Eight lessons to learn from The Block’s lacklustre auction

Eight lessons to learn from The Block’s lacklustre auction

By Catherine Cashmore
Tuesday, 23 August 2011

Surprised by The Block result at the weekend? Well, don’t be. This is the new face of Melbourne’s auction market, and it’s not expected to change in the short term. Auctions don’t just need bidders – they need “confident” bidders, and confidence – as we’re all aware – is not in abundance at present.

But then Channel 9 never intended this to be a program focusing on the state of our current real estate market. The houses weren’t picked to make a profit on initial investment. After all, the homes are opposite a car park, in the shadow of the commission flats, with no off-street parking, average floor plans, and aside from the standard of renovation, they didn’t present any real competition to other better-located period properties in and around the surrounding area. The original intention for 37-43 Cameron Street, Richmond was a block of flats, and although this would have produced better returns on the land, Channel 9 had an idea that would ensure a much better profit if they kept the original homes.

This was a huge success for Watercress productions. The advertising attracted thousands to the open homes and the ratings were tremendous. No doubt they would have made a healthy profit from their sponsors, and overall it was a big hit. However, for those interested in property investing it highlighted a few important lessons we can all take on board.  Firstly, anyone thinking it’s easy to get rich quick from “flipping” will now I hope understand that this is not the case. Building wealth from property only safely works when incorporated into a long-term plan. Secondly, contrary to popular belief, most homes listed for auction sell via negotiation either before or after the auction.

This is particularly prevalent in a flat market – and very much the trend in our current Melbourne market.  Melbourne’s clearance rate this weekend came in slightly higher than previous weeks at 60%, however this percentage includes all properties that were sold before and on the day via pass in negotiation – and from my own experience this is the majority not minority.

So it was therefore no surprise to see only two of The Block homes sell on Sunday night (one under the hammer and another via negotiation) and – as is typically the case with passed in properties – I expect the remainder will sell over the next couple of weeks. However, with low confidence, and stock levels not producing an abundance of quality property to really inspire purchasers to part with their cash, the key to securing a good deal is firmly focused on a buyer’s ability to assess a home’s true value and successfully negotiate the purchase. It’s impossible to teach negotiation without employing practical experience. However, if you want to place yourself in the box seat, arm yourself with as much information as possible.  Here are a few tips to help along the way.

  • There are three numbers involved in real estate negotiation, and it’s important to get a rough idea of each before you formulate your negotiation strategy. What’s the property worth to you (market value + intention of use – is it an investment or your home for the next 20 years)?  What’s it worth to the vendor – (where’s the vendor’s expectation? Are they expecting a premium due to a costly renovation)?  What’s it worth to other buyers – (how fierce is the competition)? The first question is easy; however the other two will take more assessment. Start to gather information early, because the answers will help you assess the timing of your offer.
  • Try to establish why the vendor is selling. The agent may not be forthcoming if you ask directly, however questions such as “What settlement suits your vendor?” can give clues.  A longer settlement may signify they have not yet bought, while a shorter settlement may indicate they’re under time constraints to secure a deal. Vendors will sometimes accept a lower price if settlement terms are favourable – especially if they’ve purchased elsewhere.  Use the information wisely.
  • Note the property’s appearance. If the home is vacant (previously tenanted), you can assume it’s owned by an investor and they’ll probably preference a quick deal.  Going in with a lower price sweetened by a short settlement may be the way to proceed. However, if the house has been professionally furnished with show home written all over it, vendor expectation is likely to be high and they’re unlikely negotiate at the bottom end of the price range, especially at the beginning of the sale process.  In this circumstance, should you want to make a pre-auction offer, wait until the last week of the campaign, during which the selling agent will have hopefully tapered vendor expectation to meet the market.  There are many options and shades of grey, but above all, timing is crucial, so think before you act.
  • The longer a house has been on the market, the greater the pressure to lower price.  Look for those properties that have been hanging around for a while. Some houses don’t sell because they’re poorly located and don’t represent quality; however others may not have been marketed well or presented in an attractive manner. The latter can often present the best opportunity for a savvy buyer to pick up a bargain.
  • There’s always potential for multiple offers, especially if a house stands out from the crowd. Talk to the agent and ask him to keep you informed if he gets an offer in writing.  Nothing can be done until the vendor statement is available so request a copy to be e-mailed as soon it arrives. Find out how the sales agency handles multiple offers.  Some agencies only take a “best foot forward – one shot” approach. Others will favour the buyer who makes the first move by giving them a chance to increase their bid if someone offers more.  Don’t be afraid to ask questions.
  • If you love the home the priority is to secure the property within budget, rather than risk being gazumped with lengthy negotiation. In this circumstance preparation is the key – get the documentation checked, building inspection done, and your finance in place before you make a move.  An unconditional offer strengthens the chance of acceptance over a higher offer with conditions attached.
  • Consider employing a professional to negotiate on your behalf. One of the first lessons in negotiation is to place a “buffer” between you and the other party.  This takes emotion out of the equation and provides you with valuable thinking time while your advocate deals with the usual tricks selling agents employ. Don’t be afraid to pay for experience in order to potentially save thousands on price.
  • Finally don’t worry if you miss out because someone paid more.  Use the knowledge you gathered to help assess other homes on the market, and feel assured you’ll be better prepared next time.

