Buying at a discount in the current cycle may sound like wishful thinking. After all, who in their right mind would sell property at a discount when they know the market is hotting up, right?
The short answer is no one.
“The reality is, no one wants to sell under market value in any market,” says Cameron Patterson, founder of InReach Investments.
“They only do so because they have to. Your job as a buyer is to identify those distressed sellers.”
The trick is to seek out these desperate vendors. However, it’s not always as easy as it sounds. In most cases, the reasons for selling are not advertised. If it is, it’s generally to drive prices up. This is because everyone is thinking they’re getting a bargain.
A distressed vendor may be a developer who has run into financial difficulty or a home-owner who has lost their job. It could be an owner who’s moving into aged care and needs to sell to pay for their bills. It could be a deceased estate and the next of kin doesn’t care what the property sells for, they just want to get rid of it. It could also be a divorce settlement.
Insider Tips for Buying Discounted Properties
It may take a bit of legwork, but it’s still possible to find these properties on your own. Here are some of the proven strategies that experts use when finding discounted properties.
1. Look for suburbs with the biggest drops in value over 3-5 years.
Todd Hunter, founder and director with wHeregroup, a buyers agency, says the quickest way to identify areas ripe for the picking is to look at how they’ve performed during the past 3-5 years.
“I look for areas that have fallen in value during the past three years or so,” says Hunter. “I also check if there are a lot of stocks that have been sitting around but already starting to move. This is a good sign that the area is turning. Don’t be afraid of negative growth. Negative values scare people, and rightly so. There is a chance that values could fall further. That’s when you do your due diligence and look for other signs that demand is returning in the area. At this point, vendors are more willing to negotiate.”
2. Establish the true value of the property you’re about to buy.
If you’re actively pursuing discounted properties, make sure you’re buying genuine undervalued properties.
There could be a big reason for the property to be highly discounted. The question you need to ask yourself is why is it undervalued or highly discounted? If it’s such a good deal, why is it that no one has found it yet?
There could be something fundamentally wrong with the property such as its location being close to a major highway or train lines.
It’s important that you understand the true value of what you’re buying, however, as not all distressed sales are good buys.
3. Identify capital growth triggers.
Unless there’s something else going for the property like capital growth potential or renovation potential, there could be little further profit to be made with that discounted property you’re about to buy.
“Capital growth is king,” says Patterson. “While there’s no guarantee that you’ll get the projected capital growth, if you buy in a location with good fundamentals and pick a sound property, you’ll significantly reduce your risk associated with buying discounted properties.”
This means ensuring that there’s a strong cash flow, low vacancy rate and infrastructure going into the area. Patterson insists on properties that are close to public transport and amenities, and areas with a low proportion of investors in relation to home-owners.
“I also look at trends such as population growth and vacancy rates in the suburb,” adds Patterson. “Look for areas with proven records of capital growth and sustainability, such as those with inner-city period homes or new developments close to the CBD. These, historically, have patterns of strong capital growth.”
4. Check the level of supply and demand.
One reason a property is selling at a discount could be the fact that it’s in an area heading towards oversupply at a time when demand starts falling.
Developers tend to overbuild in an area that has been forecast to experience strong population growth and ignore supply. They often build in a location with loads of infrastructure projects going in without considering if there are already enough properties available for sale. If the developer is having trouble selling, they’ll get desperate. Looking for locations with a large percentage of stock on market (SOM%) will uncover these problem areas.
5. Submit multiple offers.
The only way to snag a property under market value is submitting multiple offers, according to Patterson.
“Firstly, I will establish the true value and then I put in a low ball offer. I will repeat that process multiple times. Eventually, you will find an interested seller,” he says.
“Most of the leads come from my contacts in the industry. I get offered properties that don’t even go to market. I don’t necessarily get them under market value, but it gives me the chance to put in the first offer, which is a low ball offer. If the vendor is desperate, they will accept it. Mortgagee listing companies can help as well.”
6. Crunch your numbers and monitor them throughout the process.
You have to be confident with your numbers when buying any property, but even more so when buying distressed or discounted properties, says Patterson.
“If the numbers don’t stack up, be prepared to walk away. There are always going to be opportunities out there; it’s really just a matter of finding one with the right balance. You have to assess the deal holistically to make sure that the acquisition will help you move closer to your goals. Make sure that the numbers stack up. It’s always better to reject a deal and wait for the next one rather than go ahead when you’re not sure the numbers are stacking up. You’ll end up regretting it over the long run,” he says.