a boom, a low price guide attracts an excess of bidders who all compete vigorously for the home.The sellers end up with a satisfactory price, one buyer gets the home and there are many devastated buyers who line up to have another go next weekend.

What happens when the price guide doesn’t attract the promised crowd of bidders? The pain of under quoting is transferred to the seller. When a low price guide fails to attract the masses, the sellers face the ghastly scenario where they publicly pass in for a previously unimagined low price. Any chance of a high price is destroyed if your home passes in for a low price.

To fully understand how this can play out, take the campaign of a townhouse in Lilyfield. It was marketed in late 2015 for $1.6 million but remained unsold as Christmas rolled in. The property was rested and turned-up in the New Year with an auction date and new price guide of $1.4 million.

On auction day, the new price failed to ignite the buyers’ interest, as it was turned in for just over $1.4 million.On the following Monday, after the auction, the property went back on the market for just shy of $1.6 million.

This unsightly fluctuation in price is recorded against the property advertised history for all time, possibly unbeknown to the owner.  A failed campaign creates a damning digital footprint for a property that can haunt the current and any future sales campaigns.

When a property is put through the wringer, like the Lilyfield townhouse example, the sellers can still achieve a good price, if luck goes their way. But it certainly makes it harder than necessary.

As the boom turns into normal trading conditions, its crucial to remember that the stats don’t always tell the full story. Statistically speaking, prices are holding.However, there are fewer bidders per property in the current market than there were in 2015.

If you allow your property to be advertised for a low price on the promise that it will fuel buyer competition, be warned it doesn’t always go to plan. And when it doesn’t, the results can be devastating. During a boom, a sale was assured for the vendor. It was simply degrees of success. Now that the easy money has tightened up, employing the right agent, with the right selling and pricing strategy, is required to achieve full market value.

An auction that stops well below the reserve price in front of hundreds of spectators (and buyers) is the surest way to destroy the value of your home. Why would the agent advertise below the reserve price?Agents advertise properties below the reserve price because they know that the vendor’s reserve price is above market price.

Instead of being honest and highlighting to the owners that their expectations are ‘ambitious’, they under-quote to attract buyers to the auction. When the bidding stops below the reserve price, the agents will often pressure the owner to drop the reserve price to meet the market.

Some owners can see through this low-rank sales tactic and others succumb to the pressure on the day.All sales people know that the client can say one hundred times, but they only need to get a yes once to get a sale.

If you allow an agent to promote your home below the reserve price, beware, they may also pressure you to sell below your reserve price. Accurate evidence-based pricing is required in the current market to attract the right buyers to your home.

The right buyers are people prepared to pay a good price for the right home. Sellers who attempt to bait buyers with a bargain price may get exactly what they asked for – a bargain price.

Chapter 39 – Interpreting the auction clearance rate

The most commonly quoted indicator used to assess the performance of the real estate market is the auction clearance rate. Simplistically, if the auction clearance rate is high, property pundits say the market is going well. If the clearance rate is low, below 50 percent, they say the market is in trouble. It’s worth looking at how and why the clearance rate has become the indicator of choice. Finding reliable and accurate data on the real estate market is almost impossible. Unlike the stock market which is dynamic and has instant price reflection in real time, the reporting of sales results in real estate remains cumbersome. There is no centralised point where all sales results are collated and displayed. If there were such a system in place, the real estate market would be able to offer accurate and insightful information on how the market is performing at any one point in time.

Sales results only become publicly available upon settlement of the sale. The exchange of contracts relating to those sales could have happened any time from four weeks to four months before the settlement is reported. A lot can happen to a market in four weeks and real estate markets can change completely within four months. The only way to have total clarity in the real estate market is if it were compulsory for every transaction to be reported to a centralised reporting authority at the time contracts are exchanged. The market could then be assessed in real time. This is a good idea in theory but the desire for accuracy in the market clashes with an individual’s right to privacy.

Therefore, the auction clearance rate is used as a second best option for a key market indicator in real estate because it is the closest thing to real time sales. All the weekend auction results are collated from across the country on Saturday night and published in the print media on Sunday morning. Pundits, economists, market watchers, the media and consumers then draw sweeping conclusions about what is happening in Australia’s markets via a glance at the weekend’s auction results.

