To save the deposit for my first property when I was 19 (22 years ago), I bought second hand cars and sold them for a profit. I owned 14 cars before I left High School. The one lesson this taught me was to negotiate hard, because the money you make, in any deal, is ALL in the buy.
I have the privilege of being able to look at this topic through two sets of eyes, the eyes of a Buyers Agent, but also from the eyes of a professional investor.
It was a funny turn of events that allowed me to help people in their investment life. The job came to me through you, the investor, asking me to help you out. Whilst writing mortgages, I had clients wanting to invest and asking me if I was investing. Of course I said yes, and they wanted to know from me where, and more importantly why, I was investing there. And as they say, “the rest is history”.
Now, where you invest means absolutely nothing, it’s all about the why. Why are you investing there?
But before we go there, the topic of this article is about bargain hunting. To me, it’s a no brainer. Why wouldn’t you want to get the property for as cheap as you can? Why wouldn’t you want a bargain? After all, it’s human nature to try and get a deal. How big a deal you get depends on how confident you are in your own negotiation skills. Sure, it’s not everybody’s game, so if it’s not, then that’s where a good buyers agent who negotiates hard, could come into the equation for you. The true value of a Buyers Agent is not only knowing where to invest, but to also negotiate hard and hunt you down a bargain. Why else would you pay for their services?
I am a bargain hunter and happy to say so. I make no qualms in saying I am trying to get the very best deal I can on every purchase. I will even let a vendor sit for a few days over the last $1,000. I know they will drop their price to meet my offer.
Paying list price and above for a property is just insane in every circumstance except for buying your home or a holiday house. And that’s because these are emotional purchases. For myself, even buying my home was one of the best negotiated deals I have ever done. Buying a new House and Land package or an Off the Plan Unit is paying list price from the developer or marketing company. Unfortunately, property investment is unregulated and open to unscrupulous characters who receive undisclosed kickbacks of up to $60k per property. For the purchaser, they are essentially paying for their own capital growth in advance. You are actually paying more than the properties value. In what world does that make sense?
The positive for me, is that where the above behavior has occurred, those vendors properties become great properties to buy for the second owner.
Under Market Value
When I invest, I always buy under market value. I don’t want to make “some” money, I want to make as much as I can. With entry costs like stamp duty and exit costs like Capital gains tax and real estate commissions being so high, you need to make as much as you can so that at the end of the day, you still walk away with a tidy earn.
Many will find this hard and confronting and that’s because it’s not the norm. I don’t invest with the masses or the have the sheep mentality, I go against the grain and this type of investing makes some investors feel uncomfortable.
Over the years I have read some commentators use the analogy that the market value of a property is what price somebody is willing to pay. Essentially the sale price is market value. Really?
If there were ten identical houses in a row and nine sell for list price but one sells for 10% less, is that one discounted sale now the true market value for the other nine? No, its not. It’s what real estate agents would call an “out of character” sale. This is what we call – Buying under market value.
Market value by definition is ‘the price at which an asset would trade in a competitive auction setting.’ Source: Wikipedia
It’s this one house, that as a bargain hunter, I am looking to find. So why would one vendor in ten sell their house for 10% less than the other nine?
Motivation! After I have done all my research on any area and the type of houses I want to invest in, plus know my exact price point, my last component to the equation is to find a motivated vendor.
How to research markets to buy a bargain?
Now, take out the usual high-risk market concerns like mining towns, small regional towns and high rise units and I can say that the world is my oyster, in relation to, that nowhere is off the table. All in the name of bagging a bargain.
Following my own investment strategy, now takes me all over Australia and around the world to invest. As I write this I am on a plane to Perth, then Brisbane tomorrow and the USA next week. The last few years I have been buying houses in the USA for US$60k (half their pre GFC price tag) which receive 18%+ yields in an awesome strong market.
The core strategies I use to research every single location I invest in, are to:
A model very similar to Warren Buffet’s strategy that he uses when buying shares and valuing companies.
Did you notice that I didn’t mention infrastructure projects, schools and new highways? Sure they can help and they form part of what research I do, but they come after the above can be met.
The problem that most investors tend to do is follow the crowds. And in doing so, they invest in warm and hot property markets. Buying property for a discount and under market value can only be done if you buy the property in the low or dead part of the property cycle. When the property is at its cheapest price of this property cycle. That is the No:1 key to succeeding in buying cheap.
Even if you find a motivated vendor in a warm or hot market, you won’t really be buying a bargain at below market value. If you manage you buy the property for a 10% discount off the low list price, you are really only paying the list price or above of what that property was worth a few months ago. Yes, only a few months ago.
There are a bunch of advantages to buying in the low or dead part of the property cycle:
Yes, that’s what can be achieved, plus more. Now that’s what I call stress free investing!
Now what you may have noticed from the above is, that negotiations are not all about price. I add a full page of terms and conditions on every house I buy. Some of them listed above. Again you can’t get away with this in a warm or hot market.
If you know anything about me you will know I never disclose where I am investing, it’s my 11 herbs and spices. I sometimes will disclose which state I am investing in, but that only.
Why would I want to tell everybody and create my own competition for myself and my clients?
So how do you find these locations?
The trick to buying at the bottom of the property cycle is to time it so that the location won’t sit stagnant very long before the next rise. And that’s why I like to see a decreased market for between 3-6 years. When a market cools off, the first thing to happen is the “stupid” money instantly goes. This is the top 10% of the value where purchasers will pay almost anything just to secure a property. We have seen this occur many times in the Sydney and Melbourne market over the last 3 years. Where properties go to auction and sell for hundreds of thousands of dollars more than the reserve. Once this buying stops, over time, vendors will start to get anxious, as their property will not sell so they start to reduce the price.
