Every property investor aspires to be a savvy wheeler and dealer when it comes to negotiating asset acquisitions.
After all, you can either make money or lose it at point of purchase. Rarely will you break entirely even Steven, because that’s just the nature of a very emotionally based beast like bricks and mortar.
It’s not surprising then that some property investors get so caught up in analysing the market and trying to ‘buy a bargain’, they forget the many other variables that must be carefully considered.
First and foremost, the location and liveability need to tick certain boxes to ensure an appropriate combination of capital growth and cashflow for your needs. Plus, these two fundamentals ultimately determine market demand.
Should you seek out a bargain above all else?
The short answer is no. Property investments must be purchased in accordance with many factors.
Of course price is one of them.
But it isn’t necessarily the priority, so much as understanding whether the price for a particular property in a particular market is actually worth paying in light of your investment approach and the enduring location fundamentals.
You get what you pay for
This consumer’s mantra has arguably helped us justify spending more and more money on ‘luxuries’ since the 1980s dawn of modern decadence. But is it really the case?
Well in some instances, yes it is. Residential housing happens to be one of those commodities where quality really does tend to cost more.
That being said, what some buyers might perceive as quality – ie. shiny new apartment builds for instance – could come with a premium price tag that’s at the other extreme – way too expensive for what you get.
Not always the case?
At different times, different circumstances will impact the many housing markets within Australia. These will all exert pressure and in turn create various imbalances. Some of the imbalances will work in favour of buyers and some will work in favour of sellers.
At these times, prices will fluctuate according to which side is currently benefiting from the supply/demand scenario of the day. It could be said that during a buyer’s market, you can find bargain buys as motivated vendors start discounting asking prices.
Likewise, you’ll perhaps expect to pay more for the same property when there’s a lot of competition and vendors are inflating values.
Of course, one could also argue that because residential real estate markets are so influenced by buyer and seller behaviour, there’s no such thing as a ‘good’ or ‘bad’ price to pay…it’s what the market is prepared to pay ay any given time that ultimately brings everything back into a sort of imperfect equilibrium.
What you need to know about a ‘bargain’
All that being said, you can of course negotiate your way into a great deal if you know what you’re doing and how to play your cards.
But first, you need to understand why the property in question appears to be selling ‘cheap’, when evaluated against comparable market sales in the same neighbourhood. It’s usually one of two reasons…
- Vendor motivation
If you can find a seller who really needs to move their property…perhaps their experiencing mortgage stress or a change in circumstances that means the need to move urgently.
Whatever the reason – you should always try to find out the extent and motivation for the vendor to sell – sometimes this can be used to exert a little extra pressure on them to accept a ‘cheekier’ offer.
These types of seller situations can represent opportunities to purchase at a ‘discounted’ price. But they’re not necessarily easy to find. More often than not, the reason a property seems like a ‘bargain’ will be…
- Immutable property characteristics
These include issues that are virtually impossible to change or improve and will therefore likely continue to compromise the dwelling’s value into the future, including:
Location. A property situated on a main road, or next to a noisy industrial complex, a train line, or bad neighbours for instance, will generally take longer to achieve optimal capital growth than so-called ‘investment grade’ real estate. It will also attract a shallower tenant pool.
Scarcity. Another element that often factors into property pricing is how much of the same type of property is available at point of sale. Think large apartment complexes, with hundreds of look-a-like dwellings saturating the market in one big wave. Now compare that with art deco or period homes in areas where land is tightly constrained, such as inner city Sydney and Melbourne.
Design. This could be a lack of parking or storage space, poor layout and natural light or any other number of ‘quirks’ that limit the market. The more liveable a property is, the broader your market appeal will be to underpin long-term price growth. And this is what you’re investing to achieve.
As you can see, buying a bargain can mean walking away with what is literally a ‘cheap’ investment – in every sense of the word.
A true bargain is the best possible investment property, purchased according to your needs, without over-committing yourself financially.
Importantly, you need to base the price you’re prepared to pay on research. Not so you underpay for the property, but so you pay the most appropriate price according to the enduring level of tenant and owner-occupier market demand that will underpin future growth and cashflow prospects.
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).