How to find a bargain investment property

First published 25/05/2012

Canny investors can pick up quality properties at an excellent price. These could be in suburbs which might seem fraught with risk today but that are likely to see capital growth over the coming years. But how can you identify these suburbs and, more importantly, how can you find the diamonds in the rough within these areas?

Crunching the numbers

The best place to start when identifying potential ‘bargains’ is with the numbers. The data located at the back of Your Investment Property magazine is an excellent resource, as is the suburb data featured on our website here.

There are two key indicators that you should be looking at to identify suburbs where you might be able to negotiate a great deal: vendor discounting and time on market.

Vendor discounting measures the average difference between the original asking price of a property and the final selling price. Higher levels of discounting suggest that vendor expectations are out of line with what buyers are willing to pay. Also, high levels of discounting imply that buyers are likely to have more opportunities for negotiating a lower price on a purchase and that vendors are having to considerably lower their asking price in order to make a sale.

Time on market measures the median number of days between the initial listing date and the sale date in a suburb. A higher time on market figure can mean that there is also scope for negotiating a lower price as properties linger on the market and vendors lower expectations to make a sale.

However, you shouldn’t just look at these two in isolation – you should marry up these indicators of how property stock is moving, with fundamental indicators such as long-term capital growth, solid rental yields and low vacancy rates, depending on your overall strategy.

There’s no point in buying a bargain property in an area which isn’t likely to experience strong capital growth or provide cash flow benefits: while you may see some profit, you won’t be maximising your investment.

Tim Lawless, head of research at RP Data, adds that another key metric you should be looking at is the difference in median prices between neighbouring suburbs. He says that by comparing and/or identifying geographical trends in these price differentials using mapping programs, investors can identify pricing gaps where there may be scope for ‘catch up’ capital growth.

Buyer’s agent Oliver Stier, director of OH Property Group, agrees that a lower median property price relative to adjoining suburbs is a key indicator. He suggests a number of other indicators that point towards strong future capital growth – or “outperformance” as he puts it – which you should also take into account. These include:

• Increasing weekly rental prices (reflecting high rental demand/attractiveness of suburb).
• Lower mortgage stress rates relative to average.
• A lower ratio of median property price/median income relative to suburbs with similar median incomes.
• An even distribution between renters and owner-occupiers (renters often eventually choose to buy close to where they have been renting).
• Performance of local schools as seen on www.myschool.edu.au, and/or the number of private schools located in the council area/suburb.
• Low supply of properties on market (some suburbs are highly sought-after, but there is very little supply of properties for sale).
• Low supply of vacant land for development (suburbs over 20km from CBD typically have a high supply of vacant land for development, meaning there will be a lot of new properties in coming years to compete with existing properties).

Once you’ve identified suburbs with some or all of these characteristics, you can then investigate further.

On the ground

Data isn’t the ‘be all and end all’. To really get a sense of whether a suburb is a good investment area – and to be able to identify bargain properties – you need to get a feel for the area.

Stier reckons there’s no substitute for actually going to a suburb and seeing it for yourself. “You can’t just rely on data: you need to take into account qualitative factors,” he says. “You need to understand the area inside and out. Are there developments or infrastructure projects taking place or being planned? Which are the good streets versus bad streets in the suburb?

“It’s not worth buying a ‘bargain’ if it turns out to be a sub-par property with likely below-average long run returns. For that, you need to get on the ground. You need to know the suburb and get an intimate knowledge of what the market is doing.”

Stier suggests that a good way to do that is to speak to local real estate agents, shopkeepers and restaurateurs – people who are plugged into the local economy. He also recommends going to every inspection and auction in an area that you can.

“The only way to find an ‘undervalued’ property is to see the entire market, and get a sense of what the market value is. You need to be thorough in your research, view all the properties you can and follow them along the course of their marketing,” he says.

“You can only spot a bargain if you have seen a lot of properties in the same area. Otherwise you risk doing the opposite, and overpaying for a property if you don’t compare ‘apples to apples’.”

Looking at multiple properties can also help you get a sense for the demand for other properties within a suburb. Stier says “if you’re looking at multiple properties, you can ask about other ones you’re interested in without making it too obvious by bringing them up as ‘chit chat’. For example, casually asking if there’s much interest in a property you saw the other day, or whether it’s sold yet.

“This is an area where employing a buyer’s agent can be beneficial. By definition we’re interested in multiple properties, are in regular contact with sellers’ agents, and are able to bring up questions like this in a professional and less ‘loaded’ way,” he adds.

Finding the hidden gems

Once you’ve got a good sense of the suburb, you can get serious about selecting properties. This is where savvy use of data can give you an advantage – yet again. Lawless argues that by analysing individual property transactions, you can put yourself in a strong negotiating position.

“Most information providers, RP Data included, provide information on transactions down to street and property level,” he says. “You can use those tools to target specific properties, see selling prices, and see the marketing history of individual properties.

“So, for example, you can see recent sales, previous sale prices, whether a property has changed real estate agent, whether there’s been a failed auction and so on. All that information can be used to bolster your bargaining power – and if you’re not using it, you’re potentially operating with one hand behind your back.”

Stier adds that paying attention to ‘ugly duckling’ properties can work to your benefit too. He advises buyers to look out for:

• Properties which may not have any pictures of the interior online.
• Properties which do not present nicely during inspection (quite often these are tenanted properties).
• Properties with difficult tenants (as the agent may be motivated to just sell to the first buyer

  that comes along to save hassle and effort).

• Lazy or incompetent agents who mis-market the property in some way.
• The real reason behind the sale – particularly the triple Ds of a ‘motivated seller’: death, divorce and debt.

Buy cheap, buy twice?

Stier warns that investors shouldn’t get fixated on purchasing a cracking deal. “At the end of the day, you should never buy a property just based on the price tag alone,” he says.

In most instances, you are better off paying market price for a solid property in a good location, rather than trying to get a bargain just for the sake of getting a bargain. Ultimately, you’ve got to find a good property in a good suburb, then negotiate to get your ‘bargain’.

It’s worth paying up to market price for something that will have a strong return. But if you do find a bona fide steal, though, you’ve got to be ready to move fast.

“Make sure you have financing all lined up, a solicitor/conveyancer on standby to review the contract and a pest/building inspection or strata search ready to go,” adds Stier. “Genuine bargains don’t last long and it can be a race to the finish line. You need to be prepared, informed and at the right place at the right time.”

Key indicators for bargain hunters

Look out for the following indicators as possible hints for good investment opportunities at rock-bottom prices:

• High vendor discounting.
• A high time-on-market figure.
• Consistent, strong long-term capital growth and/or economic drivers that suggest future growth, such as supply constraints, growing population, or infrastructure improvements and development.
• Lower median prices than neighbouring suburbs.
• Solid rental yields and increasing weekly rents.
• Low vacancy rates.