The secrets of due diligence, valuations and negotiations

There are plenty of properties out there, but not all properties are investment-grade properties, writes Lloyd Edge.

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In fact, at any one time there can be up to 700,000 listings of properties for sale in Australia and less than 5 per cent of those I would classify as investment grade, which means there are only roughly about 35,000 properties that I would consider for investment purposes which we have to find before starting to do any due diligence on the properties!

This is why it is important to go into property negotiations with the mindset of a professional buyer, which can ultimately be broken down into two stages:

Stage 1: Performing the right due diligence and valuation on the property; and

Stage 2: Negotiating right.


Due diligence and valuations

I see many of my clients get bogged down in the details of the data from online research, which will only result in “analysis paralysis” because there are so many contradicting statistics and data out there which, is easily accessible to anyone through a Google search.

This day and age, it seems like everyone has an opinion on the property markets, and it is important to be able to differentiate between the facts and opinions.

When performing due diligence on a potential property purchase and when determining your valuation of a property, it is important to decipher whether the data you are looking at is both relevant and reliable.

Relevancy: How relevant is the data?

My number one tip is to ensure you check the data’s relevancy. By this I mean, check how old the data or statistic is, is it still relevant in today’s market? The property market is constantly changing, so it is important to check the date that the data was published and anything that is more than three months old is probably now irrelevant.

However, this rule does not always apply. For example, when looking at short-term growth statistics or market data (such as vacancy rates, growth charts, etc.) than the three-month rule should apply because the market changes on seasonality however, the three-month data rule would not apply when you are looking at demographic statistics (such as employment factors, residency age, average income, etc.).

It also would not apply when researching government spending on infrastructure and projects such as road upgrades, schools and hospitals, because this sort of information will not change significantly over a three-month period.

Reliability: How reliable is the data?

I see so many people come to me with their own opinion of the property’s value and fear that it is overvalued and that they will be paying too much for a property, however when I look closer at their determination they have looked at data that is not from a reliable source.

Property data sources that can be classified as reliable are RP Data, CoreLogic, Bureau of Statics, DFAT, government sources, SQM research, or actual area statistics (e.g. clearance rates) often published in property magazines and newspapers. This is because the data is reviewed by qualified property strategists, relies on actual results and data, or comes from a statistician or government source.

Data that we classify as unreliable, is data which comes from a source which can be influenced by emotions, personal opinions, published by unqualified persons, or even someone within the industry but doesn’t have the adequate experience or qualifications to be providing the advice (an example would be a mortgage broker providing property investment advice, or perhaps a conveyancer providing mortgage advice.)

We also suggest taking advice from family and friends “with a grain of salt”. Meaning that your friends and family will provide you their opinion because they care about your investing endeavours, however they are (usually) not trained professionals to be providing that advice.

How does a buyer’s agent value a property?

To value a property I only look at “hard statistics” such as real data and historical statistics to determine a property’s true value.

To value a property, you need to see what similar properties are selling for in the area that are similar quality, similar size and in a comparable location. But this is not the only thing to consider.

A property’s future value needs to also be considered to determine whether it can be classified as investment grade.

Typically, I look at population growth, economic growth, real demand and supply, vacancy rates, local economy and industry, and growth drivers.

Other reliable measures I will consider are guaranteed government spending, infrastructure plans, and approved construction and major projects in the area.

So now you’ve found the property you’d like to purchase, you need to ensure that you negotiate right, and not fall for any real estate sales agents’ typical sales tricks which they use to try to get you to pay your maximum price for the property.

How to negotiate like a buyer’s agent

Negotiation all comes down to a strategy, and a buyer’s agent is experienced in negotiation (we have seen all the tricks in the book!).

Negotiation strategies will vary between buyer’s agents and will even vary depending on the individual property.

The area the property is located in, how long it’s been on the market, whether you have had previous experienced with the real estate agent, how popular the property is, whether the property is listed for sale through private treaty or through an auction campaign will all influence my negotiation strategy.

My top tip for novice investors is to try to find out the motivation of the vendors and whether there are any particular things other than price that would persuade them to accept an offer (an example would be if they need a quick settlement period).

When it comes to negotiation, you need to always be one step ahead. Before you place an offer, think about what their counter-offer is likely to be and how you would respond to it. This will keep you ahead of the game and prepared for whatever happens next.

Be realistic with your offers

One common mistake I see with first-time buyers is that they think they can get an absolute bargain and so they try to be smart and offer way too low for a property which means they miss out on a really good property because someone else has come in with a sensible offer which is accepted before they are even given a chance for a counter-offer!

Placing an offer too low can make you look inexperienced, ill-informed about the property, and not serious about purchasing which will only damage your chances to purchase the property and also any future dealings with that same sales agent.

This is why it is crucial that you are realistic with your offers.

If you’ve done your due diligence on the current and future value of the property then you can confidently place an offer that you know is realistic.

By Lloyd Edge, director and founder of Aus Property Professionals and author of new book ‘Positively Geared’.

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