Eight property rules broken by The Block

Mal JamesAugust 28, 20110 min read

As we look back on 2011, Property Observer is republishing some of our most noteworthy stories of the year.

 

The Block was great entertainment – but for me it was also the best reality TV show in a decade because it showed the harsh reality of what happens when you break all the rules in the property investment book.

I took the opportunity to go through each property a few weeks before the auctions and assessed them according to our James Home Ratings criteria.

What stood out most, apart from the fact that it was a hugely popular show, was how many rules were broken. Breaking those rules led, almost inevitably, to the end result, where only one of the properties sold at auction. The three other houses have since been sold.

Sorry guys, but this was always a disaster in the making. For us though, as viewers, it was an  invaluable lesson in how not to make money through property.

So what did we learn from the show?

Rule No. 1: You make your money when you buy.

If you’re buying as an investment and are hoping to make a profit on the resale, what really matters is not the selling price but how much you pay for the property.

OK, we understand that Channel Nine was more interested in the show’s ratings than the profit it would make on reselling the properties. But the price paid for the initial properties was way too much. Sure, it was a big block, and it had four houses on it, but at an average of about $900,000 per site, plus stamp duties of about $50,000 each, plus holding costs of 6% (another $50,000-plus each), plus the selling-agent fees … Well each home was priced at well over a $1 million before the first contestant even showed up and the first nail was hammered.

Rule No. 2: Buy the best position you can.

This for me was the real killer – the position was a shocker. Yes, the properties are close to all amenities but anything in Richmond is close to all amenities. Have you been down that street at night? It’s scary. Stand in the street or look on Google streetview and do a 360-degree turn – what do you see? Industrial sites, multistorey car parks. And who knows what is going there in the future? What if it’s a panel-beater’s shop and you have the smell of paint thinner in the morning?

There’s a vacant block of land to the west of No. 37 that has recently changed hands for just over $1 million: who knows what will go in there?

Rule No. 3: Consider your target market – before you start!

The properties themselves had some real positives in terms of the land. The northern orientation will bring light and winter warmth into those back living areas. So sure, that’s a tick. They all had good street appeal (tick) and the block widths were above average for the area, meaning the houses could give that feeling of space, which is very important in a home (tick).

However, they all had another huge negative: there was no car parking. Which means that future buyers or renters have to park their cars on the street. So that is going to knock single women,

young married couples, and older couples out of your target market. In fact, just about anybody except students and local lads would have concerns about living here.

Rule No. 4: Don’t overcapitalise.

If you are about to spend $1 million or so even before one sod of earth is turned or one nail is hammered and you want to make a profit, you need to know whether you’re likely to recoup the costs of your renovation – and hopefully more. Otherwise you’re going to end up overcapitalising.

How can you work that out? Well, look around you. What sales evidence was there in The Block area for $1.5 million homes? Zippo. We can tell you this because coincidentally on the same day of The

Block auction we bought a property at auction for a client in Richmond only a few hundred metres away. It was on bigger land, it had car parking and good period features – and we got it for just over $1.2 million. So if $1.5 million is the minimum amount you need to make serious money, but there is little or no sales evidence of properties selling for that amount in the area, don’t buy.

Rule No. 5: Amateurs don’t make money on renos – they make money because they are lucky that the market happens to be in an upwards phase.

Whenever someone tells me they made money on a renovation, I think, well, no, you didn’t. You made money by buying the right house in the first place. They would have made the same, and maybe even more, by doing nothing. It’s the market that makes you money. If the market is not in your favour, most amateur renovators lose money, and The Block confirmed this. The bloke with the vacant block at 35 Cameron Street, Richmond, made more money than all the renovators combined by doing little.

Rule No. 6: Don’t think short term with property unless you like excessive risk.

The Block also highlighted the risks of short-term flipping. Besides the fundamental error in the initial choice, the market was also unkind to the contestants. Which again highlights the short-term risks in property. To buy this year, tart up and flip next year is a strategy fraught with danger and can cost you a packet. Each of these houses lost at least $200,000 if you factor in all costs – and probably lost more.

Rule No. 7: Choose local selling agents who are experienced at your price range – and choose ones who can deal outside the auction process.

The four auctioneers chosen to sell properties are all very good. But it was interesting to note that the only house that sold under the hammer was through a local agent, Russell Cambridge. He is a good operator, as is his partner Sam Davenport, who got the buyers there.

Glen Coutinho is a really good auctioneer but his patch is Hawthorn, which is a different market to Richmond; however, he sold his house at reserve almost immediately afterwards. Well done.

Ruth Roberts is a top auctioneer but better known in Carnegie, however post-auction she got the best house away for $1 million, which is about the right money – well done – $1 million in Richmond in this market with no car park is excellent.

Clayton Smith, a strong local agent, was always up against it having to market the weakest house in terms of floor plan. However, to get $922,000 post-auction for a single-fronter proved two things: he knew more than many of us; and he fought hard for (in our opinion) the best result.

Rule No. 8: Substance v. puffery.

TVs, colours, furniture etc come and go. If you view our online ratings you will notice that we give one point out of 1000 for stuff such as cabling and shower screens. The other 999 points are for land, position and floor plan. And if you’ve learnt one thing from The Block, hopefully it’s that it is the price, property, and positional fundamentals that really count. On all three counts the contestants were doomed even before they started.

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.

This article originally appeared in The Weekly Review.

For expert commentary and analysis on lessons to be learnt from property reality TV, download our e-book Lights, Camera, Auction!

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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