So what does the auction clearance rate really tell us each week? Essentially, it informs us of the percentage of buyers who offered a price which the seller accepted. That is all. When taken in isolation, a high clearance rate does not suggest that prices are rising or falling. It does not suggest that the seller received a good or a bad price. It simply tells us what percentage of sellers accepted a bid on the day. More often than not, it means that a buyer met their reserve price.

But the reserve price is simply the lowest price that a seller is prepared to accept to sell their property. It is most unlikely to ever be the highest price that the winning bidder was prepared to pay in order to secure the property. In a falling market, buyers will be reluctant to meet the seller’s reserve price, which causes the auction clearance rate to drop. This is why a low clearance rate is viewed as an indicator of a soft or falling market. If the market is rising, buyers will happily pay the seller’s reserve price and more if that’s what is required to be the highest bidder. High clearance rates and stories of properties selling above the reserve price are all symptoms of a rising market. If all auction campaigns were reported, the auction clearance rate would have a place as a market indicator but it should still not be the ‘prime’ market indicator.

When agents forget to report failed auction campaigns in order to artificially bump up the clearance rate, there is even less of a reason to see that rate as an accurate bellwether. Here is a little secret a real estate industry bent on public auctions tends to brush under the carpet: The number of properties selling by auction as opposed to private treaty is under 20 percent of all sales nationally. The percentage is slightly higher when considering capital cities only. So using this process of sale as a prime indicator of the market’s health or lack thereof is an obvious mistake.

It is better to invest the time and energy to get the facts right rather than be misled by industry hype relying on one market indicator. In order to accurately gauge current market conditions on a local level at any one time, attend open inspections and auctions to see what is really happening.

Although it’s time consuming, the closer you look at what stock is on the market and its subsequent sales results, the better indication you will have about what the current market conditions really are. Relying solely on property soothsayers drawing conclusions from an inaccurate market indicator is better left to the uninformed.

Will real estate agents meet their Uber?

Fairly or unfairly, many consumers would be happy to see the demise of real estate agents. And there are no shortage of people trying to make it happen. Uber has decimated the taxi industry on a global scale.

As a result, every industry is looking over it’s shoulder in fear of the one concept or idea that could Uber-ise them. Digital disruption will impact on the real estate industry in the near future. Whether it is a total game changer that diminishes or devalues the agent’s role remains to be seen.

Respected Financial Review real estate journalist Robert Harley recently wrote ‘In New York, technology experts agreed the global property industry will soon see a rush of fixed-price, no commission and highly automated peer to peer websites.’ Harley was reporting on a real estate technology conference where digital disruption is high on the agenda.

The stakes are high, so are the rewards for those that get it right when it comes to digital disruption. In the mid 1990s, realestate.com.au did not exist. Today it is a $7 billion company. Fairfax recently released their half year results. Domain the real estate website is essentially propping up the parent company.

The Internet has made it easier for buyers and sellers to engage directly than ever before. The majority of attempts to Uber-ise real estate have been companies encouraging and coaching vendors to go on the market as private sellers, avoiding agents commission.

Buy My Place is the largest company in this space. Their slogan of ‘No Commission, Lots of Help!’ pretty well sums up the offering. Buy My Place plan to list on the stock exchange in the near future, it’s fair to say they are not going away. Good news for consumers, may be not for agents.

Many of the people featured in video testimonials on the Buy My Place website are classed as ‘successful sellers’. This is an interesting description in that it is undefined what a ‘successful seller’ is and should be. Just like real estate agents, Buy My Place is classing someone that ‘sells’ as having made a ‘successful sale’.

This is the same as agents that spruik the importance of ‘clearance rates’ without any regard for the quality of the price achieved.

Teena and Andrew Hubbard sold their home using Buy My Place. They were interviewed by Harley and quoted as saying ‘we have no idea why people would sell with an agent’. The Hubbard’s have sold twice without using an agent, so their assessment of estate agent’s will be confronting for the industry that has felt indispensable for so long.

Real estate agents have had people believe that high clearance rates are the key to a good agent. Now the disrupters threaten to put sellers and buyers in direct contact, sellers can achieve their own high clearance rates without paying an agent’s hefty commission.