This effect will start to snow ball and in some locations it can literally be a race to the bottom. Then slowly, the market will start to slow down in decreasing. That part can take 3-6 years. This is when I start to monitor that location. It’s then you start calling a few agents and visiting the location a few times to inspect houses for sale. Build a rapport with real estate agents. Get on their databases for weekly updates. Remember, they want a sale too and in this market they are not selling very much at all. They don’t get paid unless they make a sale. Tell them exactly what you are after and that you are ready to pounce on a bargain property should it arise. You may find they actually badger you, as you may be their only active buyer.
Now, tell me if you can do that in a market that is warm or hot. No a chance. The agents are far too busy to even return your calls by then.
Motivation
Some of my best buys are from stale properties that have sat around ‘for sale’ for months and months as there have been no buyers. Motivation can change for vendors. Maybe they will sell cheap now, as they have been presented with another opportunity where they can place their money and make some gains. You never know.
Remember: it’s Motivation by the vendor that will allow you to buy a bargain, not just a distressed vendor. Financial stress is a form of motivation.
Similar to the over heated peak of a property market where purchasers pay “stupid” money for property, the same happens in reverse. There is a bottom dollar value of houses in that area, but out of character discount sales occur, where motivated or desperate vendors will sell for even less. These are my preferred vendors. Bare in mind not all desperate vendors are financially distressed. Outside of divorce, job loss, over committed and vendors on the verge of bankruptcy, there are positive vendors who will also liquidate. Vendors like:
Stock on Market
Now contrary to belief, don’t be afraid of lots of property on the market. Firstly, Google the population of the suburb and put the “apparent” high levels of properties for sale into context. Seeing 100+ properties for sale in a suburb of 20,000 people is not high. Real estate websites only list houses for sale. You need to do a little extra research yourself to work out whether it is actually high or not.
If you have done your research and know that there is not one major factor for the higher stock levels, like a closed mine, then lots of houses for sale on the market is great thing. Embrace it. It means your market timing is spot on. This stock level will quickly change when the start of the new upward cycle begins. The “dead wood” will sell in a matter of weeks.
The large stock levels simply means you have got in early and you can cherry pick the best deal from a big bunch. This is my favourite place to be. I will inspect every house for sale in my price range. This could take 1-2 days. Be ready and take notes and photos of all the good ones. At the end of the day, I like to go to a bar and get a well-earned beer and spreadsheet all the inspected properties good and bad points, so you can compare apples for apples.
In a warm or hot property market, you are left to fight over whatever extremely limited properties come up for sale. Then you must pay list price or above and have to make an immediate decision or you miss out. Tell me the benefits of investing this way again?
Finding a motivated vendor
In some cases the real estate agent will tell you who is a motivated vendor or not. Whether it’s good or bad that they have told you this, it is their morals and they need to live with that. You are simply using that information to the best of your ability. If they don’t tell you, then you need to find them yourself, but how?
You need to put in ultra low offers on every single house that you have inspected that is suitable to your portfolio. You need to make your offers low enough that not one single vendor will accept it. What this does is syphon out the non-motivated vendors who don’t need to sell from those who do. Don’t worry if an agent or vendor or two curses at you. It’s part of the game of buying a bargain house. Take it as a compliment that your offer was low enough.
What will happen though, is that the motivated or desperate vendor will want to negotiate. They will counter your offer. They won’t want to lose the only potential buyer they have had in months. Now you need to be patient. Let the agent know you will have a think for a day. Remember; in a dead market, you don’t have competition, so time is your friend. Then go back a day later with an odd number, like $387,400 and let the agent know that this is your second and final offer and in fact you have scraped everything you had together to get to this number. This figure is generally only a few thousand dollars higher than your first ultra low offer. Never offer even thousands. This sends a sign to the agent that you have more money. And remember, you are not insulting the real estate agent; they are simply the facilitator in the purchase. Some will get offended but don’t worry about that. If again they counter or say no to your offer, you can always go back with a higher offer. But you can’t do the reverse. You can’t offer a high price and then pay less. So start low and work your way up.
My target hit rate on a new area is like this, 20 houses inspected for 10 offers for 2 purchases. Yes a 10% hit rate.
And remember the cheaper you buy, the better the yield!
The motivated vendor you are trying to find is the property owner who has owned their property for 8 -15 years plus, as they will have reasonable equity in their property and be able to potentially sell for much less. The problem with a vendor who purchased at the peak of the last property cycle with a 95% loan, is that they won’t be able to sell cheap as they owe the bank too much. The banks won’t let them release the property if they owe more than the sale price, even if a contract for sale has been signed.
Advantages of buying under market value
Buying a bargain is much more than just a better yield:
As an example of the benefits of buying a bargain, I was investing in South West Sydney (Campbelltown).
Now looking at the numbers above you could say that those investors who paid $340k in 2011 and $380k in 2013 have done great in the two and four years they have owned the property. But if they were to sell at $480k, then how much did they really make. When you add in approx $15k set up costs and add in $10k real estate agent sale commissions and CGT, they really haven’t made that much.
By purchasing a one to two years earlier when no-one was buying out there, I was buying for $70k cheaper, which also had less stamp duty applicable. By the time 2013 and beyond came, my properties were considerably positively geared as my mortgage was around $250k with $380 per week rent.
And the BEST part – I was able to cherry pick the best houses from a large group of houses for sale at that time.
Mortgagee in Possession
On the surface these properties appear to be the ideal property to buy under market value. I actually find them to be quite the contrary;
To me, buying a bargain is the only way to invest. But to do this you need to make market timing as your number one search criteria before you research all the other factors that make a location one that’s going to increase in value substantially. So by stepping out of your comfort zone and investing where no-one else is, you will not only will you cherry pick the best properties and purchase a bargain, but your investment purchase will be stress free. And that can only be a good thing.