How to find property bargains and not ‘lemons’ in the current market

While the property market appears to be again heading upwards, the improvement has been modest to date and uneven, creating opportunities for savvy investors and homebuyers.

“Overall, there are still plenty of bargains to be found in this market though we remind buyers that it is important to do proper due diligence prior to pricing negotiations by either getting research or getting a valuer to come in and provide a valuation. Doing this will help find real opportunities and help avoid the lemons,” says SQM Research managing director Louis Christopher.

Not that finding bargains is easy.

“The only thing that has changed [in the last couple of years] is it’s just got harder to find and secure great properties at great prices and I don't see that changing for a while given the demand,” says Patrick Bright, a buyers' agent and director of EPS Property Search.

“In the last couple of years I have never had so many people from interstate wanting to buy in Sydney,” he says.

Bright says reasons for investing in Sydney vary, but are generally along the lines of "compared to the other capitals it currently looks to be very good value”.

In June 2011, Louis Christopher and Patrick Bright provided seven tips for securing bargains and not lemons. Two years have passed, the market trajectory has changed and we've revisited them:

1. Only fools rush in: “Look now, don’t rush,” Christopher suggested in 2011. “The only trouble in trying to theoretically work out whether you have a bargain is that it may be a bigger bargain tomorrow because the market continues to fall."

June 2013 update: “I always believe that one should not rush on a decision to buy a property, even in a rising market even if it means risking losing the property to another buyer. By all means, efficiently to your due diligence and do not bluff a vendor/agent by not retuning phone calls etc as they may take you too seriously and sell it to the next buyer," says Christopher.

“In a rising market it really is very important to properly investigate fair value and not be pressured into purchasing over valued property.”

2. Time it right: The best time to buy is at the bottom of a market trough, just before prices start to rise again. But as Christopher rightly points out in 2011: “No one rings a bell at the bottom of the market.”

However, that does not mean it is impossible to know when the right time is to buy. “Potentially, there could be bargains towards the end of this year [if most national markets have stopped falling by then],” Christopher says.

Buyers should study the market closely now to be ready to buy when the time is right and they have found the right property to suit their needs.

June 2013 update: “As it turned out, the end of 2011 was very close to the bottom of the market. We place the bottom at the third quarter of 2012. And as discussed frequently, this recovery is a modest to moderate recovery. Prices have not yet ‘surged’ ahead. Yet the outlook is far more positive then what is was when this story was originally written. I believe that in terms of timing, the current climate does present some very good opportunities for buyers." 

3. Be especially wary in over-priced areas: Darwin is “massively over-valued,” according to SQM, and properties in south-east Queensland and Perth are selling for far more than they should. Christopher said in 2011 that housing markets in these and other over-valued regions will remain sluggish or will continue to correct. If interest rates rise again this year, that could cause prices to fall further.

June 2013 update: “As it turned out south-east Queensland did continue to fall, while Perth bottomed out sooner than expected on the back of interest rate cuts. Fortunately there were no rate increases in 2011, rather the RBA saw the light of day and cut, thereby saving the market from deeper falls than what actually took place. 

4. Everything is harder in Sydney – but that does not mean impossible: Sydney prices are rising, making bargains even more difficult to find. “In the next three years, I am not expecting any dramatic falls in Sydney,” Christopher said in 2011.

But that does not mean it is impossible to buy in Sydney. There are fewer bargains than in other capitals, but there is also much less risk that the price of an apparent bargain will fall after purchase – provided that you buy into a sought-after suburb.

June 2013 update – “Sydney is now recording a more robust recovery than most other cities. I would place the annualised growth rate now at between 5% and 9%. That’s what I think the pace is, though it varies depending on the location.

“For example the northern beaches are not doing as well, while eastern suburbs and lower north shore are doing better. As a result, it is becoming increasing difficult to find genuine bargains. Rather, the main goal should be (as it always should be) to buy property that is at fair value. I believe Sydney will keep rising for the foreseeable future,” he says.

Patrick Bright says his comments on Sydney remain unchanged.

In 2011, he wrote: “When a market is on the move, what someone paid for a very similar property a month or two ago can look like a bargain.

Bright says most deals that seem too good to be true usually are. He warns that buyers of properties with “something that’s not good about them” will either have to fix the fault or flaw or will have to sell the property at below market rates for the area.

However, some properties are listed at below market value because owners had initially asked too much and have cut the price out of desperation to sell.

What types of properties should savvy Sydney bargain-hunters look out for? “Stick to the inner ring, three to 15 kilometres from the CBD,” Bright says. He says buyers should look for properties close to beaches or those with harbour views.

“Correct property selection for the particular suburb is critical,” says Bright, “if you want to achieve a better-than-average return.”

5. Watch for desperate vendors: Christopher says some vendors in areas with falling prices become desperate to sell and lower their prices below market rates.

June 2013 update – “This is still the case now, though there are fewer areas in this situation around the country. Canberra is one city though where I believe we might see some keen selling.”

6. Look for properties on the market a long time: Prices will sometimes fall on properties that have been on the market for more than two months.

Marketing of these properties often follows a pattern: vendors start off asking too much; agents lose interest, sometimes even warning prospective buyers that the house is overpriced and the vendor is difficult; vendors become desperate to sell; vendors cut the price heavily, sometimes below market value.

June 2013 update: “This is still the case in a rising market. Indeed many vendors can get a little too confident in recoveries thereby asking way above the market for their property. Even more so today, buyers are very conscious of an overpriced property and will walk away despite overall rising prices. This of course can still really damage a selling campaign leaving the vendor in precisely the same situation mentioned above," says Christopher. 

7. Monitor housing supply levels: When the supply of housing is rising sharply, buyers are in a much stronger position to negotiate for good deals.

According to figures compiled by SQM Research, the number of listings in Australia rose by more than 40% last year. Sydney had the lowest rise in housing supply, at 19.5%. 

June 2013 update: “As published by Property Observer, SQM’s index of total listings peaked last year, though we note they for the majority of cities, listings are still elevated meaning there is plenty of existing stock to choose from, though noted we agree with the sentiment that there appears to be fewer new listing entering into the market," says Christopher.

“At this stage I judge that buyers are in not as good a position to negotiate as where they were back in 2011 yet they have not lost complete power.”