You should never pay too much for a property, but investors continually fall into the same traps.
Blogger: Oliver Stier, director, OH Property Group
It seems inconceivable that people would pay more than they should or need to when acquiring a property. Yet, in my line of work as a buyer’s agent, I see it all the time and have some interesting observations about the profile of people who have a tendency to overpay.
Reliance on price guides
Many buyers make offers based on what the selling agents quote or what the vendors supposedly want rather than based on their own informed research. This could be due to lack of time to conduct thorough research or simply by misplacing their trust in the agents whose legal obligation is to represent the seller’s best interests.
In a hot market and in areas where agents may underquote to attract viewers, many buyers simply ‘mark-up’ on top of the agent’s price guide and assume if they add 10-15 per cent margin, then they are paying a fair price. This is a silly way to appraise the worth of a property and you risk overpaying by blindly marking-up.
Price guides are known to be notoriously unreliable. That is why, as a buyer's agent, I practically ignore any price guide given by the agent and I assess the worth of the property independently with my own data sources and based on my own market knowledge.
Apples v oranges
The real estate market is not homogenous and prices can very significantly from one suburb to the next. Many buyers cast a wide net when searching and can easily make the mistake of comparing apples to oranges. For example, a buyer may have searched for months in Pymble and then by an off-chance inspect a property in North Ryde. This buyer may then use the price points of properties they have inspected in Pymble to form the basis of their appraisal of what the property in North Ryde may be worth. You risk overpaying when you do not have sufficient knowledge of prices in each respective suburb.
Some buyers just take too long in their search for a property and the market may have shifted in this period. If it takes a buyer 12 to 24 months of searching on and off, they may not be comparing prices accurately.
Then, of course, there are buyers who get caught up in the moment and become too emotionally attached to the property. It is good to keep in mind that there is always another good property around the corner if you miss out. This will keep you level-headed in negotiations or auctions.
People who have time constraints are often also under pressure to buy quickly and this can lead to paying a premium. This is why real estate agents usually love to see pregnant women come through Open Inspections! Likewise for buyers who may have sold and need to buy urgently to avoid having to rent, or expatriates who are returning to the city and trying to get established in time for the school term.
Another group of buyers that tends to overpay are those who may have narrowly missed out in past negotiations or auctions and have become frustrated. The more properties they have missed out on, the higher the likelihood they will overpay next time around.
Not surprisingly, in my experience, prestige property buyers (north of $3 million) tend to overpay the most frequently and by the largest dollar amount. This can be attributed to a few factors. The first is often the lack of comparable recent sales information. Very few properties may have sold in a given street, the level of finishes varies greatly, or the property is just so different from neighbouring ones (e.g. views, aspect, private mooring for boat, etc.) that it becomes difficult to assess an accurate value. Hence a lot of premium properties are sold on the strength of emotional appeal or perceived prestige, making the buyers particularly susceptible to overpaying.
Another reason why prestige property buyers often overpay is because they tend to negotiate in large increments because they can afford to. For example, people buying an $800,000 property may negotiate or bid at auction in increments of $5,000 to $10,000. However, people buying properties in the $3 million-plus range may do so in increments of $100,000 to $500,000. When they do eventually purchase, chances are they would have overpaid by a bit.
As an example, we once lost a property to another buyer who paid much more than he needed to. Based on our appraisal, our client’s offer was $5.4 million and we were on the verge of exchanging contract. Another buyer then made a last-minute offer to acquire the property and he offered $6.1 million off-the-bat. In other words, this buyer offered $700,000 more than what the vendors were prepared to accept and without any real competition (apart from our clients, who would not have gone much higher than they already offered).
A lot of prestige property buyers may also be based overseas and simply lack the time or knowledge to fully understand property values in the area.
Where most buyers struggle is in interpreting the subtle difference between paying a fair market price (which may well be a premium price) for a property that is in high demand, versus simply overpaying when there is no reason to.
If in doubt, contact a buyer's agent who can help you maintain objectivity and perspective in the negotiation and purchase process.
About the Blogger
Oliver J. Stier is the Director of OH Property Group, a leading Sydney buyers agency. He studied Quantitative Economics and Finance at Cambridge University (UK), University of Toronto (Canada) and Princeton University (USA). In addition to being a licensed real estate agent, Oliver also holds the Chartered Financial Analyst (CFA) designation.