Buying at a discount in the current cycle may sound like wishful thinking. After all, who in their right mind would sell property at a discount when they know the market is hotting up, right?
The short answer is no one. “The reality is no one wants to sell under market value in any market,” says Cameron Patterson, founder of InReach Investments. “They do so because they have to. Your job as a buyer is to identify those distressed sellers.”
The trick is to identify these desperate vendors. However, it’s not always as easy as it sound. In most cases, the reasons for selling are not advertised. If it is, it’s generally to drive the prices up. This is because everyone is thinking they’re getting a bargain.
A distressed vendor may be a developer who has run into financial difficulty or a home owner who has lost their job. It could be an owner who’s moving into aged care and needs to sell to pay for their bills. It could be a deceased estate and the next of kin don’t care what the property sells for, they just want to get rid of it. It could also be a divorce settlement.
Insider tips for buying discounted properties
It may take a bit of a legwork, but it’s still possible to find these properties on your own. Here are some of the proven strategies experts use when buying discounted properties.
- Look for suburbs with the biggest drops in value over 3-5 years
Todd Hunter, founder and director with Where Group, a buyers agency, says the quickest way to identify areas ripe for the picking is to look at how they’ve performed during the past 3-5 years.
“I look for areas that have fallen in values during the past three years or so,” says Hunter. “I also check if there are a lot of stocks that have been sitting around but already starting to move. This is a good sign that the area is turning. Don’t be afraid of negative growth. Negative values scare people, and rightly so. There is a chance values could fall further. That’s when you do your due diligence and look for other signs that demand is returning in the area. At this point, vendors are more willing to negotiate.”
- Establish the true value of the property you’re about to buy
If you’re actively pursuing discounted properties, make sure you’re buying genuine undervalued properties.
There could be a big reason for the property to be highly discounted. The question you need to ask yourself is why is it undervalued or highly discounted? If it’s such a good deal, why is that no one has found it before?
There could be something fundamentally wrong with the property such as its location being close to a major highway or train lines.
It’s important that you understand the true value you’re buying however, as not all distressed sales are good buys.
- Identify capital growth triggers
Unless there’s something else going for the property like capital growth potential or renovation potential, there could be little further profit to be made with that discounted property you’re about to buy.
“Capital growth is king,” says Patterson. “While there’s no guarantee that you get the projected capital growth, if you buy in a location with good fundamentals and pick a sound property, you’ll significantly reduce your risk associated with buying discounted properties.”
This means ensuring that there’s a strong cash flow, low vacancy rate and infrastructure going into the area. Patterson insists on properties that are close to public transport and amenities and areas with low proportion of investors in relation to homeowners.
“I also look at the trend such as population growth and vacancy rate in the suburb,” adds Patterson.
“Look for areas with proven records of capital growth and sustainability, such as inner-city period homes or new developments close to the CBD. These historically have patterns of strong capital growth.”
- Check the level of supply and demand
One reason a property is selling on a discount could be the fact that it’s in an area heading towards oversupply at a time when demand starts falling.
Developers tend to overbuild in an area forecast to get strong population growth and ignore supply. They often build in a location with loads of infrastructure projects going in without considering if there are already enough properties available for sale. If the developer is having trouble selling, they’ll get desperate. Looking for locations with a large percentage of stock on market (SOM%) will uncover these problem areas.
- Submit multiple offers
The only way to snag a property under market value is submitting multiple offers according to Patterson.
“Firstly, I will establish the true value and then I put a low ball offer. I will repeat that process multiple times. Eventually you will find interested seller,” he says.
“Most of the leads come from my contacts in the industry. I get offered properties that don’t even go to market. I don’t necessarily get them under market value but it gives me the chance to put in the first offer which is a low ball offer. If the vendor is desperate then they will accept it. Mortgagee listing companies as well can help.”
- Crunch your numbers and monitor them throughout the process
You have to be confident with your numbers when buying any property, but even more so when buying distressed or discounted properties says Patterson.
“If the numbers don’t stack up, be prepared to walk away. There are always going to be opportunities out there, it’s really just a matter of finding one with the right balance. You have to assess the deal holistically to make sure that the acquisition will help you move closer to your goals. Make sure that the number stack up. It’s always better to reject a deal and wait for the next one rather than go ahead when you’re not sure the numbers are stacking up. You’ll end up regretting it over the long run,” he says.
Nila Sweeney is the managing editor of Your Investment Property magazine, Australia’s favourite property investing magazine. For extra dose of inspiration and motivation, check out her personal blog at nilasweeney.blogspot.com
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Nila Sweeney is managing editor of Australia’s leading property investment magazine, Your Investment Property, Canada’s only property investment magazine, Canadian Real Estate Wealth and Your Mortgage magazine. An active property investor herself, Nila owns a number of properties in Australia and overseas. She has worked as a TV journalist for CNBC Asia and CNN International for more than 10 years and has been writing about the Australian property markets for more than eight years.
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