If the real estate agent is not going to be ‘Uber-ised’ they are going to have to focus on getting ‘high prices’ for their clients not high clearance rates for themselves.

How will you be paying today? – Finance the new frontier.

Cheap finance has powered the booming property market over the past 3 years. That’s ‘cheap and readily available’ finance. Expect finance to remain cheap throughout 2016 just don’t expect it to be as easily and readily available.

Cashed up, ready to buy buyers have been in abundance to the point that vendors did not even need to entertain conditional offers. As the banks clamped down, firstly on investors and then home buyers in late 2015, the abundance of cashed up buyers begun to tighten.

Buyers need to be aware that ‘qualifying’ for a home loan on an internet quiz is not a loan approval, it’s called marketing. This marketing is simply a ‘lead generator’ for the respective financial institution.

Buyers are being led to believe that they have a binding loan offer from a financial institution, when in fact they don’t.

If you are dealing with a mortgage broker on your finance, note that they are inherently optimistic about attaining finance. They have to be, that’s their job. There are two areas of caution with mortgage brokers. Can they actually attain the amount of money the marketing gimmick otherwise known as a ‘loan calculator’ claimed? Secondly, can they attain the finance in the required time frame.

The banks have become slow and cautious. No amount of harassment from a mortgage broker is going to see the banks by-pass proper due diligence.

Sellers need to be aware of non-binding/subject to finance offers. A subject to finance offer is not an offer. It’s an aspiration from the buyer. If you receive an appealing ‘offer subject to finance’ keep the bubbly on ice. There is still a long way to go!

The Inner West market is actually holding up well, although it’s off it’s peak from mid 2015. Greater Western Sydney has been hardest hit by the tightening in finance.

The end of the boom does not mean that a market crash has begun. But it does mean that dozens of cashed up (ready to sign a contract) buyers fighting to buy real estate is probably over. And that’s a good thing.

The single consistent factor in global property markets that crashed has been easy/excess credit sold to buyers by banks. Sydney and Melbourne were both recently named in the Demographia International Housing Affordability Survey for the Top 5 most unaffordable global property markets.

The fact that our banks are being forced into prudent lending is a positive, albeit with some short term jolts.

Before asking the buyer what will you pay, it’s better to first ask, how will you pay?

 

The property market in 2016

Dear Readers,

To successfully navigate the housing market in 2016, it’s advisable to be aware of the factors likely to impact the market in a meaningful way. We suggest you keep an eye on the following indicators in 2016. Banks/APRA – A theme of 2016 is likely to be the fact that credit is cheap, but it’s not as readily available as it was from 2012 to late 2015. APRA have enforced, and continue to enforce, tougher lending standards on retail banks for residential investment. In the short term, this may weaken the market. In the long term though, prudent lending ensures the sustainability of the market. It is very clear that the days of easy money from the banks are over. Interest rates – Most pundits expect interest rates to remain stable during 2016.

The December 2015 increase in interest rates by the US Federal Reserve could signal the bottom of the global interest rate cycle. Back home in Australia, banks increased lending rates for residential investors as part of APRA’s regulations. There was an expectation that the RBA may offset this with a rate cut, but that’s looking unlikely. Whilst we are unlikely to see significant movement from the RBA, retail banks have been adjusting their interest rates independently of the RBA in recent years, meaning rates will play a role in 2016.

Employment – The level of full and part time employment plays a huge and largely underestimated role in the performance of real estate markets. Both Sydney and Melbourne’s unemployment levels over the last few years have remained low, resulting in stimulated spending on consumer goods and housing from the high participation rate. Sydney continues to enjoy a golden period of construction and employment not seen since the Olympics in 2000.

Brisbane was tipped to follow the Melbourne and Sydney property booms over the past 3 years, but it didn’t, so it continues to disappoint property investors. A stubbornly higher than normal unemployment rate in Queensland, caused a lower participation rate, which was a big part of the reason real estate prices in Brisbane did not follow those in Sydney and Melbourne. AUD/International money – The Australian Dollar began 2015 just above US80c and now begins 2016 just above US70c. As the dollar goes down, our real estate becomes cheaper for foreign investors and expats.

