I have the privilege of being able to look at this topic from both viewpoints: through the eyes of a buyer’s agent as well as the eyes of a professional investor. I’ve been investing in property for 22 years. To save the deposit for my first property when I was 19 years old, I bought second-hand cars and sold them for a profit. I owned 14 cars before I left high school. The major lesson this taught me was to negotiate hard, because the money you make, in any deal, is all in the buy.
It was a funny turn of events that allowed me to turn my car trading days into the basis of a business and career that helps people through their investment journeys.
The job came to me through you, the investor, asking me to help you out. I was writing mortgages and I had clients wanting to invest and asking me where I was investing. Of course I said yes, and they wanted to know 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 we are focusing on is bargain hunting. To me it’s a no-brainer. Why wouldn’t you want to buy the property as cheaply as you can? Why wouldn’t you want a bargain? After all, it’s human nature to try to get a deal. How big a deal you get depends on how confident you are about your negotiation skills. Sure, it’s not everybody’s game, so that’s where a good buyer’s agent, who negotiates hard, could come into the equation for you.
The true value of a buyer’s agent is that they not only know where to invest but also can negotiate hard and hunt you down a bargain.
I am a bargain hunter and happy to say so. I have no qualms about 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 circumstances, except for when you are buying your own home or holiday house. And that’s because these are emotional purchases. In my case, even buying my home was one of the best deals I have ever negotiated.
By purchasing one to two years earlier when no one else was buying out there, I was buying for tens of thousands of dollars less - LARGE
Buying a new house and land package or an off-the-plan unit means paying the 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. The purchaser is essentially paying for their own capital growth in advance. You are actually paying more than the property’s value. In what world does that make sense?
The positive for me is that, when the above behaviour has occurred, those property owners who have been swindled will have great properties for the next purchaser to buy.
The reality of buying 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, exit costs like capital gains tax, and high real estate commissions, you need to make as much as you can so that, at the end of the day, you still walk away with a tidy sum in earnings.
Many will find my philosophy hard and confronting, and that’s because it’s not the norm. I don’t invest with the masses or have a sheep mentality; I go against the grain, and this type of investing makes some investors feel uncomfortable.
Over the years some commentators have used the analogy that the market value of a property is the price somebody is willing to pay for it, which is essentially saying the sale price is the market value. Really?
If there were 10 identical houses in a row and nine sold for the list price but one sold for 10% less, would that one discounted sale now be the true market value for the other nine?
No, it’s not. It’s what real estate agents would call an ‘out of character’ sale. This is what we call buying under market value.
It’s this one house that, as a bargain hunter, I am looking to find. So, why would one vendor in 10 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 decided on my exact price point, the last component of the equation is to find a motivated vendor.
How to research markets where you can snag a bargain
First of all, take out the usual high-risk markets like mining towns, small regional towns and high-rise units. Then you can say that the world is your oyster, in that nowhere else in Australia is off the table.
In fact, my own investment strategy now takes me all over Australia and around the world in my search for properties. As I write this, I am on a plane to Perth, then to Brisbane, and then to the USA next week. In the last few years I have been buying houses in the USA for US$60,000 – around half their pre-GFC price tag. These homes receive 18%-plus yields in an awesome strong market. And I am also researching some fantastic opportunities in the UK.
So, how do I find these under-market deals?
The core strategies I use to research every single location I invest in are:
• buy a bargain
• buy under market value.
• buy in the LOW of the property cycle
It’s a model very similar to Warren Buffett’s strategy for 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 my research, but they come after the above criteria are met.
The problem is that most investors tend to follow the crowd. In doing so, they invest in warm and hot property markets. Buying property for a discount and under market value can only be achieved if you buy the property in the low or dead part of the property cycle – when property is at its cheapest price of the cycle. That is the number one 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 below market value.
ADVANTAGES OF BUYING IN THE LOW/DEAD PART OF THE PROPERTY CYCLE
The biggest discount off the list price can be achieved.
