Way back in 2003, the Sydney property market was a hot market….red hot actually. I was a selling agent back then and in April I listed a little weatherboard cottage in Lilyfield for a May auction. We didn’t yet know it but we were very near the peak of the market, which hit only a few months later in September.
While the house was cute, nicely renovated with parking, it had a tiny living area and a layout that didn’t make it particularly family friendly.
Yet frenzied buyers did not seem to even notice.The auction ran and ran and ran.For panicked buyers you need to be well prepared, whether buying at auction or prior. Click To Tweet
At one point I had to turn away from the bidders to conceal the silly grin I had on my face. It ran way past reserve and I simply couldn’t believe that these buyers weren’t stopping!
I have seen this scenario happen again in recent times. But it doesn’t happen all the time.
The house sold at auction for $865K, if my memory serves me correctly, that was close to $100K over reserve.
The first big lesson in this story for today’s panicked buyers is that if you are well prepared and know the value of a property before you head to auction, you won’t be one of the buyers drawn into such a battle. And you won’t be one of those homeowners who live to regret the day you bought it.
Only a few years later the young couple who paid the astronomical price were offered a job transfer to another state. So they decided to sell. Which wasn’t such good news for me as they wanted me to sell it for more than they bought it for. Not only had they paid a whopping premium but the market had since shifted in the buyers’ favour.
So we took it to auction on the 19th February 2005, at a time of year when there is usually a stock shortage (to increase their chances of buyer competition), and got no bids. The owners by this stage realised they weren’t going to recoup their costs but were still hopeful of recovering their purchase price and it was listed for sale at $879,000 and continued to get no interest from buyers.
My poor vendors decided to rent it out for six months and put it back on the market in spring. In October 2005 they listed it with one of my colleagues (I guess they felt I had done too good a job selling it to them and was not good enough at selling it for them) for $839,000, then $819,000, then $799,000. And still no offers. Interestingly enough, all the buyers kept complaining about the small living area and the floorplan that was not ideal if you had little kids.
And these were the negatives that nobody seemed to notice when it was a hot market.
And this is the second big lesson for today’s property buyers. Do not overlook the negatives that cannot be easily fixed. The negative characteristics of the property will remain and will devalue it when the market returns to normal. If you are going to pay a premium for a property, make sure it is a premium property!
Eventually, our demoralized owners took their house off the market and decided to rent it out again for a while. And the rent was only $650 per week, unlikely to cover the mortgage.
Two years later (four years after they bought it), the market started showing signs of recovery and they relisted their house with a different agent and an auction date of 2nd June 2007. This agent got a decent offer prior to the auction and these battle-scarred vendors sold it in May 2007 for $826,000, almost $40K less than they paid for it. Add in stamp duty, marketing costs, agents fees and they would have been out of pocket at least another $70K plus the shortfall between the rental income and their mortgage repayments. That’s a minimum cost of $110K, not taking into account their personal stress and the fact they were not free to buy a new home in their new city. That’s a big penalty for paying too much for a property in a heated market.
And it’s not just the dollar value that is lost but the time your life is on hold while you wait for the next boom to return what you have spent.
Now, to illustrate that not everybody lost money in that time, there was another cute weatherboard house in Lilyfield that sold in June 2003 for $715K and resold in April 2007 (without any renovations to increase the value) for $795K. So while some people paid too much in the peak and lost money, the owners of this second house also bought in the peak but avoided paying too much, then managed a capital growth of 11.2% in a flat market.
The moral of this story is by being careful you can still buy well in a hot market. Be selective in choosing a property without negatives that you cannot fix. Do your research and know the value of the property before you enter into negotiations or go to auction.
Published:- 2o February 2014
Please note: Good Deeds buyers tips are intended to be of a general nature. Please contact us for advice that is specific to your individual circumstances. You may also need to get advice from other professionals such as an accountant, mortgage broker, financial planner or solicitor.