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Step-by-step guide: How to buy well in softening markets

Downward trend, softening markets, arrow down, step-by-step guide

Step-by-step guide: How to buy well in softening markets

by Bianca Dabu | 26 June 2018
buying
1 minute read

Step-by-step guide: How to buy well in softening markets

June 26, 2018

Real estate adviser and auctioneer Tom Panos said that, except for a select few like Hobart, Australian property markets are generally following a downward trend. How can investors find and maximise opportunities in these softening markets?

Property buyers are among those who can enjoy the benefits of this trend as there are more chances to purchase at discount levels.

On the other hand, a lot of real estate agents are concerned because of the apparent shift in investor activity. Investors no longer have the fear of missing out — a strategy that has once worked for agents looking to fast-track transactions.

Mr Panos explained: “When you go into a negotiation, you normally have two to three people as an agent to play against each other to get a deal. You're using buyer competition and buyer frenzy in many instances, particularly in Sydney and Melbourne. That's gone now.”

However, good agents are far from worried, he said. Not only do they understand that market movements are particularly unpredictable, but they accept this reality and work around the circumstances, so they can give the best possible results to their clients.

These agents — “the dealmakers, not the order takers” — are the ones that investors should be seeking, especially if they plan to invest in markets that aren’t exactly in the middle of a property boom, according to the real estate adviser.

He said: “What investors need is a real estate agent that's got the ability to get the vendor to accept the reality of the marketplace and commit even though there's another 10 properties that they can buy. That's a special skill set, Phil. Not every real estate agent can do that.”

“If you've been a real estate agent that was brought up in an era where all you had to do was put the keys in the door, open the door, say to buyers, ‘If you like it, let me know,’ you're going to struggle now because this marketplace needs dealmakers, not order takers,” he highlighted.

The buying process

Aside from engaging reliable agents, Mr Panos strongly encouraged investors to learn how to do their own due diligence and ultimately pick the right properties for themselves.

Less competition and lower prices do not necessarily mean an easier time for both agents and investors. In fact, softening markets present unique challenges, which is why extra measures must be taken to ensure a worthwhile purchase.

Aside from knowing the basic fundamentals of property investment, including price and location, Mr Panos shares five other secrets that smart buyers and good agents use to strike good deals, even in softening markets:

1. Gain ‘super product knowledge’

Knowledge is power in softening markets, according to the real estate adviser. There will be a ton of conflicting advice that you will receive throughout the process, and it’s up to you to filter them and determine the best decision to make.

Mr Panos recommended starting with research on comparable properties in the area, as well as the level of sales in a variety of markets over the past 15 to 30 days. You can get these by contacting the local council or engaging a local agent.

With these data, you can start identifying ‘reference points’ that drive sales and make comparisons from different markets. This wide-reaching research is deemed necessary due to the higher frequency of unpredictable movements in the whole property landscape, Mr Panos said.

He explained: “The market now appears to be changing on a weekly basis. You're seeing clearance rates go down weekly.”

Clearance rates have to be one of the most deceptive indicators of property at the moment. People don't realise that when they read a clearance rate on a Sunday in the media, it does not include non-collectibles or the properties that data analysts could not collect off an agent

“Why haven't they been able to collect it? They couldn't get onto the agent or the agent wouldn’t give them the information. If there’s 30 per cent of properties that are uncollectible, which is quite normal in Sydney, Melbourne and Brisbane, you’re basically having 30 per cent of properties not reported. Most of those may not have been sold yet,” the real estate adviser added.

Essentially, Mr Panos recommended that you strive to become the “Google of the marketplace” by constantly doing research and being in touch with the right professionals to gather and collate as many credible information as you could.

2. Secure financing

After doing your research, it’s time to sort out your finances, Mr Panos said. Property investment is one of the biggest financial commitments you will ever make, and a lack of preparation could derail your wealth-creation journey.

This step basically requires you having a clear and complete documentation of your finances, which banks will use to determine whether your serviceability is enough to afford you a home loan.

Mr Panos advised investors to be thorough when establishing their financial plan, especially since the current state of the markets has led to stricter lending regulations across states and territories.

According to him: “I've got clients right now who have deals in Melbourne and in Sydney and they are struggling to get financing with a week to settlement because banks are saying, ‘We're not so sure on that anymore.’ That wasn't happening before.”

