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Many diligent investors like to research and seek out all kinds of portals and information sources. Not all of them are reliable.
Blogger: Cake Bakos, director, Cate Bakos Property
From Australian Bureau of Statistics data to online forums, the breadth of information available is often mind-boggling. Often, though, I find an illogical, outdated or outright incorrect piece of data can throw a clever investor’s strategy into disarray, so I’ve decided to write about my four least-liked methods for analysing a suburb, area or property.
The first is council valuations. Buyers often get caught up in their assessment of a property’s value when they rely on a council rates Capital Improved Valuation. Not to say that they aren’t sometimes correct – but in most cases, councils don’t update their data on a regular basis and, even when they do, no valuer walks through the property to assess it on its merits.
In most cases that I encounter, council rates notice valuations are significantly lower than one could expect the property to sell for. And let’s face it; when the council gets it wrong and assesses the property at a higher value, well – we let them know about it because it affects our rates.
The second often-unreliable data source is median house price data for any given suburb. Median literally means the mid-point piece of data. Not the average, not a weighted and adjusted figure, and not necessarily a figure which has had outliers removed from the data set. Median literally means the sale which falls at the half-way mark of the available data. It could be skewed if there are a greater number of lower or higher sales than the average sale figure. Or worse still, it could be very skewed if there are limited numbers of sales for that particular suburb in that timeframe.
It’s not uncommon to see a data bank report on a ‘top five capital growth suburb’ which is almost unknown and has a population of fewer than 1,000 people. This could be because someone sold a farm that month or a flurry of expensive holiday homes sold in the same month. Median house price data has to be understood before it is believed, and the number of data points being adequate to draw a trend-line is critical if the buyer is going to make assumptions.
The third – and often most dangerous unreliable data source – relates to reported growth and rental yields of townships which are supported by one main industry (or even one main employer). In the case of boom towns and/or mining towns, property developments will often follow a major project announcement and during the course of the initial construction phases, reports will feature in the media about the severe accommodation shortage, the crazy rental prices being achieved by some fortunate landlords and the out-of-control growth of the area. Developers and marketers who are exploring some new-found wealth will be more than happy to share the data and within a short period, their glossy full-page ads will be featuring in investor magazines and trade shows.
The data isn’t necessarily unreliable at the time, but it’s not always reliable longer-term. If a town is fuelled by one industry which could potentially slow down or leave the township altogether, then the viability of the area for medium- to long-term investing could be a big problem for unlucky investors who buy into a development before the industry scales back or collapses. Sadly, we’ve seen many cases of this in mining towns across Australia.
The final unreliable data source that I often warn clients about computer modelled estimates for property values. While the programs take in a great cross-section of data, they don’t always get it right and in many situations get it horribly wrong. I’ve seen buyers go to auction with unrealistic budgets and expectations based on what an online portal ‘predicted’. The program hasn’t taken into account the quality, finish, style or even recent renovations to the home. How would it know if the three-bedroom house on a 350 sq m inner-ring suburb is a knock-down or an intricately renovated period property? It wouldn’t. So when a buyer asks a portal to determine what they should pay for a property, they shouldn’t.
The best methods adopted are those which qualified valuers use when they physically walk through a property. But, failing paying a valuer to assist, a buyer should familiarise themselves with recent comparable sales in the area. As a starting point it’s far more sensible than leaving it up to an online program.
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