Work the numbers
If you want to find an undervalued property you need to know the market, says Cameron Kusher, Senior Analyst at RP Data. “Data is your best source of knowledge when looking to purchase a property,” says Kusher. “When considering a purchase ensure that you look at what other properties have sold for in the local area and what price other properties are listed for.”
By assessing the local median sale price over time you gain an insight into what you can expect when buying in a suburb. Make sure you get as much information on the following as possible:
* What are the historic levels of capital growth?
* What is the average vendor discount?
* How long does it take to sell a property?
* What is the gross rental yield and median weekly rents?
According to Kusher, all these questions can be answered with data that helps the investor become better informed and more capable of targeting suitable suburbs and properties.
However, to get the true story, investors still need to dig deeper. “The tip is to look for suburbs which have a good level of amenity but in comparison to the nearby suburbs, or suburbs with similar characteristics, have either a lower level of growth or a lower median price.” Median price reports from data suppliers such as RP Data can point to these suburbs quite easily, he says.
A motivated seller
Finding a motivated seller is a sure fire way to secure an undervalued property. Pay particular attention to the circumstances of the sale – why the property is being sold, what the sellers circumstances are – and try to get an understanding of how motivated the seller is. By knowing how motivated a seller is, you will know how much opportunity you have to negotiate.
Asking pointed questions about the sale can provide you with valuable information, says buyers agent Chris Gray. “Look for someone that has bought somewhere else, is in financial trouble, has just filed for divorce or lost their job,” he suggests.
While an agent isn’t going to tell the general public that the seller is motivated, Gray says that by developing strong industry relationships investors can obtain this information from selling agents more readily. “Speak to the agent privately after an open house. If you can make the agents life easier – by offering a good deal to make a quick sale – then that will help you secure a bargain,” he explains. “A cheaper price guaranteed right this instant can be worth more to a motivated seller than the dream of a better price tomorrow.”
An ugly duckling
Remember that age-old real estate-ism about buying “the worst house on the best street?” That saying generally holds true for investors looking to maximise their capital gain over the medium to long term.
Cameron Kusher agrees that finding something a bit run down can yield good results. “The best advice is to look for properties that need a little bit of TLC,” he explains. According to Kusher, if the property doesn’t present well the selling point will be hampered. “It is amazing the difference some paint, some work in the garden or some new cabinetry can make on a property which previously did not present well,” he says.
However, Property Investment and Finance specialist at InSynergy, Jason Pitkeathly cautions investors to make an educated decision when buying property that needs a bit of tender loving care.
“There are dangers as these properties tend to be tired, run down and sometimes damaged. We find purchasers often pay too much for the property and then don’t fully factor in the costs of repairs, renovation and holding costs through the duration of the remedial work,” he says.
Do your numbers correctly to avoid paying more than the real cost of the property.
Many undervalued suburbs boom after increased spending in local infrastructure and amenities. New train lines, shopping centres, parklands and access to other amenities all help increase rental yields and capital growth.
Pre-approval for large developments is often dependent on the inclusion of large areas of parkland, so buying an undervalued property in a closely built up area that is scheduled for development can increase both rental yields and capital growth through the extra level of amenity that the new development will provide.
Also consider light industrial areas that have recently been rezoned or where councils are planning to rezone can provide investors with a great opportunity to pick up undervalued properties.
Pitkeathly, an experienced property valuer, agrees. “Often newly gentrified areas can be difficult to value,” he says. “If a property has architectural significance, is unique in flavour, of the first of its kind in an area a valuer will find it difficult to find comparable sales evidence and the far market value can be somewhat subjective,” he says. “If you are confident in your research and purchase decision and can cover any shortfalls because of a low valuation, it should not take long before you can realise some of the equity in that property,” says Pitkeathly.
Properties that are passed in at auction provide investors with a great opportunity to negotiate a bargain, says Gray. “An agent might over-quote a property. If it’s worth $600,000 and the agent says $650,000, if no-one turns up to the auction the property gets a label that the owner or agent wants too much for it and it stays on the market for months,” he explains. “Once it’s got that label it is easier to negotiate a price of $570,000,” he says.
Mortgagee auctions are worth following too, as these are almost always committed sales that can provide an investor with an excellent opportunity to negotiate a good price.
Buy in a new development after completion
While buying off the plan and selling upon completion can provide an opportunity to net some good profits while attracting no holding costs, you can also pick up bargains after construction is complete.
Look for properties that are being sold three to ten years since completion. A lot of developers do a lot of presales in the construction phase, and a lot of people think that they will make a good profit when they sell post construction; if the market doesn’t move in their favour a lot of people want to exit the building.
That creates a flood to the market that drives prices down: investors who wait and buy the first resale within this three to ten year window can get a good buying opportunity.
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