Don’t panic.

Not all is lost. What ever you do, don’t panic. Like all due diligence it should be taken in your stride. In many instances when doing our due diligence we come across something that at first sight for most buyers would make them run a mile.

I recently did some due diligence on a building in Bronte. Everything about the building and the apartment was perfect for a long-term investment. Everything except that one of the neighbouring properties had lodged a Development Application with council. Not only were they proposing to split the large block of land to build two dwellings, they were also going to double the height from a single to a double story building.

The first thing that came to mind for the unit holder was that they had to sell the investment unit immediately. My initial reaction was how much would it would actually cost to sell and buy again. The unit’s value is approximately $900,000.

Agent’s fees  -           $18,000

Advertising   -            $5,000

Stamp Duty to buy – $36,000

Total -                         $59,000

Add to this any indirect costs such as Capital Gains Tax if applicable.

Simply put you will lose at least 6.6% of the value of the property directly and possibly more indirectly though market conditions. The first thing you need to do is speak to an independent valuer. What you want is a before and after valuation.

In most cases you will be able to get a reasonably complete set of drawings from the council website without getting off your chair. This will give both you and the valuer a clear picture of exactly what physical effect the new building will have.

In summary, there were no main factors that would have affected the overall valuation of the property. There were no main (water) views that would be blocked out. The very small views of the sea from the balcony were still intact and so small that it did not improve the value of the property. Rental estimates were done at the same time and showed that there would be almost no negative effect to the rental the unit owner would be able to get. Any possible change in rental yield could also come naturally from a positive or negative shift in market conditions.

Look at the logic as well. If after the house is built, you potentially get $30 per week less rent, it is only $1,500 a year less income. If you sell and have to buy another investment unit, even over a ten-year period the loss of rent will be far less than the potential loss of relocating

The second point of logic is that when buyers flock to see properties at open for inspections, many of the properties on the market are surrounded by other blocks of units, which have significantly less appeal than a double storey semi-detached house and is just a regular part of living close to the city.

This same reasoning can also be applied when faced with special levies for general building maintenance.

So you are out looking for a property on a rain drenched Saturday. It’s your fourth or fifth inspection for the day. It’s around lunchtime, so not only are you wet, cold and miserable, you’re hungry as well.

You are hoping that this is your dream property as the past few inspections left you feeling like you will find never what you are looking for. Hoping that that past two weeks of downpours will minimise your competition and feeling somewhat proud that you managed to brave these harsh conditions, your heart suddenly skips a beat as you see a small mountain of dripping umbrellas at the front door. You finally realise that everyone else had the same idea.

Two thoughts immediately come to mind. Should you just hang your head low and turn around feeling totally deflated once again or do you feel like barging in like a bull in a china shop to beat down the competition.

ANSWER: Don’t do either.

Buyers’ Agents face this dilemma every day. Yes through the thick of it all, come hail, rain or sweltering heat, we go through a calm and calculating methodical process to see if firstly the property is suitable and secondly if it is, how do we buy the property before auction at a fair market price.

 So now that you have haggled with your better half and agreed that the property ok, yes not perfect, not even close to what you originally planned to buy, you decide to proceed because you have no energy left too continue looking.

Lesson #1 – Don’t Settle. Patience is your best virtue.

 As BA’s we often have to advise our clients to do the same as it may take a few more weeks to find what we are looking for. The less properties on the market for example in the winter period, the longer it may take you to find the right property.

Lesson #2  - The most useless question for most buyers is “What are you quoting?” or “ What is the price guide?”

The less you speak to the agent, the less buyer input they have by which to gauge how the sales campaign is going. Stand near the agent for a few minutes pretending to admire some mundane feature, and sooner or later you will hear the price guide, which will bring us to…

Lesson #3 – The price guide is NOT the price the vendor wants.