Expats are likely to offer some support at the upper end of the Sydney market. Developers will continue to target foreign investors with ‘high rise off-the-plan’ apartments. The Federal budget – Expect a stinker of a Federal Budget soon. When it comes, it may very well hurt sentiment in the real estate market. Joe Hockey’s ill-fated budget of 2014 knocked confidence out of both the economy and the property market. The question now will be whether the Government calls an early election in March 2016 with the aim of unleashing a tough budget come May. Conversely, they may play it safe on the budget front this year and push through the tough one in 2017.

Property and money markets are very attuned to what happens in the Federal Budget. State economy – As the Nation at large battles to deal with the end of the mining boom, the NSW economy continues to go from strength to strength. This is a clear example of why generic reporting terms, such as ‘Australian House Prices,’ are nonsense. The Perth and Sydney property markets are at polar opposites, yet both form part of the ‘Australian House Price’ narrative. There are markets within markets when it comes to property.

The NSW economy is performing well and promises to support the real estate market, even as other markets struggle. Off-the-plan apartments – Talk that banks are beginning to baulk at lending against off-the-plan purchases can trigger wider problems. Excess development in apartments is a potential risk, particularly if investors at large are forced into selling existing stock to fund off-the-plan purchases. Rental market – As prices skyrocket, rents have stagnated. This has been just another reason for investors to cool on residential investment for the time being. If rents were to rise as prices stagnate, expect investors to re-enter with enthusiasm.

First home buyers – If there is oversupply in the apartment market across Sydney, first home buyers will enjoy a long awaited opportunity to enter the property market via distress selling. It feels like 2003 all over again! First home buyers will play a crucial role in ensuring over supply does not become endemic.

We hope that helps!

The leopard’s new spots – Expensive internet ads

Real estate agents love a ‘motivated vendor’. Why? Because a motivated vendor is far more likely to sell, even if the price is below their expectations. Unmotivated vendors are more likely to reject lower than expected offers. You may have heard the saying, ‘the best time to sell is when you don’t need to.’ It’s this lack of motivation in the seller that causes indifference, inadvertently creating an advantage of sorts for themselves, over the buyer. The buyer and/or agent need to pander to the seller’s demands when the vendor’s motivation to sell is low. Unmotivated vendors can be a nightmare for many real estate agents if they are ambivalent about selling, but the agent only gets paid if they do sell, which creates conflicting motives for the seller and their agent.

Sometimes, strong market conditions deliver agents easy negotiations, resulting in both the vendors and buyers being happy with the end result. In normal trading conditions, real estate agents are often left to deal with a gap between the vendor’s ‘sell price’ and the buyers ‘buy price’. If the buyer is focused on a fair market price and the vendor wants an above market price, then the agent will usually work on the party they can exert the most pressure on, the seller.

When a vendor signs with an agent, they are exclusively signed to that agent’s firm for the duration of the agreed listing period. This arrangement provides the real estate agent with a degree of control, particularly if they have a motivated vendor. A buyer is free to wander in and out of as many real estate agent’s offices as they choose to, during their search for a new home. Therefore during negotiations, real estate agents have a lot less influence on buyers than they do on sellers.

Two types of motivated vendors There are two types of motivated vendors. The first is the ‘pragmatically’ motivated vendor. They may have bought elsewhere, be in control of a deceased estate or be selling a long held, yet profitable investment. Pragmatically motivated vendors accept the best market price and sell. They are motivated enough to sell so that the agent does not have a particularly difficult time ‘controlling the vendor’. This allows the agent to focus more on attaining each buyer’s best price, confident that the vendor will accept the highest offer. The second type of vendor is an ‘artificially’ motivated one. They ‘were’ only motivated to sell if the price was right. Strangely enough, they find themselves having moved the tenants out of their investment property, committed thousands of dollars towards hiring furniture and spent several thousand more on internet ads. Internet ads which cost several thousand dollars! When did that happen? How did that happen? And most importantly, why is that happening?

Real estate agents may have been weaned off newspaper ads (very, very reluctantly), but they are now embracing a new form of advertising like there is no tomorrow, expensive internet advertising. Expensive Internet ads ‘Bigger photos equal more buyers’, sellers are assured. ‘Make your property standout amongst the crowd. You cannot sell a secret’. The cheap lines that agents used to sell needless newspaper ads are now being used to sell unnecessarily expensive internet campaigns.