There is no competition from other buyers – why would you want to compete for a property and pay more than you have to? Even at auctions, if I am not the only registered buyer, I don’t bid. The only time this makes sense is when you are buying your own home and you are emotionally attached, not when you're buying an investment property. Even then, for me personally, it still doesn’t make sense.
The ball is in your court throughout the purchase process. This equates to
stress-free buying. I am sure many of you have purchased before and it was one
of the most stressful things you have ever done. That’s not the case when you
invest my way, because you dictate terms such as:
• two-week or even four-week finance clauses
• two weeks to get building and pest inspections done
• settling on the date you desire
• additional clauses such as the house is to be professionally cleaned upon settlement (if vacant possession)
• access to show tenants the property once purchase is unconditional, so
you can secure tenants to move in right after settlement
• lawns mowed before settlement and gardens weeded
• all appliances in working order at final inspection
Yes, that’s what can be achieved, and more. Now that’s what I call stress-free investing! What you may have noticed above is that negotiations are not all about price. I add a full page of terms and conditions for every house purchase I make, including some of those listed above. You can’t get away with this in a warm or hot market. Also, I never disclose where I am investing; it’s my 11 herbs and spices. I will sometimes disclose which state I am investing in, but nothing more.
If you manage to buy the property for a 10% discount off the low list price, you are really only paying the property’s list price, or above, from a few months ago. Yes, only a few months ago.
How do you find these investment locations?
The trick to buying at the bottom of the property cycle is to time it so that the location won’t sit stagnant for very long before the next rise. That’s why I like to see a market that has been falling for three to six years.
When a market cools, the first thing that happens is the spending of ‘stupid’ money instantly stops. This means buying in the top 10% of values – the price paid by purchasers who will pay almost anything just to secure a property. We have seen this occur many times in the Sydney and Melbourne markets over the last three years, when 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 properties are not selling quickly, so they start reducing their asking prices.
This effect will start to snowball and in some locations it can literally be a race to the bottom. Then gradually the market will start falling. That part can take three to six years. This is when I start to monitor that location.
This is the time when you should start calling a few agents and visiting the location occasionally to inspect houses for sale. I suggest you build a rapport with real estate agents and get on to their databases for weekly updates. Remember, they want a sale too, and in a down 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 that 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? Not a chance. The agents are far too busy to even return your calls by then.
When sourcing your bargain basement property purchase, you’ll come across all types of property sales. On the surface, a ‘mortgagee in possession’ property may appear to be the ideal property to buy under market value. However, I actually find them to be quite the contrary, for a number of reasons.
• The vendor is a bank or lender with no emotion or motivation involved.
• The bank or lender has a debt on that property that the vendor owed them. They want to achieve this price level or higher so they don’t suffer a loss.
• They are offering a buy ‘as is’ deal, meaning there is no guarantee that the oven, stove, lights or hot water work.
• It can take a long time to get a response from the bank on any offers.
• They nearly always take properties to auction first so they are seen to be allowing everybody a fair chance to buy them – the exception being auction houses which are commissioned by the banks to sell for a certain figure.
The trick to buying at the bottom of the property cycle is to time it so that the location won’t sit stagnant for very long before the next rise. That’s why I like to see a market that has been falling for three to six years
The key to a killer deal: Motivation
Some of my best buys have been deals involving 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 cheaply 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 of 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 overheated peak of a property market in which 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, in which motivated or desperate vendors will sell for even less. These are my preferred vendors.
Bear in mind that not all desperate vendors are financially distressed. Outside of situations involving divorce, job losses, overcommitted vendors and those on the verge of bankruptcy, there are positive vendors who will also liquidate. These are vendors such as:
• the upseller – the vendor who owns, say, a $400k house and wants to move up to a $600k home. They nearly always go shopping before they list their home for sale, and nearly always fall in love with their potential new home before selling. They must also sell before they can buy so they are happy to discount their home to then buy the home of their dreams deceased estates – obviously death is not positive, but for the beneficiaries of the estate it can be financially beneficial. Sometimes they will also want to receive funds from the sale fast and will therefore sell at a discount for a fast sale.
