VERONICA'S BLOG: Go behind the scenes of Episode 7 with this expert advice about a buyers market from host, Veroncia Morgan.
What Sort of Property Drops the Most Value in a Buyer's Market?
Contrary to popular belief, not all property prices go down when the market drops. In every area there are certain types of homes that seem to attract interest regardless of the market conditions at the time and may even increase in value while those around it will see price reductions. We estimate that these would comprise 10% of the market at best. The bulk of real estate will be affected by a market downturn, so where are the best bargains to be had?
Unrenovated properties are where you can often see the most marked price drops when the market slows down. In a sellers market buyers can see an unrenovated house as an opportunity to get into an area that they are otherwise priced out of. For this reason these are often hotly contested and end up selling for more than they should if the cost of the renovations was factored in.
In a buyers market, house hunters don't feel the same panic about getting onto the property ladder and will usually have a lot more choice in available listings. The idea of putting your own stamp on a home loses its appeal when there are more affordable renovated options to consider. For this reason, unrenovated properties start to languish and take a lot longer to sell as buyers no longer wish to compete for them. Right now they are generally offering much greater value and the buyer is in the box seat when it comes to negotiating.
The other type of property that really suffers in a soft market is the one that sold for too much in a hot market. In a sellers market nearly every property generates competition. So buyers end up competing for good and bad properties alike. When the market flattens we see that quality property often still attracts competition while lesser homes take longer to sell and those that do sell tend to be very price driven. Thus, inferior properties that sold for too much in the first place can dramatically fall in value if offered again for sale in a buyers market. But beware. Just because someone once paid too much, this does not now make this a bargain.
While we may recommend buying an unrenovated house in a slow market, we are unlikely to encourage buyers to pursue an inferior property that is offered at a low price unless there are some simple fixes to turn the sow's ear into a silk purse. We believe that property "bargains" are almost non existent as the secret to buying well is to identify a piece of real estate with characteristics that have a level of scarcity and are desirable to buyers under all market conditions.
Two of the properties we showed Jenny & Peter in West Hobart had last sold about a year earlier. The pretty white double-fronted weatherboard on the level block of land had a lot of these desirable characteristics and was certainly generating interest from other buyers and the owners had rejected offers that were slightly above the price they for it. The street appeal, period features, neighbourhood, aspect, views and large land all combined to make this a very desirable property. However, it was only partially renovated, with the most difficult and costly part of the project not even started. So buyers held back, preferring to reserve their money for properties requiring less work.
How to Give Yourself the Best Opportunity for Capital Growth in a Flat Market
In order for a property to grow in value you need to get it for the right price and then it needs to attract interest from buyers when you go to sell it. The secret to capital growth, then, is to identify a property with the characteristics (or the potential) to generate this interest in the future.
The first rule is don't pay too much in the first place! So don't fall in love with a property and let good judgement fly out the window. Do your research so that you can understand property values in your chosen area and make sure you pay no more than a fair price. The thing to remember in a buyers market is that there will continue to be opportunities until the market heats up again.
The second rule is to be very selective with the property that you buy and do not let the idea of a "bargain" cloud your vision. Most bargains are heavily discounted because nobody wants them. And nobody wants them because they are sub-standard so getting them at a low price is really a false economy as their rate of capital growth will be lower than that of superior properties. There is a difference a bargain and being opportunistic, however, and being opportunistic requires fast action, as opposed to a bargain, which has probably sat on the market for some time.
Keep in an accessible price bracket. Find out the median price for the area you are looking to buy in and aim to spend a maximum of 10% over that figure. This way you will ensure that the property you buy will be in the more affordable price bracket when it comes your time to sell. (Unless, of course, you are preparing to do major renovations.). There are more buyers with a budget around the median price range than there are in the top 30th percentile, therefore there is more chance for competition. And it is buyer demand that ultimately drives up prices.
Choose a prime, proven location. You can usually improve a property but you can't fix a poor location. A desirable street will always attract buyers. So this is the safest way to give you the best chance for capital growth.
If you have a long term plan you can try to pick an up and coming area. This is a riskier strategy, however, because there are no guarantees. Wooloomooloo and Waterloo, for example, are both in an extremely convenient inner city location and bordered by some prime suburbs. Surely they would have to be the next hot spot! However there is a crime element in both suburbs and big things would need to happen in terms of the social mix before the balance is likely to change. But if it does change, you can expect values in these areas to rocket.
Choose the type of property that will appeal to the largest group of buyers. For example, young professionals love the buzz in inner city areas like Surry Hills and family buyers prefer a quieter existence and larger land size in areas like Haberfield. So buy a property that is appropriate to the dominant buyer in the area.
Stay away from high rental yield properties with limited capital growth prospects, like student accommodation. Any property that has a limited market is going to have limited capital growth opportunities. The best option is to go for a property that appeals to owner occupies and investors alike.
Don't overcapitalise on renovations. But do make sure you renovate to the required standard in your suburb. Get out and about and see what sort of finishes buyers like. If laminate kitchen benches are the norm, don't waste money on stone. Conversely if top brand kitchen appliances are a must, don't scrimp and go no-name. The trick is to keep your personality out of the equation, keep it neutral (without being bland) so as to appeal to the widest group of buyers.
Finally, don't rush your purchase. Time is on your side in a buyers market. If a vendor has unrealistic price expectations, ride it out and wait until they are read to accept what the property is worth. Maybe you will get it for even less as the longer their property sits on the market the more the perceived value drops in buyers' minds. If the property you are looking at falls short of your criteria, don't feel pressured to make compromises. You can afford to wait for a better property.