‘Vendors…If you are not on page 1 of the buyers search you have erected a signboard in the forest’ screams the real estate trainer hired to increase the amount of ‘Vendor Paid Advertising’ (VPA) sold by agents. Negotiators call it the ‘sunk cost syndrome’. If you can get someone to invest upfront – emotionally or financially – in an outcome, they are substantially more motivated to want a return on their investment. The sunk cost syndrome allows agents to sell unmotivated vendors a poison pill in the form of increased exposure. Once the vendor swallows that pill, they have unwittingly increased their motivation to sell, tenfold. Agents therefore now love expensive internet ads for exactly the same reason they loved expensive newspaper ads. The real estate industry still proudly spruiks the idea that campaigns which utilise print marketing have higher clearance rates than those that don’t. That’s a really weird conclusion to draw when you consider that home buyers rarely look at print ads now!

What is not said by the industry, is the fact that vendors cajoled into spending money on a print campaign have needlessly spent good money on bad advertising. While their agent has caused them to become more motivated to sell, they have also caused them to pay for advertising in a medium where buyers don’t look anymore! To ascertain whether expensive internet ads work, let’s look at them from the perspective of a buyer. As a buyer, would you accept or reject homes based on the size of the home’s respective ads or photographs? Do you like homes that are on page 1, more than homes listed on page 3? Are you more or less likely to inspect a home because the internet site allows you to go on a video tour? If you are like most buyers, and the answer is less likely to inspect the home because you have now seen inside, then why would you pay to run a video tour ad in the first place? A few probing questions uncover some surprising answers! Agents now buy subscription packages from advertisers, which force them to run expensive web campaigns. The rules are simple. Either the consumer or the agent pays upfront for these ads, but pay upfront they must, regardless of the outcome of the sales campaign. It is easy to see then, where an agent’s passion for selling vendors this type of expensive internet advertising is derived from.

Stockbrokers love big real estate websites – they are ‘high margin businesses’. That is, they have low costs and high incomes. Their cost base has barely risen as their volume of business and income has exploded in recent years. ‘Rightmove’ the premier real estate site in the UK, has seen its share price rise four times in the past five years based on this very same model. Rightmove’s defacto sales people are real estate agents in the field talking to homeowners about the benefits of Rightmove. ‘Zillow’, the number 1 real estate portal in the US, is attempting to replicate elements of the Australian model of VPA, amongst other strategies. Many of the major shareholders in Zillow are Australian. They appreciate the profitability of a dominant real estate portal where real estate agents act as unofficial advertising salespeople for the portal. In Australia, the real estate industry’s greatest fear is ‘digital disruption’.

Industry forums are full of agents who fear their ‘Uber’ moment is imminent. And it may well be if they continue to unnecessarily charge home sellers thousands of dollars for expensive internet campaigns, when inexpensive internet campaigns work just as well, if not better. The leopard may have changed his spots from newspaper ads to internet ads, but vendors should be aware, he is still a leopard.

 

Navigating the pest & building inspection

When you are selling your home, a poor pest and building inspection can derail the sales campaign. Genuine issues that neither the seller, buyer or agent expected can be damaging. The buyer can think crucial information has been withheld and the seller can feel as though the buyer is using a tactic to lower the price.

If you are selling your home, it’s best to get a detailed pest and building report done prior to listing on the open market. This will ensure that buyers cannot bluff you with a bogus issue mid campaign.

Conversely, if there is an issue that requires attention, you can rectify it prior to going on the market. Buyers are understandably hypercautious prior to making a purchase. They are committing a large percentage of their wealth to one transaction. Plus they have no doubt heard one too many real estate horror stories. Unconsciously, some buyers will often double the bad news and halve the good news.

A poor pest and building inspection can cause the buyer to reduce their offer or even crash the sale entirely. What the exact issues are will determine whether it’s commercially best to address the issues or simply disclose them to buyers. Even if you choose not to rectify the issues, at least you are aware of them.

