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 do so because they have to. Your job as a buyer is to identify those distressed sellers.”
The trick is to identify these desperate vendors. However, it’s not always as easy as it sounds. In most cases, the reasons for selling are not advertised. If they are, it’s generally intended to drive prices up, because everyone thinks they’re getting a bargain.
A distressed vendor may be a developer who has run into financial difficulties or a homeowner who has lost their job. It could be an owner who’s moving into aged care and needs to sell to pay 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 experts use when buying discounted properties.
1. Look for suburbs with the biggest drops in value over 3–5 years
Todd Hunter, founder and director of wHeregroup, a buyer’s agency, says the quickest way to identify areas ripe for the picking is to look at how they’ve performed during the past three to five years. “I look for areas that have fallen in values 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 are 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 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 being 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 has no one found it before?
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 you’re buying, as not all distressed sales are good buys.
“The key to understanding the real opportunity in distressed assets is the difference between the price you pay and current market value,” says John Kovacs, founder of NMD Data.
“If your intention is to buy, renovate, then flip a discounted property, then it’s crucial to set a renovation budget and get the property properly assessed by a builder and valuer. I've seen it time and time again where investors pay far too much for the property, blow out their renovation budgets, and when it’s time to sell, lose a hefty sum of money.”
In other words, don’t cut corners when it comes to your research. Find out what fully renovated properties are selling for in the area, and then determine what your purchase price will be.
“Talk to local agents. Talk to the neighbours and shop owners in the area as they have a wealth of local knowledge,” says Kovacs.
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 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 strong cash flow, a 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 homeowners.
“I also look at the trend such as population growth and vacancy rate in the suburb,” adds Patterson. “Look for areas with proven records of capital growth and sustainability, such as inner-city period homes or new developments close to the CBD. Every capital city in Australia has a circle of heritage and new development properties available within a 15km of 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 has started falling. Developers tend to overbuild in an area forecast to get strong population growth, and they ignore supply. They often build in a location with loads of infrastructure projects underway, without considering whether there are already enough properties available for sale. If the developer is having trouble selling, they get desperate. Looking for locations with a large percentage of stock on market will uncover these problem areas.
5. Submit multiple offers
The only way to snag a property under market value is by 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, then they will accept it. Mortgagee listing companies as well can help.”
6. Check out niche market listing websites
If you want to cut your research time and don’t mind spending a bit of cash, consider signing in to specialised listing websites like NMDDATA (National Mortgagee & Deceased Estate Data), at www.nmddata.com.au, which exclusively lists financially distressed properties.
These include:
● Mortgagee repossessions
● Deceased estates
● Trustee and executor properties Australia wide, including commercial and industrial properties that are under receivership, liquidated or administered – basically, properties that are most likely to sell and historically go a bit cheaper than the current market
7. Crunch your numbers and monitor them throughout the process
You have to be confident about 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.
Deal breakers: When to walk away from a deal
So when should you walk away from a deal? Our experts share their instant deal breakers that you may want to consider when buying a discounted property.
1. The property is selling above market value
For Patterson, this is an instant deal breaker. “We’re all in this to make money. If you’re paying above market value, you’re already behind,” he says.
2. Poor cash flow
While capital growth is king, Patterson insists on having a good balance between cash flow and gearing, especially during the negotiation process.
“I monitor this closely during the negotiation, because the cash flow can drop away. It’s important to watch this because, once it passes a certain point, your profit or cash flow will be eroded. When it happens, I will terminate the deal on that basis.”
3. Vendors unwilling to negotiate on poor inspection result
“If the building and pest inspection yield some concerning issues and if the vendor is unwilling to negotiate on the price, then I’ll make the assessment and add this cost to the purchase price. I’ll crunch the numbers again to see if the deal still stacks up. Sometimes I have to terminate based on this reason. Sometimes things are cheap for a reason,” says Patterson.
4. Too much competition from investors
Strong competition from other investors is an immediate deal breaker for Todd Hunter. “I would walk away from an area if there are a lot of other buyers around and it’s becoming more difficult to secure those properties at the prices that I want. When agents are not willing to negotiate due to multiple offers, it’s a cue for us to move on.”
