Don't buy badly

Don't buy badly
Don't buy badly

Even in a buyers’ market it is still possible to buy badly. You can buy the wrong home for your family, or you can commit the lesser but still significant sin of paying too much for a home.

Why is paying too much a sin?  Because it not only lessens your capital growth, it also puts more of your disposable income towards your mortgage.

What if I promised you a free family holiday in Europe each year for the next 20 years or agreed to pay your children’s school fees until they have left the most expensive private schools?

That’s what you’d be losing if you paid $3,200,000 for a home that you could have bought for $2,900,000. Over the life of a 20-year loan you would need to pay back approximately $580,000, or $29,000 per year (after tax) assuming an average 7.5% interest rate. That’s an overseas holiday or fees for two kids at private school.

Paying too much upfront means your capital growth will be lower too. Our investment division has the constant challenge of explaining to firs- time investors that the price tag of a home is not always the start point for capital growth – the market value is.

Take the example of paying $2,100,000 for a home that you could have negotiated down to $1,800,000 in this buyers’ market. If you sold the property in seven years for, say, $3,600,000, your capital growth would be 100% if you’d originally paid $1,800,000, but only 72% if you’d paid $2,100,000. Do that a couple of times, and the smart buyer gets to keep a free home and the not-so-smart buyer gets to keep a big mortgage.

Want some more evidence that this is a buyers’ market in which you should be able to negotiate a better price?  Here are three big stats that show the May 2011 million-dollar-plus market is a buyers’ market:

Clearance rates – these have dropped into the 40% and 50% levels at auctions. That means that abouut half the homes currently up for sale can’t find anybody to agree with the seller on price.

The Weekly Review Bidderman – This stat is derived from the 30 auctions we attend each week. It’s a simple count of all the bidders who bid divided by the number of auctions, giving a measurement of underlying demand for what is on offer. With Bidderman currently around one, i.e. an average of just one bidder per auction, you can see that there ain’t a lot of leftover bidders for the next home.

Lone Ranger Auctions – Single-bidder auctions are currently the most common type of auction, at one in three auctions. This is why buyers need to be on firm foundations in terms of price.

What those three stats tell us is that there is little group consensus on price right now, which makes it all too possible to overpay.  It also makes possible to miss a bargain. Sellers sometimes get prices too low as well.

Even professionals can get it wrong, as this personal story shows: I sold one of my own investment properties during the GFC. I’d bought a ripper little investment in Brighton, but it had put me out of my comfort zone and I decided to get rid of another investment home I’d owned for around 10 years at 13 Durrant Street, Brighton, Victoria. It failed to sell at auction (I wanted too much), I got the squeeze and despite everything I knew, because I was emotionally involved I let it go in the $800,000s a couple of months later. If I’d sold a year either side of that, either 2007 and 2009, it would have gone for more than $1 million. Shows how much easier and better it is to deal with others than your own.

The point is that this market is a great market to buy in if you have a longer-term view, have found the right home and you have a good plan, good strategies and good execution. But you can pay too much for a home in this market, and for most of us that doesn’t makes sense.

Mal James is principal of James Buyer Advocates, which advocates on behalf of buyers of property over $1 million. Mal writes weekly auction reports, advice and in-depth market analysis on James' website.

Mal James

Mal James

Mal James is principal of James Buyer Advocates, which advocates on behalf of buyers of property over $1 million.

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