A Good Deal or A Hidden Nightmare?

A reader of a magazine wrote in and asked some questions. I was invited to reply.

A good deal or hidden nightmare?

I recently found a property that meets all the ‘fundamentals’ that property investment experts always talk about. I’ve looked at the property twice and I’m very happy with it. I haven’t done any tests on it yet – but I’m a carpenter, and to my eye everything looks sound: the structure is in good shape and there’s no termite damage or anything like that.

The only thing that makes me apprehensive about purchasing the property is that I recently heard that it has been on sale for 200 days. I’d understand the long sale period if it was highly priced, but its $350,000 and in a popular Brisbane suburb.

Do you think there could be something I am overlooking or is it really possible that a great deal like this could have been ignored by the general public?

Reply

Considering the question “Do you think there could be something I am overlooking or is it really possible that a great deal like this could have been ignored by the general public?” … both outcomes are possible, but the answer lies in the due diligence on the thee critical components: Property, Place and People!

Due Diligence: The Property

When researching whether or not to purchase a property, quite obviously you need to know about the building you are buying. In this part of your due diligence you look at the quality of construction, state of the structure, the detail in the finish, and the attraction for someone to want to live in the house.

With respect to construction and structure, this includes the age and state of the plumbing, the wiring including light fittings and power meter, the sub floor structure, evidence of cracks movement in the walls and doorways, and for older dwellings, whether the ridge of the roof it still straight for example. To offset this risk, you’d simply need to include in your offer to purchase, a

“subject to” clause to ensure you get a building and pest inspection completed to your satisfaction prior to the contract of sale becoming unconditional.

Given that the reader is a carpenter and speaks confidently around his ability to be able to ‘read a house’, I am not worried about him missing anything here. It’s possible, but not likely.

Due Diligence: The Place

When speaking about the place in which the property is found, we are talking about getting to know your area and becoming an area expert. As an expert, you’d leave little to chance, so knowing your area well will reduce the risk of being caught out by something unforeseen.

The sort of details we are interested in here centre around the cold hard statistics of what’s happening in the area: things such as infrastructure changes (for example, increased zoning density, new road/rail networks or any major shopping developments), income sources (for example mines, farming or tourism), the economic circumstances and the property sales history details and trends for the area. Spending the time and getting to know these details will help you to become fully aware of the place you are investing into. The more knowledge you have here, the less likely you will end up buying into a dud deal.

Our reader spoke about the “popular Brisbane suburb” with some awareness of the place he’ll be investing into and has some confidence here. He talks about the property being on the market for 200 days, and that $350K is a good price. However his hesitancy around snapping the property up and his fear around missing something implies a lack of confidence in the decision to buy.

I’d suggest some more due diligence around what the price trends are in this suburb of Brisbane, including sales history details and trends, ‘average days on the market’, and more broadly, the income sources and trends for the area. He might find that prices in the area have come down in recent months, that the average days on the market is more than 200, and that tourism (the primary income source for people in this place) has taken a significant fall. If this is the case, then the circumstances of this sale are simply average for properties in this place.

Due Diligence: People

When speaking about the people related to the purchase of a property, we are talking about two distinct groups. Those that are directly involved, and those that influence the market in which you are buying.

Those that influence in market

While there is some overlap with Place, here we are talking about a number of people related circumstances about the Market in this place; economic sentiment and demographics for example. Answering questions of this nature help to build your knowledge around capital growth and rental expectations for properties in your area. This provides another piece of the puzzle about buying with confidence.

For example: As a result of economic circumstances, is the sentiment enthusiastic, indifferent or shy about spending money or buying property? Is there anything happen in or around the place that might change the sentiment in the area, and if so, when? Is the size of population in the area growing or declining? Is the population aging, or attracting new groups of younger people?

While answering these question may not contribute directly to buying any one property, they do contribute to buying into that area relative to what you wanted to do with the property. If for example, you are looking at a long term buy and hold for growth, you would not want to buy into and area with an aging and declining population with an increasing trend in rental vacancies.

Those Directly Involved

Here we talk specifically about the needs of the vendor, the occupier and any prospective purchaser. Property is all about the people, not so much the bricks and mortar. It is the people that have the money to live in the property, and so it is the people you need to know to ensure that your customer is satisfied with the product they are buying whether it be for rent or to own. If you continue to serve our customer, you’ll continue to yield a great result from your property transactions. If not, the path of property will potentially get increasingly tougher for you.

In the case of our reader, we could ask: Is the vendor getting anxious about having the property unsold for 200 days? If so, then the $350K price might just have been posted as a desperate attempt to finally move it on. Was the property seen on page 100 in realestate.com.au and therefore missed by much of the population? If so, then you could simply be in the right place at the right time to snap it up. If it works out the price is in fact average for the area, is the vendor willing to negotiate further in order to sell it today and settle quickly?

The next person we need to consider is the occupier of the property. Ignoring the purchase price for the moment, as an investment you want a rental return. Will a tenant want to live in your property, and how much will they pay for that privilege? Is there any way to make their stay more comfortable and therefore increase the amount they are willing to pay for that comfort? If no-one is interested in living there, either because of the property, factors around the place, or even people indirectly influencing the market… then no price is a good one!

Similar sorts of questions exist for a property you plan to on sell if this is your strategy.

Because the price is apparently low and a long time on the market, it does not mean that the deal is a dud. Those with less knowledge than you are going to be more fearful than you, and less inclined to purchase. On the flip side, it doesn’t mean that you should automatically buy it because you think it’s a bargain. Those with more knowledge than you may indeed know better!

So back to the question: “Do you think there could be something I am overlooking or is it really possible that a great deal like this could have been ignored by the general public?” The answer here lies in the level of knowledge you have about the property, place and people! Invest your time here, build your wisdom around these areas and you’ll be able to answer this question for yourself… confidently!