Catherine Cashmore 

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Cheap investments might be more trouble than you bargained for

Cheap investments might be more trouble than you bargained for

By Catherine Cashmore
Tuesday, 16 August 2011

As a property investor you face a mine field of advice from financial advisors, sales agents, property planners, developers, not to mention numerous magazines and books all promising the road to riches  – and never more so than in a downward phase of the property cycle.

Not unlike politics they offer a sea of differing opinions of what constitutes a good property investment, and it’s often hard to sort the wheat from the chaff.  Learning from past mistakes isn’t preferable when you’re investing large amounts of money, so it’s best not to make one in the first place.

Ironically, buyers often feel more confident purchasing into what’s traditionally known as a seller’s market rather than a buyer’s market.  Purchasing property that’s rising in value is understandably more assuring than reading weekly headlines that instigate fear we’re on the brink of a property crash. However, for those wise enough to step in whilst we’re still experiencing flat conditions, it’s important to identify a good buy from those that are simply substandard.

There’s currently a lack of quality real estate on the market – and to achieve maximum capital growth over the long term, it’s important your acquisition is attractive to owner occupiers (who fuel price growth) as well as holding appeal for long term tenancy in both downward and upward phases of the property cycle. Even in the current climate of market uncertainty, if you want to purchase a property that’s going to perform well over the long term, nine times out of 10the property you’re attracted to will also attract healthy competition from other buyers.

With sound negotiation skills there’s always opportunity to purchase good property at a great price. However if you find yourself being lured into a deal that looks too good to be true – with little competition surrounding the home – it’s time to start asking why. Vendors have usually done their homework on market value prior to listing their property for sale.  Australians don’t give up their houses easily – it’s one of the reasons house prices in Australia are more likely to stagnate for periods of time than drop.  Most vendors will hold rather than sell in a downward market, and the value Australians place on their property is heavy with romantic aspiration.

Therefore, if it looks like they’re giving the home away it will be for one of two reasons – they’ve hit a financial dilemma and need a quick deal, or they want out of a non-performing asset or money pit. It’s important to make sure you walk in with your eyes open.

It’s not unusual to hear about distressed sales, or quiet off-market listings, and in such circumstances a reduction in buyer competition is always advantageous.  However, this doesn’t mean the vendor is desperate to sell or the price is below market value, it usually means they will sell ‘if’ they can get the price they’re looking for.  So, before you whip out your wallet, make sure you’re not assuming otherwise.