• active investors – those who have had their investment properties on the market for a long time, who would like to liquidate their assets quickly as they have other opportunities they could invest their money in and need to move fast to take advantage of that opportunity
Finding a motivated vendor
In some cases, the real estate agent will tell you who is a motivated vendor and who isn’t. 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 for your portfolio. You need to make your offers low enough that not one single vendor will accept them. What this does is siphon 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 curse at you. It’s part of the game of buying a bargain house. Take it as a compliment that your offer was low enough.
ADVANTAGES OF BUYING UNDER MARKET VALUE
•You make more profit when you sell the property.
•The property will be more cash flow positive. Remember: the cheaper you buy, the better the yield!
•You have taken a burden off a desperate vendor. Many financially distressed vendors simply want to get back to a normal life. They have accepted that they made a bad financial decision when they purchased the property and all they want is to leave the bad memories of that house behind and start enjoying life again.
•You have an extra buffer in your property portfolio when interest rates rise again, as you can more easily afford to hold it.
•Buying in the low part of the property cycle stimulates the local economy by way of extra sales for many working in the property industry who may not otherwise have done this deal. These businesses may include:
• real estate agents
• conveyancers or lawyers
• building inspectors
• pest inspectors
• local tradespeople
• retail shops, if you renovate
• mortgage brokers
• property managers
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.
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. 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.
You need to make market timing your number one search criteria before you research all the other factors -LARGE
This figure is generally only a few thousand dollars higher than your first ultra-low offer. Never offer ‘even’ thousands, such as jumping your offer up from $380,000 to $390,000. This sends a sign to the agent that you have more money and that you’ve settled on these numbers arbitrarily. 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 like this is:
-20 houses inspected
-10 offers made
-Two negotiations that lead
-10% overall success rate
The motivated vendor you are trying to find is the property owner who has owned their property for eight to 15 years plus, as they will have reasonable equity in their property and be able to otentially 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 cheaply as they owe the bank too much. The bank won’t let them release the property if they owe more than the sale price, even if a contract for sale has been signed.
Bargain buying in action
As an example of the benefits of buying a bargain, I was once investing in Southwest Sydney in the suburb of Campbelltown.
• I was buying three-bedroom houses for between $260k and $290k in 2009. This was in the heart of the GFC.
• The market turned and started to increase in 2011. As the deals were then all gone, investors were paying $340k for those same houses.
• The market gained good momentum by 2013, which is when most investors thought it was time to invest and they paid $380k for the same houses.
• In the last two years the Sydney market was going insane and investors still saw value in buying the same houses in early 2015 for $480k.
• The market has since gone flat again.
Now, looking at the numbers above you could say that those investors who paid $340k in 2011 and $380k in 2013 have still done very well in the two and four years they have owned the properties. But if they were to sell at $480k, then how much did they really make? When you add in approximately $15k set-up costs and another $15k real estate agent sale commissions and capital gains tax, they really haven’t made that much.
By purchasing one to two years earlier when no one else was buying out there, I was buying for tens of thousands of dollars less, which also meant less stamp duty was applicable. By the time 2013 and beyond came, my properties were considerably positively geared as my mortgage was around $250k with a $380 per week rent.
And the best part of the story is, I was able to cherry-pick the best houses from a large group of houses for sale at that time. Doesn’t this sound like an ideal way to invest? To me, buying a bargain is the only way to invest. But to do this you need to make market timing 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.
By stepping out of your comfort zone and investing where no one else is, you will not only be able to cherry-pick the best properties and purchase a bargain, but your investment purchase will also be stress-free. And that can only be a good thing.