One of my favourite sayings is “you always make money on the purchase of a property”, but buying property in a bull market can be a quick way to lose money. In the current market, you need to negotiate hard and see the potential capital upside of your investment before any money has left your bank account.
It’s so easy to get caught up in the media hype of a property boom, not to mention Australians tend to have this almost innate belief that property investment is the key to instant wealth. But this simply isn’t the case. You need to be careful not to get burnt in the current conditions.
With low interest rates and easy money available through the banks, we’ve seen auction clearance rates spike at over 80 per cent in NSW and 70 per cent in Victoria. These conditions are hot indeed and the best that real estate agents have seen since well before the GFC. So how can you avoid getting burnt?
1. Never get competitive
I’m not sure about you, but I’m a competitive guy and am best served to avoid auctions – and so are you if you don’t like to lose. Competitive people can pay thousands, if not hundreds of thousands more for a property in the heat of an auction, and real estate agents know this. They host auctions to create a feeling of scarcity and to encourage a competitive environment. Never buy at auction because you are far more likely to pay too much for your property.
“Buying in a bull market is fraught with danger” In quieter times, however, an auction can be an advantage, and there’s always the potential to pick up a bargain after a property is passed in. This is still the case in quieter markets such as Perth, Brisbane or Tasmania, where auction clearance rates are sub 50 per cent.
Sometimes you have no choice but to buy at auction. For example, in Sydney’s eastern suburbs or the very hot inner-west area, auctions are the only way to buy. If you are stuck in this situation then you need to set a limit and really stick to it – hard. If you are inherently competitive then avoid the situation altogether, or get a buyer’s agent to help you out (see point three).
2. Buy properties that are not on the market
Talk to your local real estate agents and get to know them – the good ones will know everyone in the area who is looking to sell. In Sydney’s Northern Beaches, where I live, I can make a few calls and line up a few inspections within minutes with local agents of property owners who are keen to sell but not advertise. This saves them advertising dollars and lowers their cost of sale. It can be a convenient, anti-competitive method of buying.
“It always pays to get an RP Data or Residex report on your house and suburb”
3. Get a buyer’s agent
A buyer’s agent is a real estate agent who helps you buy property. They are often well connected, aware of off-market sales and typically know most of the local agents very well, which can make your job easier and save you ten of thousands of dollars on your next purchase. They typically charge around 1 to 2 per cent of the property value, while some charge flat fees of, say, $15,000, depending on how much the property is worth. They can save you a bundle with their auction strategies and negotiation skills.
4. Do your research
It always pays to get an RP Data or Residex report on your house and suburb so you know the market, previous sales and potential yield from your desired property. You should also do a cash-flow analysis if you’re buying for investment purposes (Somersoft and POSH are said to be helpful).
Buying in a bull market is fraught with danger. It’s like spilling hot wax from a candle – some people may enjoy it, but most of us will just get burnt. Property can be a richly rewarding investment, but always do your homework, ask questions and don’t be afraid to get some professional help.
What’s your hot property investment tip?