One of the most concerning acquisitions widely touted to investors are off-plan developments or house-and-landpackages.  Some sellers often disguise themselves as ‘free’ buyer agents picking up their fee directly from the developer.  When you purchase off plan you’re taking a punt the property will continue to appreciate in value.  With established dwellings it’s possible to trace the sales history for reassurance of capital growth; however off the plan dwellings don’t offer the same luxury. They come with a promise of high rental yields and depreciation benefits; however you have no guarantee that the look, feel and design will fulfil expectation.  You’ll usually be charged a premium on price (much the same as you would with a new car) – and like a new car, the price is unlikely to hold value without risk of initial depreciation once the word “new” has disappeared from the title.

Remember, as an investor, you’re not purchasing the home for yourself; you’re purchasing it to attract a long term tenant and – if you decide to sell – hopefully an owner occupier who’ll be prepared to dig deep.  Therefore identify the demographic you’re targeting. Who’s going to live in the property? Are you buying an apartment in an area which mostly attracts families who won’t be interested in your ‘shoe box’? Is the location desirable or are you purchasing on a main road, close to an industrial zone, or in a far off field away from local amenities? Is a flash renovation covering poor bones, or are there strict heritage overlays which will make future renovation or development problematic?

Finally – if the word accommodation is preceded by ‘student’, ‘defence’, ‘serviced’, or listed with ‘huge stamp duty savings’ probably best to steer clear. It may look attractive on paper, but without considerable due diligence, there’s a good chance capital growth will be limited, on-going corporation fees invariably high, and you’ll find yourself walking into a greatly increased ‘risk v reward’ scenario.

In most circumstances, a good property will sell well in all markets.  Therefore, cheap properties are cheap for a reason, so before you purchase, find out why.

Catherine Cashmore

Tips to minimising your risk in a turbulent market

Tips to minimising your risk in a turbulent market

By Catherine Cashmore
Tuesday, 09 August 2011

The financial fallout in America is not going to do anything positive for investor confidence, however the agents this weekend were taking full advantage of the news to spruik the safety of investing in “bricks and mortar”.   Without exception, in each auction preamble, there were comments to the effect that “the share market is crashing, and therefore there’s no better time to turn to real estate”.

Of course it’s in the best interests of real estate agents to spruik this message – but then, why not? Amidst all the conflicting headlines, the property market is happily singing its own tune. The clearance rate has been firmly in the 50s (the new “norm”) for some months now. We’ve had a flat market all year with minimal movement – interest rates are on hold, our economy looks secure – and if anyone was perturbed following the downgrade of America’s AAA rating, it wasn’t evident in property land this weekend. Numbers walking through opens and standing outside auctions gave the impression we’re in anything but doom and gloom. Of course, the crux is when will the window shoppers turn into buyers?

While investors have flexibility to step in and out of the market as confidence dictates, there are increasing numbers of homes buyers who – having sold earlier this year during which stock levels were at a peak – are now looking to purchase. Data released this week shows evidence of this, with a marked increase in approvals for owner occupiers (and slightly less so for investors). Rate City reports the biggest increase in June, rising by 0.93 % or $9.60 billion since May.

However, the physical evidence is also clear – during the torrential rain at Saturday’s auctions in Melbourne, there were large crowds of brolly-less buyers (not neighbours) standing outside home sales monitoring results –and getting very wet in the process! It’s inevitable those with pre-approvals will take action sooner or later, and when they do this will result in upward pressure over some sectors of our market.

The amount of stock on market is another contentious issue. Good properties with motivated vendors priced to sell in the current market are not in abundance, however agents are reporting large numbers of off-market – (and on-market) – stock where vendor expectation is set firmly at prices that far exceed even the best times of 2010. These are the discretionary vendors who don’t need to sell, however, they will do so only if a buyer can be found who’ll pay their “wish” price! This is dictating where our market stands at the moment – it’s not going down – but neither is it going up at any great pace.

