Top tips for purchasing in a cooling market – Listener question! (Ep.160)

In this week’s episode, Dave, Cate and Pete take you through:

1. A question from our listener

Some questions for the pod about how to approach a flat/cooling market. 
Cate what should you do when you are the only one to show up to an auction and or bid?  
Peter, how do you approach comparables when prices are falling?   
How do you take advantage of seller FOMO?  
I also think a whole pod on climate risk (BAL levels, flooding, future temperatures in capitals) would be good. Keep up the great podcast.

2. When you are the only one at the auction, what are the risks that buyer psychology can pose? The trio discuss how buyer psychology can get in the way and cause obstacles for an opportunistic purchase. If the research has been done and the property is a winner, then ignore the white noise in your head that’s saying there’s something wrong with the property. It may just be your lucky day.

3. How to value properties in a cooling market. Pete explains how valuers actually assess the market value of a property and how comparable sales are used. More importantly, what adjustments valuers make in a rising market vs a falling one. You might apply some decreased percentage overlays to the historical sale prices. The same applies in a rising market, if dealing with a property that had 1% month on month growth, you will need to overlay this growth.

4. Why falling markets are the best time to buy. Dave touches on market cycles and why in a falling market, you’re likely never to get such a good price on a property ever again.

5. The fear of over-paying. We can tie ourselves in knots over paying too much for a property. However, if you hold the property for the long-term, this amount will appear to be comparatively miniscule in the end. A reminder to our listeners, to purchase a property, you have to be willing to pay more than anyone else for it!

6. Why research is the cure all. The trio discuss the worst-case scenario of purchasing a property and paying more than what a lender thinks it’s worth. Cate explains why this is very rare and quite mitigated if the homework and due diligence is done. Now is not the time to cut corners. Roll up the sleeves and get through as many properties as you can.

7. What do you do if the vendor’s expectation is sky high? Cate shares her best tips on how to manage vendor expectations and how to negotiate in a falling market.

8. Where can buyers get good information about current climate change risks associated with their property in question? Although we can’t solve climate change in 5 minutes, there are some key considerations and signs to look out for that will indicate whether a property is at risk of fire or flooding. The trio discuss the steps to take and resources to consult to determine the risks associated with the property in question. 

Resources

• After recording, the RBA Governor speaks on interest rates
• Why Property Values won’t plummet – Cate’s Sunday blog
• Ep#9 – Why mortgage strategy is more important than your interest rate
• Ep#12 – Property Cycle Management – why now is always the best time to buy if it suits your personal economy and you have a long-term property plan
• Ep#46 – Market update – Recovery lessons from recent recessions, the great depression, GFC & Spanish Flu.
• Ep#97 – Listener questions – What will drive capital growth after interest rates rise?
• Ep#155 – Plotting Australian property market movements from 1970 to now – the impacts of recessions, inflation, financial deregulation, population growth, unemployment rates and analysing what could disrupt the drivers of price increases? 
• Understanding your lifestyle goals and strategy
• Four critical mortgage offset strategies 
• Five mortgage strategies that can grow your wealth 
• How will your mortgages serve you in the long run?
• How our mortgage strategy helps us to hold properties
• How to succeed with Property and Create your Ideal Lifestyle
• Mortgage Strategy 101 – YouTube video series.

Show notes

A question from our listener

Some questions for the pod about how to approach a flat/cooling market.
Cate what should you do when you are the only one to show up to an auction and or bid?
Peter, how do you approach comparables when prices are falling? 
How do you take advantage of seller FOMO?
I also think a whole pod on climate risk (BAL levels, flooding, future temperatures in capitals) would be good. Keep up the great podcast. 

When you are the only one at the auction – What are the risks that our own buyer psychology can create when this happens?

If you’ve done your analysis and you know the property is good, then being the only person at the auction is exciting and you’ve just gotten lucky. But buyer psychology starts to weigh heavy when there’s no one else bidding. Giving a low ball and walking away is some of the worst things that you can do. Ignore the bad white noise in your head saying that there’s something wrong with it.  

You might apply some decreased percentage overlays in there. Same as in a rising market, if dealing with a property that had 1% month on month growth, you need to factor that in.  