The best way to handle defects is full disclosure to the buyer. If you allow buyers to discover negatives of their own accord, caution and distrust in the buyer can build. The law may state ‘Caveat emptor, buyer beware’ but decency suggests ‘these are the issues you should consider…’ It’s a savvier approach. Full disclosure builds trust between the seller, buyer and agent. It also avoids messy re-negotiations as the buyer will ultimately discover the negatives if you attempt to hide them.

Most buyers can accept negative issues about a property and factor it in to their offer accordingly. If there is the slightest suggestion that issues have been withheld or smothered, most buyers will simply (rightly) withdraw from negotiations or over play the extent of the issues.

When it comes to defects, as mother used to say, ‘Honesty is the best policy’.

Emotion v Logic – The elements of persuasion

Buying or selling residential real estate is likely to be one of the most emotionally charged transactions you will do in your life. Buying or selling in an emotional state can sometimes lead to poor decisions. Whether it’s the buyer that overpays or the seller who declined the best offer, we are all susceptible to making regretful decisions when transacting the family home.

Prior to entering the real estate market, understand the difference between emotion and logic in the decision- making process. We all like to reach pragmatic and logical conclusions. This is less likely if our emotions swamp our logic.

A lot of people suffer buyer’s remorse and/or seller’s remorse after transacting. Buyer’s remorse is where buyer feels they bought the wrong home or overpaid in an emotional state. Once the emotion of the purchase has worn off, they logically begin questioning the merits of the purchase. Some people carry buyer’s remorse for years after their purchase. They seriously regret the emotional decision they made, questioning it for years afterwards.

Seller’s remorse is where the seller feels as though they undersold or should not have sold. They may have made a decision in haste that they now regret. Many a vendor suffers seller’s remorse after the auction if they succumb to the tactics and pressure employed by the agent.

A reluctant vendor who is selling the family home of 40 years needs to accept that a buyer won’t compensate them for happy memories. The buyer is purchasing tangible goods, bricks and mortar if you like. Sure, the buyer may be in a competitive bidding scenario against other buyers that pushes the price up, but this is simply the market at work. Rarely will a buyer pay more because the owner has emotionally overpriced.

Interestingly, many sellers subconsciously overprice as a means of scaring buyers off, thereby diminishing the chances of a sale. If the buyer pays the excessive price, the seller wins. If they don’t, the seller does not have to sell. This is very common in circumstances where one partner wishes to stay in the home whilst the other has a strong desire to move.

Many people look back at themselves after they have bought or sold and laugh at their irrationality. It’s only through the clear lenses of logic that they can see how emotion fogged their thinking. The seller realises that the agent was right when they told them the offer was a good one and they should take it. The buyer looks back and understands their low ball ‘take it or leave it’ offer was factoring in all sorts of Armageddon scenarios.

In the emotional haze that descends over us once we begin a real estate transaction though, this clarity is absent.

Particularly so if you are unaware of emotion overriding logic in your thinking. Our purchasing decisions are influenced by two psychological factors – emotion v logic.

Emotion and logic manifests themselves in many different ways. From an emotional perspective, you may find yourself overcome with fear, excitement, worry or jubilation when deciding to act or not act in a transaction.

From a logical perspective, you may find yourself buried in statistics and reading the internet late at night as you research the subject, hoping to find the logic to justify the emotion of the transaction. Real estate investors will often read dozens of reports and statistics hoping to stumble on the signal that screams ‘buy’ or ‘don’t buy’.

Regardless of how aware you are of the emotion v logic element at play, we all tend to buy emotionally and justify logically. The problem there is you can find yourself looking for logic that does not fit with the emotional decision that has been made. Real estate agents are acutely aware of the influence emotion and logic exerts on buyers and sellers.

The presentation of a home is often designed to ensure an emotional reaction in the buyer that causes them to say ‘we love it, we have to have it.’ The agent then attempts to logically confirm the desirability of the home by claiming there has been ‘a lot of interest in this particular home’.

The seller who wants above market price is assured by the agent that their thinking is understandable and plausible. Just ‘sign here and I will look after things’ says the confident agent at the height of the positive emotion that has been generated. The agent spends the next 5 weeks of the campaign producing reports and offers that bring the owner’s price expectations down from a state of emotional exuberance to market based logic.

The key to rising above the transaction and seeing yourself in it is to ensure that you don’t delude yourself that you are making a logical decision when you are overridden with emotional and vice versa.