On second thoughts it may not even be the price on the sales agency agreement. In NSW the agent is not allowed to quote less than a figure on the selling agency agreement. Some agents have been know to put “Above $xxx” on the agency agreement without indicating a high price expectation.

In South Australia due to legislation it is unlikely an agent will quote anything if a property is going to auction.  

Lesson #4 - Expect to pay more…

If you are looking in a very select area where there are very few properties on the market, and zero chance of a high-rise being built next door, such as Bondi Beach, then a good rule of thumb is that at auction you could expect to pay at least 10% more than what is being quoted.

 EXAMPLE

Sale Type – Auction

Agents answer – We think it will sell somewhere between early to mid $700,00’s.

My interpretation – I wonder if the vendor will expect anything less than $750,000.Very unlikely. Based on passed experience in situations like this it would more than likely sell for around $770,000; however I would not be surprised if the property sold for closer to $800,000 at auction.

Lesson #5 – Don’t play guessing games

Your best friend right now is a valuer. Get an independent valuation. Before you actually start looking for a property interview some valuer or meeting one from a trusted referral is even better. In order to make this work for you, you will need to be able to get a valuer to commit to doing a valuation, not only on short notice but also within a24hr time frame. Some valuer will only be able to turn around a valuation in a week or more.

So just when you thought it was going to get easier, it’s not all as simple as that. Most Buyers agents do not use a valuer and do what is called an “Appraisal”. This may give you a good indication of expected price, but has no legal recourse. Don’t be surprised to find that most valuers will not want to take on a single valuation for an unknown client to those very tight deadlines, but are happy to do so for a buyers agent who give them up to a 100 jobs a year.

Lesson #6 – Don’t forget to do your own research

Even with a valuation giving you the numbers by which to maximise any potential offer you may make, There are many things you can learn about that will help you negotiate.

Lesson #7 – For sale by Auction dos not mean has to be sold at auction

Simply put the vendor has a property to sell at a suitable price and the agent is hired to sell the property at the best price. Anybody can make offers and buy properties before auction.

• An agent must take all offers to the vendor unless the vendor has given instructions in writing that either they do not want any offers at all prior to auction or offers only above a certain price should be forwarded to the vendor.

• If an agent will not be giving the vendor your offer they must inform you that the offer will not be forwarded to the vendor.

• Ask the agent from the beginning if they will accept offers prior to auction. Many agents will not ask or promote to get offers and will only advise you to come to the auction.

Lesson #8 – Get off the block early

 Be on your best game with research. Make sure that you are inspecting properties from the very first (or at the latest second) inspection. If you only see the property after the second week on the market then good chances that you are far too late. 

Lesson #9 – Listen

Spend as much time as possible at each inspection. Often all I do at the inspection is walk past groups of people and listen to what they are talking about. Some of the things you may pick up are:

            • Do people like or dislike the property?

            • Are they exited?

            • Are they talking about the asking price?

            • Do they talk about attending the auction?

            • Have they asked for a contract?

You can maximise the time by being a lot more selective as to the properties you short list for inspection. If you happen to inspect a property and the bedroom looks way too small, make sure that you take notes of the size even if you have to take out your tape measure. I al ways carry a digital laser measure with me at all times.  So when you are going through the online listings automatically discard any property, which has a room the same size or smaller. The more things you find wrong with properties the shorter your short list for inspections will become and the more time you will have not only to really have a good inspection, but also to negotiate.

It is common knowledge that many buyers have varying degrees of "Buyers' Remorse" the morning after purchasing a property. A million thoughts go through their heads about the, in most cases, the life changing decision they have just made.

Over the decade that I have worked with buyers, it is not uncommon that I have been able to purchase properties prior to auction. What is equally common, as many a real estate agent will testify to, is the verbal abuse they receive from buyers arriving at an open for inspection only to find the sales board covered with a "SOLD" sticker.

In at least 75% or more of cases I would exchange contracts on a Friday afternoon, many times even going into the night. It is custom for me to follow up with the agents and in many cases will actually attend the Saturday morning open for inspection to see the reaction of the buyers first hand.

