Buying is exciting and scary at the same time, so to ensure you minimise your risks and maximise your profits, Sam Saggers presents this ultimate buying checklist
We all use both emotions and logic to make decisions in life, and it seems we are often wrong as much as we are right, yet we all seem to get by okay. But is that enough to buy real estate well? If you want to become a successful property investor it’s vital that you have a practical and logical buying system in place that allows you to make good decisions based on the facts.
Two great ways to mess up a deal
In my many years in property I have learnt that there are two common ways people make a mess of – or miss out on – property deals. The first is being too emotional and the second is being too analytical. Let’s have a look at an example of each.
The emotional purchase
Reminiscing about the days of old gives us a wonderful insight into how we learn and make decisions. Though it is a generalisation, if you preferred maths to English at school you are probably more of an analytical person, whereas if English was your strength you probably prefer solving matters using emotional reasoning.
By way of example, I was good at English at school; however, I was fairly irrational at mathematics. When I buy real estate I am prone to feeling the emotions of the property. This allows me to see the insights and heartbeat of an area or market, which is an advantage, but also acts as a curse as I will often look at real estate through rose-coloured, emotional glasses. I understand this about myself and it has allowed me to become an even better dealmaker; the many years that I have been doing this have taught me to say no to myself and get second opinions.
As you now know, young and naive I bought my first property based on an emotional thought process. I bought because I loved the area – I grew up there! I was fond of the suburb and I just had to have the property. My idealism overrode any logic, though of course I didn’t know this at the time. My emotions cost me more than $30,000, as I suffered a loss and had to sell.
Many Australians try to find a property in a location they know well. This is because many people learn and make decisions through emotions. They buy in the city or suburb where they live, and hold on to the property for the long term, just because they feel like it’s a good investment and not because the numbers tell them it is. With my first buy my initial aim was to earn money through capital growth. This method can be, and is, very effective, but at the time I set myself up to fail: my research was poor and it would be years before the market would grow. The emotions of wanting that property because I had become emotionally attached to it were in the end my greatest problem.
I thought I knew what I was doing. I didn’t. Since my first property purchase I have never treated property with contempt ever again.
Overly analytical people suffer a different form of trap. They will analyse a deal often beyond what is necessary. They have a tendency to take matters too far, and so suffer from what is known as ‘analysis paralysis’. Buying property is never perfect, but analytical people can have a problem with this. They can often suffer from the fact that real estate involves both give and take. Often they never get into the game as they strangle property with their own reasoning before they even get started.
In my second book, How To Be a Part Time Property Millionaire, I talk about a friend who I set up with a great deal. I had brokered a three-bedroom property in Sydney as a mortgagee-in-possession sale. I knew he was going to buy at a rock-bottom price – just $530,000, a $120,000 discount on fair market value. The property was also tenanted at the time of sale.
We inspected the property together. When I told him about the deal he thought he was on to a winner, but when we arrived at the property I noticed his energy and mindset began to change and he quickly chose to focus on the negatives of the building and the condition that the tenants lived in. My friend’s logic told him that an investment property had to look perfect for a deal to be a success, rather like the way he kept his own home. (Admittedly, the tenants did not keep the home in great condition. The day we inspected, the tenants’ belongings were not very tidy, dishes littered the kitchen and children’s toys were scattered all over the floor.)
As I saw my friend’s enthusiasm wane I explained again the numbers of the deal, the good price he was getting, and that the area was set for capital growth. But that evening he rang me and said he was not going to continue with the purchase because the tenants did not keep the property in the kind of shape that he would like. This analysis paralysis cost my friend $120,000. In the end, he could not see past the condition of the property. He had no feel for the market, and his logic killed the deal for him. He was looking for the perfect property deal, which quite simply doesn’t exist.
101 buying questions
When you are buying real estate, to remove the weakness of emotions or the imbalance of being too logical there are some very useful and practical questions to consider. They clarify what is important in a deal and will stop you from becoming emotional about a property or – conversely – analysing it so carefully that you convince yourself not to go ahead. The process investors need to adopt is clinical, taking into account only the numbers, a strategy, financial position and goals. This is not an emotional process; the only thing that matters is whether the property will make a return to achieve financial goals.
For this practical lesson I have assembled the 101 must-ask questions that will help all investors, whether you display emotional attributes or logical attributes. In practical terms, these questions form the commencement of intelligence gathering for all property deals; you can use them all or limit them to finding out what you need to know from agents and vendors, and about areas or properties. They are designed as a guide to prompt you and will no doubt lead to useful discoveries. There is so much to understand in real estate; having great questions means you will find great information.
With this type of introduction they will know you are serious. You have property-buying experience and you’re dangling the old greed carrot to get them hooked. And once you’ve introduced yourself, and built rapport, it’s time for the questions…
These are in no particular order. Think about what you need to find out about the area or property you are looking at, what your strategy is and what your goals are. Then make sure you ask the right questions.
If you need to, right them down in a notebook or folder and take this with you when required.
Let’s get into it!
101 buying questions
- What is the availability of new land in the area?
- What major projects are happening in the area?
- What major retailers are moving to or from the area?
- What are the commercial office space vacancy rates in the area?
- What transport plans are in the area?
- What is the main employer in the area? Are they likely to upsize or downsize?
- Does the local industry have expected wage growth?
- What kinds of properties match the local demographic: houses, units, townhouses or apartments?
- How many bedrooms should a property in this area have: one, two, three, four or more?
- Should it have a rumpus room and/or an alfresco entertainment area?
- Should it have a single or double garage, or none at all?