How much prices move over the remainder of the year is debateable and will no doubt be moderated by affordability. However while we still have a supply/demand imbalance of both useable and available housing along with increasing GDP, labour shortages, a strong mining sector, low unemployment and an economy that is faring better than most other developing countries, we will continue to suffer the inflationary consequences.

There may be a good proportion of our population who are financially feeling the strain, and this has certainly been evident in some sectors of the housing market. However an equally large proportion of our population is reaping the rewards of investment in a booming economy. As the old saying goes: the rich get richer while the poor get poorer.

Of course, not a week goes by without numerous reports hitting the headlines suggesting we’re heading for a housing market crash. Despite plain facts, a minority always seem to find a public platform to beat the drum of impending disaster. It seems pointless to reiterate the arguments for and against; they have been repeated many times from all corners of the spectrum, and like politics – sides have already been staked out.

The truth is no market or investment is risk-free and ultimately the future prospect of any one market is largely out of our control. As individuals we have little say over the weightier matters dictating the economy, but we do have the ability to minimise risk through a carefully strategised plan before making any financial decisions. Short of putting money under the mattress or taking an oath to live the remainder of our lives on the rental ladder for fear of the next looming financial disaster, risk minimisation is something we can control when deciding to purchase property. With this in mind, it’s important buyers take care to buffer any rollercoaster effects by minimising their risk profile and employing strong negotiation skills whilst purchasing well within their borrowing capacity.

It’s just as possible to lose money through unwise investment in the real estate market as it is with any other financial acquisition. However the difference with property is it’s essential to our daily needs. Next in line to air, food, and water comes shelter. Unlike America and the UK, most people in Australia live in capital city locations – in Melbourne alone we have between 1500 – 1800 people entering the city each week. For each person that enters the country our total GDP increases – as our population grows, so does our GDP. The majority of immigrants actually bring wealth and income into the country – they are not all coming in poverty stricken on boats even if it is the popular perception.

All of these people (including our growing generic population) need a place to call home. Whether they purchase or rent is immaterial, because we have a shortage of quality residential real estate, in the places where they need and ‘want’ to live (the city!). With increasing demand it’s inevitable – over a period of time – property prices will increase, and with this in mind, it seems fair to suggest the ‘right’ property presents a relatively low risk investment.

So what are the boxes you need to tick to minimise risk? Well if before you step in; get some good independent advice,

  •  Don’t exceed the budget.
  • Buy in an established residential location close to transport, shops, and jobs.
  • Buy a property that accommodates essential living needs with good space, light, secure off street parking, and at least the potential for quality of ‘lifestyle’.
  • And finally, buy a property that has long term ‘owner occupier’ appeal. Remember – it’s home buyers that essentially fuel the market, so to ensure the house or apartment will rent and hold value during any potential market downturn, purchase a ‘home’ – not just roof space!

Catherine Cashmore

There’s more to clearance rates than meets the eye

There’s more to clearance rates than meets the eye

By Catherine Cashmore
Tuesday, 02 August 2011

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A lot of emphasis is put on clearance rates each week – particularly in Melbourne and Sydney (the two main capitals of Auction sales), however few people really understand what the clearance rate represents. The broad assumption is that “sold at auction” equates to sold “under the hammer” and a high clearance rate means the market is “flying” while low clearance rates depict the opposite. However, it’s not quite so simple.

The clearance figure released on a Saturday afternoon factors in every property that has sold “under the hammer” and also sold via post-auction negotiation. The difference between the number of homes that sell out in the public arena and those that sell via negotiation always tends to fall in favour of the latter. In other words, in our experience, more homes sell via negotiation.

Without attending every auction individually it’s impossible to assess which have sold via post-auction negotiation or reached their reserve with heated competition outside the property – however, it gives a snapshot of the number of homes which have sold on the day as a direct result of the auction’s marketing campaign.

A lower clearance rate can be a combination of many factors, such as high vendor expectation or low buyer activity. It can also be influenced by larger than usual number of listings being auctioned on a particular day resulting in a lower-level buyer competition around those that don’t stand out from the crowd.