“Now, they’re saying, ‘We want you to document and provide for us your living expenses. We don't want you just to tell us what they are, we want to see evidence of those.’ Some people are filling out 35-page documents now to get standard $400,000 loans,” he added.

Before jumping into a purchase, make sure that you have the capacity to deal with financing — from the costs of buying to the costs of holding and improving the property over time.

By being confident in your ability to finance a property, you can also establish a clear standard for the real estate asset that you want to purchase and even take control of the transaction in some cases.

Mr Panos explained: “You can tell the agent, ‘I know you want $600,000 for this property, but if you can wrap this up for me for $520,000, I'm giving you a 10 per cent deposit in the next two hours unconditionally. Take that cheque to your owners.’ There's a few owners that are in pain at the moment and they need to sell.”

“You can't have that conversation unless you've got unconditional finance from your bank broker,” the real estate adviser highlighted.

3. Keep in touch with the best agents

The first two steps may already sound complicated for some investors. Luckily, there are real estate agents who will not only assist you but also open up more investment opportunities for you, Mr Panos said.

According to him, being in the ‘little black book of agents’ will basically give you access to supply that may otherwise be unknown to you if you haven’t engaged a good local agent.

He highlighted: “You want to have a relationship with agents that give you access to off-market transactions. These are the ones that don't hit Domain or realestate.com.au. Agents list them and think, ‘I'm going back to these buyers that I've already got and introduce them to the property before anyone else.’ These properties get sold as off-market transactions.”

How do you establish a good enough relationship with agents to know about these off-market opportunities?

Very simply, according to Mr Panos, “Establish trust with the real estate agent.”

4. Make decisions logically

As you near the point of making the final purchasing decision, remember that property investment is a journey that must be ruled by logic instead of emotions.

This reminder applies to all investors, regardless of market movements, but it does become more critical if the market is following a downward trend, Mr Panos said.

He explained: “Imagine looking at six properties in a suburb, then you meet a great real estate agent that says, ‘I've got this property that’s only like three minutes away from where you want to buy and this thing is just extraordinary value. Have a look at it, but just so you know, you're going to have to do a deal in an hour.’”

“What happens is you look at it and you emotionally fall in love with it. It’s only three weeks later, when it’s too late and you've done a deal, that you realise that, while it’s only three minutes away, you actually bought in an area that's got a price differential of around 20 per cent,” according to him.

No matter what, “logic over emotions” will always be one of the golden rules of property investment, the real estate adviser highlighted.

5. Fight fear and greed

Finally, after you have done all the due diligence necessary to prepare for your property purchase, go out there and finalise the deal instead of waiting, Mr Panos advised.

It could be a little more stressful to buy in a softening market because of the higher level of risks it entails compared to investing in markets that are going up. Moreover, there’s an inherent desire in people to want to save a dollar than to win a dollar, according to the real estate adviser.

When faced with an option to buy an $800,000-asset that might go down to $700,000 due to the downward movement of the market, most people tend to think forward and say, ‘I will lose $100,000 with this property.’ They will then opt to wait until the market reaches the bottom, thinking ‘There’s no other way to go from here than up, right?’

While this mindset makes sense, Mr Panos said that it’s not the best way to look at investment opportunities in softening markets.

Instead of thinking about what you could lose, he recommended focusing on the money you can save — the $800,000-property could have cost you another $50,000 to $100,000 six months ago — as well as the growth you can achieve by entering the market sooner.

This “property investor mindset” tells you that while the value of the asset may go down by five to 10 per cent, you can weather the small storm, because you’re entering a long-term commitment. Over a 10-year period, you would have recovered the loss through cash flow and capital growth.

According to the real estate adviser: “That is a better strategy than waiting until the market has bottomed and going in. Not only will it be too late because the only way you know that the market's bottomed is when it's gone up, but you'll have less to pick from so you end up not getting your ideal property.

At the end of the day, it’s better to take advantage of the lack of competition and the decrease in prices when the market is going down, rather than having to fight over properties with other previously frightened investors who, like you, thought to wait until the market has bottomed.

After all, as many seasoned investors and property experts believe, investing in property is all about the “time in the market” rather than “timing the market”.

Tune in to Tom Panos’ episode on The Smart Property Investment Show to find out how investors can capitalise on opportunities in downward markets.

 

Step-by-step guide: How to buy well in softening markets
Downward trend, softening markets, arrow down, step-by-step guide
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Bianca Dabu

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