- Should it have one, two or three bathrooms?
- Should it be single level or multiple levels?
- If apartments are the focus of the search, what should the maximum number of apartments be in the development?
- What is the suburb yield median and what is the property returning?
- How much is needed to be spent on the property to achieve a better return?
- Is the value better in an old or new property in the area, for more profit?
- Would tenants pay more for a pool?
- Would tenants pay more for the property to have air conditioning?
- Is adding value to the property better to do now or later on, and how should this be done?
- Should the property be situated near schools, public transport and major roads? If so, how far away should it be situated and should travel time be a consideration?
- How far (driving or flying time) is the property from a major CBD or town centre?
- Should there be an airport or train station nearby? If so, how far should it be from the property?
- Is the property near major shopping centres, cafes, restaurants and so on?
- What is the percentage of renters in the area?
- What is the vacancy rate in the area?
- If the focus is on capital growth, what makes the street, suburb, town or city a good growth area?
- Is property being sold via private sale or at auction?
- How old is the property?
- Why do the owners want to sell?
- How long has the property been on the market for?
- What are the current average days on market for a property in the area?
- What price do you think the owners would accept?
- Have they had any offers so far?
- What type of person or tenant would live here?
- What is the current market rent for this type of property?
- What are similar properties in the area selling for at this point in time? Name them
- If there is a developer involved, what is their background and experience?
- Is the property in a known flood zone?
- Has there been property discounting occurring in the area?
- What are the auction clearance rates of the area?
- What is the population growth forecast in the area?
- Will the vendor offer terms?
- Will the agent put in writing the rental value and market value of the property?
- Will the agent you’re dealing with manage the property?
- What is the neighbourhood like?
- What fixtures and fittings are part of the purchase and what aren’t?
- Are there any covenants, caveats or any regulatory impositions on the property?
- Are all works done on the property permitted?
- What defects or imperfections are there?
- What is the zoning of the property?
- What is the potential for this zoning to change in the future to take into account urban growth?
- What services are currently being supplied to the property and what services are available to be utilised? For example, natural gas, sewerage (as it may still have a septic tank), reticulated water supply (as it could be on tank supply), and so on
- Does the property need work?
- Does the property have any known sealant or moisture problems?
- Are the foundations still structurally sound?
- Are there signs of internal or external damage that has been covered over?
- Are there any known problems the agent should disclose pertaining to roofing?
- Are there wiring or plumbing issues?
- Is there potential work that may need doing in the short to medium term?
- Will a title search reveal something that will affect the purchase?
- Do the actual physical property and the dwellings on it match what is delineated on the Certificate of Title?
- Is there a lease or tenancy agreement in the contract for sale?
- What are the outgoings, such as council rates, levies, property management fees and water rates?
- Is any furniture being sold with the property?
- Has the property been valued by a registered valuer? When?
- Has the vendor tried to sell before?
- How many times has the property been sold since it was built?
- How motivated to sell is the vendor?
- Has the vendor got a building report?
- Is there a development application the property?
- Has someone else tried to buy the property and failed due to finance?
- Where is the school zoning and future schools that may be planned for the area, or are there planned school reductions?
- What are the positive attributes of the property?
- What are the negative attributes of the property?
- What are the height controls in the area?
- What are the building density limits in the street?
- Does the property have a heritage overlay?
- What is the council’s attitude to development?
- Is it a buyers’ or sellers’ market?
- What properties recently passed in at auction in the area?
- What is the quality of the finishes and fittings?
- What comparable property sales have occurred in the last three months to support the property being sold? And in the last six months?
- What benchmark second-hand properties have sold in the area that are similar?
- What benchmark new properties have sold in the area that are similar?
- What comparable rental property do you have?
- What add-value rental strategy could be adopted? Furnished?
- Is the property under lease?
- Are there better buyer alternatives that the agent has?
- What is the median value of properties in the area?
- What is the surrounding housing like?
- How will I make money from this property?
- Can I get vacant or early possession?
- Will the vendor take a small or low deposit?
- Do you have a contract for sale to review?
- Who set the price: the vendor or the agent?
- Do you own property in the area?
- How long have you been operating in the area?
- Is the vendor market ready?
- Do you have a recent strata report on the property? (For strata properties)
- Has the vendor committed to a new property yet?
Do your best to get straight answers from the agent or vendor. Always keep in mind that the agent is acting in the interests of the seller and not the buyer, and so you should not rely exclusively on their answers. Always confirm the responses you receive to these questions with further research of your own.
It’s inevitable that novice investors – and even many experienced ones – will make mistakes. The trick is to limit them as much as possible and avoid the most obvious errors. Use the questions above to target the best outcome for your goals. The key phrase and learning here is: Without the adversity that investing of any kind brings we would never advance. Sometimes we need small failures that will allow us to succeed in the long run.
Your time is your biggest asset. We all get emotionally attached to property or express bizarre logic about why we shouldn’t buy a property. Being trapped by the dogma of these human flaws can see buyers lose tens of thousands of dollars, along with sidelining them from better opportunities that have faster turnaround times.
Smart investors make their equity work by being astute; they get assistance to counteract their own human weaknesses. The character of many shows arrogance and pride with wealth matters; don’t be fooled – investors need to consistently check their state of mind against the property in question. Getting it right means using a variety of strategies that will build a great property base much faster as you become immune to the real estate variables by learning about yourself and property. In the end, when you own millions of dollars of real estate you just treat it as a tool for wealth. The love or attraction for the way it makes you feel is replaced with the result: wealth!
Sam Saggers is CEO of Positive Real Estate Group.
Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.