July 5, 2018 – Article by Paul Sonntag (Reading time: 5 mins)
Don’t Pay Full Price for Real Estate
It is a sunny Saturday morning in Sydney in winter and Toys R Us is closing down. Families flock for their 40% off closing down sale. Only mug pay full price for toys right?! The aisles are packed with couples and kids. New parents with babies hanging from their front in Baby Bjorns. Everyone is shopping for a bargain. And why not?! They can smell blood in the water and toys don’t expire like fruit and vegetables. Toys are flying off the shelf and young Australians are feeling good for not paying full price.
When it comes to real estate we are not as particular. Most Australians pay full price for their property, sometimes paying well above what it is actually worth. So why is seeking out a bargain a competitive sport for most Australians, unless it is buying a home or an investment property?
We make our money in real estate when we buy. The better we buy, the better the outcome. So buying great real estate at the best possible price should be the name of the game. But so many Australians suck at it. A big reason for this is that the game is stacked in the favour of the seller.
“We make our money in real estate when we buy”
Real estate agents are driven to achieve the highest price possible for the owner. They are paid a commission calculated on the price they achieve, and that works well for them and the owner. Despite what selling agents say, they are working for the vendor. Quite simply it is the vendor is who is paying their fee. A good selling agent will create an environment where there are several buyers pursuing the same property. Several buyers on one property will invariably push the sale price up. A win for the agent and owner, with a buyer paying a lot more due to the competition from the other buyers. If this is orchestrated correctly an auction can be the perfect way to bring all of those buyers together and sell it at the highest possible price.
The Property Market
In a seller’s market, where buyers far exceed properties on the market, you will see more and more auctions. Between 2014 to 2017 the market in Sydney was hot. Red hot. A helluva lot more buyers than sellers, so most properties were going to auction and selling at record prices. If you follow the process and rock up on auction day and bid and eventually win the property, will almost always be paying top dollar for that property in a rising market. All of the interested buyers are there on the day. On a well run campaign this could be 10 to 15 bidders. The sale price is a little above the maximum bid of the under-bidder (person who came second in the auction). I refuse to buy at auction. This is not the way to buy great real estate at a great price.
On the investment side there is a segment that almost guarantees that you will be paying above what the property is worth. There are no Toys R Us bargains for these buyers. Buying brand new properties such as house and land packages, and off-plan apartments are hard to do at great prices. Instead you will usually be paying what it is worth, if not well above it’s true value. You’ve don’t buy a brand new car because it is going to be a rock solid investment. You drive that car off the lot and you drop around 20% to 25% of it’s value immediately. Brand new properties aren’t as bad, but it is not often that you see much growth when there are a lot of other new properties on offer in the same area.
The main issue with new investment properties are the fees built into the selling price. The land price, building contract and reasonable profit margin for the developer should make up the purchase price. But with strong competition from other new properties the selling fees built into these prices can be enormous. We are talking up to 6% to 8% of the purchase price gets paid to the salesperson for selling these investment properties. These percentages are far too high, and you have to wonder how good is the investment if the salespeople need to be paid so much to make a sale.
Working around these issues is not easy. That is why we built a successful business around buying great real estate well. Firstly, buying a property in an auction campaign can still be done at a great price. The goal is to buy before the auction, and the sooner the better if you are in a hot market. If you have a lot of competition then the sooner you act, the less competition you have. For any property in the established market, buying off-market should see an even bigger saving. Discussing how to do that will be for another day. Buying a brand new property well can be challenging, mainly due to the sheer amount of choice out there. If you can stick to properties in limited supply, such as a new home in an established area, or an apartment in a small block of units, you will be half a chance of buying well. If you want some help, engage the services of a professional property buyer to make sure that any type of property purchase you make is at the best possible price.