Conversely, a lower number of properties auctioned on any weekend can have the reverse effect and produce a higher clearance figure than would be typically expected. It’s important to understand the clearance figure only relates to a small proportion of the market, because most homes are sold via private treaty (the ratio is approximately 70% private sale, 30% auction sale). It also only applies to the metropolitan market, as properties in outer-metro or regional areas generally aren’t marketed for auction.

The other problem with clearance figures is that their accuracy relies on independent agent reporting, which can obviously be manipulated when not audited. Selling agents are required to work in the best interests of their vendor. Therefore they will naturally not disclose prices if asked not to do so. Some are also less likely to report an auction as passed in on the day if lengthy negotiations are still ongoing with buyers who attended the auction (including those who chased up the reserve price post auction in the hope of securing a bargain). Therefore, if the property is sold via post-auction negotiation, there can be a delay in figures being reported.

Sometimes during an auction when there is not much heated competition, the vendor may decide to alter the reserve price, thereby encouraging the agent to pass the property. After all, without this additional negotiation, the vendor will only obtain a figure one bid higher than the under-bidder. The vendor is perfectly entitled to do this.

Obviously the attraction of listing a property for auction is the hope heated competition will push the price over and above expectation. An auction campaign is generally a short four-week process – typically three weeks of marketing, with the auction taking place during the fourth week. It often results in a successful sale because by all intense purposes, it puts pressure on buyers to act within a short time frame. Also – under auction conditions – once the property is sold, the sticker goes up! There is no cooling-off period, no subject to finance – the buyers must do due diligence prior to auction day.

However, when vendors list a property, they also understand that the auction is essentially a three-stage process during which the property can sell before auction, under the hammer, or post auction. Those properties that fail to sell under the hammer or via post-auction negotiation generally sell within two weeks as a direct result of marketing. As any selling agent will tell you, once an auction has failed, there are usually numerous calls from buyers wanting to know the reserve price, assuming that the “failed” auction will result in added pressure for the vendor to sell and reduce price expectation.

So how important is it to monitor the clearance rate? When the RBA assess house price movements it takes into account a broad range of data collected from suppliers such as RP Data-Rismark, APM and the ABS. It also monitors monthly movements and clearance figures. If there is any doubt about the accuracy of reported clearance figures – or whether there should be some differentiation between properties that sell under the hammer, compared with those that sell via negotiation – it’s worth noting the graph on the RBA website, which shows a very close correlation between month –to-month price growth and clearance rates.

The fact that both clearance figures are low and overall turnover is low indicates perfect conditions for those wanting to step in. However, caution prevents most buyers acting against the herd mentality and purchasing while there is apparent doom and gloom flattening expectation and providing better buying conditions.

This is understandable – after all, to the average Australian, the family home is not just a place for shelter, it’s one of the biggest purchases they’ll make in a lifetime, and their future security. For this reason, caution must always rule the heart and buyers cannot afford to enter the market on a whim without plenty of due diligence. However, if you are planning on purchasing, waiting for certainty to set in and the spring market to kick off is not necessarily the best answer.

We should however avoid making broad statements about real estate because the Aussie market is fragmented – despite the 12-month “correction”, some suburbs have continued to outperform overall flat conditions – and some have yet to fall. Each property has its own intrinsic quality, and part of purchasing well is understanding the long term value of what you’re assessing. 

You’d be woefully ignorant if you still live under the conception that purchasing real estate is a simple as paying the price listed on the price tag. There is more than one number involved in any negotiation and assessing a property’s worth takes into account a number of factors.

The agent is only interested in meeting vendor expectation. The buyer is only interested securing their dream property for the lowest price possible. The valuer only cares about market value… and so on. Therefore, if you want to place yourself ahead of the competition, employing a savvy negotiator with plenty of experience to understand these fractions is a step in the right direction.

Catherine Cashmore