19/03/2012

Question: I recently found a property that meets all the ‘fundamentals’ that property investment experts always talk about.  I’ve looked at the property twice and I’m very happy with it. I haven’t done any tests on it yet – but I’m a carpenter, and to my eye everything looks sound: the structure is in good shape and there’s no termite damage or anything like that. 

The only thing that makes me apprehensive about purchasing the property is that I recently heard that it has been on sale for 200 days. I’d understand the long sale period if it was highly priced, but its $350,000 and in a popular Brisbane suburb. 

Do you think there could be something I am overlooking or is it really possible that a great deal like this could have been ignored by the general public? 

 

Answer: The answer to your question lies in three critical components of the due diligence process: property, place and people. 

When researching whether to purchase a property, you need to know about the building you are buying. You look at the quality of construction and the state of the structure, among other things. 

Given that you’re a carpenter and speak confidently about your ability to read a house, I’m sure you’re not missing anything here. It’s possible, but not likely. 

When speaking about the place where the property is situated, the sort of details of interest to you should be the cold, hard statistics of what’s happening in the area. This includes infrastructure changes (such as new road/rail networks), income sources (mines, farming, tourism, etc.), economic circumstances and property sales trends for the area. 

I suspect your fear of missing something underlies a lack of confidence in reaching a decision. I’d suggest you do more due diligence around what the price trends are in this suburb, including sales history and trends, average days on the market, and the income sources and trends for the area.

You might find that prices in the area have come down in recent months and that the average amount of days that properties are on the market is more than 200. If this is the case, the circumstances of this sale are simply average for properties in that suburb. 

When researching the people related to the purchase of a property, two distinct groups are important: those directly involved in the market you are buying into and those that influence it. 

Factors like economic sentiment and demographics will give you a clear picture of the latter. You need to find out whether sentiment is enthusiastic, indifferent or shy when it comes to spending money or buying property in the suburb. Then consider if there is anything that might happen in or around the suburb that might change this sentiment. 

When you look at demographics, consider whether the population in the area is growing or declining and if the area attracts an aging population or groups of younger people. 

Finally, when you look at people directly involved in your market, you’re factoring in the needs of the vendor, the occupier and any prospective purchaser. 

In your case, I’d try to find out if the vendor is getting anxious about the property being unsold for 200 days? If so, the $350,000 price might simply have been posted as a desperate attempt to finally move it on. 

If you saw the property on a backend page of a property advertiser like realestate.com.au, perhaps there is a chance that the property was missed by a lot of people. It might be that you are simply in the right place at the right time.

Still, try to also consider the occupier of the property. Ask yourself if a tenant would want to live in the property and how much they will likely pay for that privilege. If no-one is interested in living there, no price will be a good one. This is something you’d have to consider even if your strategy is to sell. 

In summary, just because the price is apparently low and the property has been on the market for a long time, does not mean the deal is a dud. On the flip side, it doesn’t mean that you should automatically buy it just because you think it’s a bargain.

  • Answer provided by Brendan Kelly, RESULTS Mentoring