Over the years I have witnessed a very common trend most driven by human nature, which is great for our negotiations as it makes people quite predictable. Most of the potential buyers did the following:

• Did not have enough experience to understand that a property listed for auction could be sold prior
• Could not agree as a family about the type of property they wanted to buy
• Had been to so many inspections they were willing to "Settle" as they were tired of the process
• Were not honest with the agent as to their intentions about the interest in the property
• Lack of knowledge about the property market and thus made offers way to low to protect themselves.

The second last one is one of the most interesting. I purchased a property last week two weeks prior to auction. Following up with the agent this week I asked him how the open went on Saturday. As expected he told me about a very disgruntled buyer who after seeing the sold sign called him to ask why the agent did not call him to ask for a higher price. The agents response was "well you told me you were not interested" to which the buyer replied this was the way he negotiated.

Now as a buyers' agent if I was instructed to purchase a property for a client, I'm almost sure I would not inspect a property and tell the agent I was "Not Interested".

I was recently asked by a potential client, why should he use the services of a buyers agent as the real estate agent was handing out comparable sales at the inspection. He was also aware that he could actually go and buy a report of all the latest comparable sales for less than one hundred dollars by one of the major companies selling property data. 

Clearly this person and most probably many others do not fully understand how to evaluate and confirm wholesale data and this is where using a professional buyers agent, makes a world of difference.

I have outlined below two examples where property prices up to 20% below should be analysed as part of your due diligence and should not be ignored but rather reviewed in context.

Example 1

The first thing you should keep in mind is that we appreciate the professionalism of the real estate agents that take the time and effort to produce a list of comparable sales to hand out to prospective buyers and ourselves. In a very isolated incident, I went to inspect a property on behalf of a client of mine and was handed out a sheet of comparable sales by the real estate agent. I checked the comparable sales against the list prepared in my due diligence for my client and immediately picked up there was a very recent sale in the street, on the same side of the block, on an identical block size, within the previous two months, missing from this list.

When the agent called me on Monday to follow up, I asked him about the missing property.  The agent’s response was that because the property was purchased well under value they did not feel it was a comparable sale. I had been the actual buyer on behalf of the client of the property that was missing on the list, and knew all the circumstances surrounding the sale. Having said that, the price is the price it should have been included as a comparable sale.

I’m not sure if this was a one-off incident, or if this occurs on a regular basis. Nonetheless there is still a lot that goes into producing a very thorough appraisal than just looking at comparable sales prices.

Example 2

In another example a property was sold relatively low to the comparable sales in the block. The average single home was valued around $930,000 at the time this property sold for $780,000 at auction. Unless one understood about the actual structure of the improvements on the land as well as the condition the property was in, one would assume that it was a very low price and would consciously think that the property market in this particular area was moving southwards. In this particular instance the main difference was that this was the only property that was built at an angle to the block and one corner of the house was actually touching the boundary. Because of this it was impractical to renovate or add an addition to the house, and to improve the property meant the house had to be knocked down.

Only further research into the property or an actual visit to the property would have given a very clear idea of why this property sold for less. Taking this property’s price into account when looking at other offers on a property for sale in the street might get you to actually undervalue a property you might be interested in, and hence miss out on a great buy.

Summary

In a summary what you get from a buyers agent is far more then a list of comparable sales and should include significant other information including not limited to:

• ·       Heritage status of the property
• ·       Development activity of surrounding properties that could affect you living in the property or renting it out and may have a log-term effect on the price.
  
• ·       The risk of a unit block to built next door to the property.

We have seen many potential buyers making drastic mistakes because they were convinced the comparable sales were enough to make a realistic offer. In hindsight most of these buyers realised that their mistakes had cost them a lot more than the cost of hiring a professional independent Buyers Agent.

Please feel free to contact us for an obligation free consultation if you would like to find out more about our services.