What are the risks of buying a bargain?

Is there such thing as buying a bargain when it comes to property? Some experts are fond of saying you make money when you buy, therefore you should try to buy as low as possible. It seems logical, but you should never sacrifice investment fundamentals in order to buy a bargain.

Here’s why:

  1. Poor quality property drops the most in a buyers’ market, A-grade assets are rarely available at bargain prices.
  2. Buying at the bottom of the cycle is fraught – how do you precisely pick it and how long until you see some growth?
  3. Being enticed by a bargain price reflects short term thinking – property needs to be considered a long term investment

When there are reports of property prices falling we need to look at where and why this is happening. It all comes down to supply and demand. Location does 80% of the work when it comes to capital growth. Areas with only one employer (think mining towns) are particularly susceptible to big downturns. Price drops can also be observed when there is an oversupply and lack of scarcity which is why units in Brisbane, South East Queensland and parts of Melbourne have been chronic under-performers over the past decade.

Bargain hunting when looking to buy an investment property is also fraught with danger, because you focus on the wrong things, for example:

  1. You buy a poor quality asset, because you just want it done.
  2. You buy in an area with ongoing supply of stock.
  3. Oversupply puts downward pressure on rents as well as sale prices
  4. Risk of false positive yield
  5. You’re buying what other people don’t want

Often, the most heavily discounted homes are in less than ideal locations, which is why nobody wants them. If these properties were in an ideal location you’d have buyers lining up for them and there would be no need to sell a discount. This leads me to the topic of developer stock. Buyers are taking huge risks with off the plan purchases, even more so if the developer is under financial pressure. After all, what corners may have been cut in order to save money?

So, before you consider buying a ‘bargain’ here are the questions you need to ask yourself:

Why is it a bargain?How many of these “bargains” are available?
Would I buy this if it wasn’t a bargain?
Is it a quality asset?
Is it easy to rent?
What’s my exit strategy?

Instead of bargain hunting think about the following:

  1. What are your investment goals and strategy?
  2. Is the property in a location with the foundations for long term growth?
  3. Is it a quality asset that you can hold for the long term?
  4. Buying costs need to be offset by capital growth, not discount price
  5. In 5 or 10 years the discount won’t compensate for no increase in value.

So, in summary if you are looking to buy a home or an investment take off the rose coloured glasses.

Property really does need to be a very well considered purchase with a long term mindset. Look for a location that will always be in demand to a broad range of purchasers. Before you buy any property ask yourself if it has owner occupier appeal, because they are the buyers who push prices up. Ask is this property in a popular price point in the area, is there any opportunity for improvements or renovations and how scarce is this type of property to come by?

But a word of warning, be sure your finance approvals are up to date as that is the first thing that you need to be crystal clear about.

 

7 mistakes property buyers make that cost them in a buyers market

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Published: 8 April, 2019

DISCLAIMER: The tips included in this blog 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.

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