July 13, 2018 – Article by Paul Sonntag (Reading time: 5 mins)
We Want What We Can’t Have
My wife and I are relatively new parents and are riding the roller-coaster with having twin 11-month old baby boys. Despite the sleepless nights it is a phenomenal experience, truly the pinnacle of life. These two little terrors are forging a bond that seems to get stronger by the day, and it is a pleasure to watch as it develops. But this unique relationship that begins from before they are born is not always perfect. Quite simply, the favourite toy of one of our sons is the one his brother is playing with. There may be a mat full of cool things to check out, but the only thing he will want is whatever his brother has in his hands. At a very early age we find things that others have to be far more appealing to us. As humans we want what we can’t have, and it looks like it is ingrained into our DNA from the beginning of our lives.
A lot of buyers fall into this same mentality when they are looking to purchase a property. All of a sudden a house or apartment becomes so much more attractive when we think we are going to lose the opportunity to buy it. The lack of natural light that the house becomes irrelevant. The fact that the apartment does not have parking becomes an issue you can work around…you will park on the street. Wanting what we are told we can’t have is not something new, and real estate agents play on this well to get the most for the property they are selling.
The Auction Conundrum
Imagine falling in love with a property. You and your partner have your finance all organised, you have done your due diligence and you are happy with the results. This is the one. You can see yourself coming home and walking through this front door. Ok, so how do we buy it? The property is going to auction in a week and you need to bid with everyone else. The owner is not looking at offers before the auction. But don’t worry… ”the reserve is going to be very reasonable and it will definitely be selling on the day.” It is a sunny Saturday morning and you go along and register, and are surprised with how many people are there. Fifteen registered bidders! Bidding starts, and you land a couple of blows, but the price rises above your limit. You go against your agreed strategy and bid $30,000 above your limit and are still not successful. Damn it! It is gone. Your home has been sold to someone else.
Why do countless buyers go above their means and bid outside their comfort zone? Why are auctions so successful in a strong market? Because we want what we can’t have. And when we see someone else literally taking this away from us, we want it even more.
The Herd Mentality
They say that 80% of investors buy after the top of the market. That means that four out of every five investors is buying at the wrong time in a property cycle, and missing out of a whole lot of short-term capital growth. This is called the “herd mentality”. Follow the herd to step up and take action. Follow the herd to feel secure. Follow the herd to validate your decision. Sure it is great that you took the initiative to decide and to buy. But imagine if you took the initiative early and bought the same property for 10% or 15% less? That may feel riskier, and you wouldn’t be competing with all of the other buyers, but you would get to where you want to sooner.
Buying property well is the name of the game. Following the herd or falling into the trap of listening to the real estate agent and buying at auction may allow you to buy. But we want to be buying at the best possible price…and this is not the way to do it. Warren Buffet is arguably the best institutional investor in history, and his mentality has always been the same “For investors as a whole, returns decrease as motion increases”. Warren is not looking for the most activity, instead he focuses on the best buys. Following everyone else is not the recipe for success. Quite the opposite. Much like Warren, do your research and understand your market, and have the confidence to act regardless of what your friends and family are doing.
The trick is to take control of the situation. For starters, buying in a rapidly rising market makes it very tough to buy well. As an investor you want to be buying very early in this phase of the cycle, otherwise it is usually best to not buy at all. For home buyers I suggest that you avoid buying at auction against a lot of competition. Sure, if no one else bids and it is you versus the vendor then great. But you want to manufacture that situation yourself through offering prior to auction. Buying great property well should always be your top priority. It is even better if you don’t have to follow the herd in order to do so.