Speaking from a valuers point of view

Use the actual prices of comparable sales, whether the prices are actually dropping or rising. If you break it down on a monthly basis, over a three-month period (if market is moving quickly, don’t take more than 3 months), it makes a total increase of 6% or less, which is an acceptable margin of error for a valuer. The acceptable margin is actually 10%. What a valuer will do in a falling market, they would pick a value on the lower end of the range and in a rising market pick a value on the higher end of the range. We’ve been stuck inside for two years, we’re not missing out on life anymore. Took auctions on field trip – 12 Neville Avenue Thebedon, 600 square metres, fully updated. The record for that suburb was $1.8M, the comparables were $1.1M. The property sold for $1.3M. When a market is going backwards, it’s the best time that you get to buy forever moving forward. It will never get as low as the previous retraction, the window of opportunity is 3 to 12 months. If we look at covid retraction, it was 3 or 4 months. The surge is a lot more prominent in a market that is surging, than a market that is retracting. The psychology we’re talking about here is the fear of paying too much. People twist themselves in knots over paying too much. When really it’s miniscule in the long-run for most people. To buy a property, you have to be willing to pay for it more than anyone else.

Unless you pay more than the lender thinks it’s worth, and you get caught with a valuation shortfall, you’re at risk. But that is worst-case scenario. It’s very rare and if you’ve done your homework, it’s near impossible.

What do you do if the vendor’s expectation is sky high? 

In a transitioning market is where the vendor expectations are a long way than yours, then what do you do. Have a peg in the sand of where you’re willing to go to and be prepared to walk away. In a crazy raging market, need to be more concerned about bidding. But for pass ins, take your comparable sales with you. Talk to them about where your appraisal is sitting and why and meet somewhere in the middle. Find out the vendors motivation to sell – vendor will stay or rent it out, that could be a bluff. If they don’t have to move, you might be banging your head against a brick wall. If you’re worried about being the only one, ask about the other buyers, what happened to them? Many campaigns have buyers that are jittery and opting out or they’re chasing finance, haven’t got their pre-approval in time.

Do your research 

Rolling up your sleeves and get through as many properties as you can. Set up an excel and track sales that are comparables to what you are trying to buy – land size, bedrooms, bathrooms, garage. That’s the boring stuff that you actually have to do, it takes hours and hours and sometimes months, it can’t happen overnight or by short cuts.

Rising sea levels and climate risk 

Where can buyers get good information about current climate change risks associated with their property in question? 

Risk – flooding and fire, depending on what the risk is, you need to do some leg work and get a key understanding of what overlays are affecting you and zoning.  

• Online insurance quote 
• Call to local planning department at council 
• 100 year flood maps 
• Call to the water authority if worried about flooding 
• Understanding the bushfire zoning and the implications of building – BAL and FZ – important to distinguish between the two 

In north Queensland, it’s almost impossible to ensure against cyclones. Ask your insurance broker what would the premium be for this property and for these events.

Do two insurance quotes on two properties, if there is a huge difference in premium, it will show that there is some sort of underlying issue with the property.

If new homes have high foundations, you can tell that you are in a flood zone. 

Gold Nuggets

Cate Bakos – The Property Buyer’s Golden nugget: Our own buyer psychology can ruin things for us, it’s great to buy a bargain, but it hurts more to lose a great property at a good price. 

Peter Koulizos – The Property Professor’s Golden nugget: When looking for comparable sales, the key is to look for those in the same suburb, on similar size blocks of land, properties where the buildings are a similar size and similar conditions. These are the 4 keys. You can look at minor points – size of living areas, number of bathrooms, outdoor area. 

Market Updates

1. NSW land tax to put a floor under property prices. Looking at quarterly results, the two major cities with the biggest price falls have been Melbourne with 1.4% decline and Sydney with 2.1%. However, NSW will soon be implementing an optional land tax over stamp duty for first time buyers entering the market, which is likely to encourage some first home purchasers to dip their toe in the water and this in turn could increase demand.

2. Pre-auction offers. Cate shares some hot tips for our listeners in preparation for today’s episode on how to manage pre-auction offers in a cooling market and sometimes a better outcome will be achieved if you wait until the auction.

3. Inflation may take longer than usual to come back down. David shares an interesting theory on why rising rates may not be enough to curb inflation. Our lost life experiences over the last two years means that not even rising rates and increased mortgage repayments can curb our desires to go on holidays, see friends and spend extra money on getting social.