As we continue to explore the 8 steps in creating and growing your property portfolio, let’s take a moment to review our progress to-date;

We’ve now established a property investment strategy blueprint that is both relevant and applicable to your specific situation and investment objectives; we’ve investigated the most appropriate investment ownership structure appropriate for you and have considered both the importance of a plan for your finance and the various options available to you.

With those steps covered, we’re now at the more exciting part of the journey – the buying stage.

In our first article we highlighted our concerns about how little research many buyers put into the buying and that how often property investment is treated as an event rather than an entire process.

We’ll re-clarify what we mean by this. By event we mean an endeavour focussed solely on searching and securing a property. The transaction itself. By process we mean the full end-to-end approach which, as you would know by now involves the equally valuable 8 steps outlined in our initial article; Initial Property Investment Strategy, Structure Strategy, Finance Strategy, Buying Strategy, Add Value Strategy (renovation and development), Property Management, Portfolio Review and Disposal Strategy.

Time and time again we see buyers enter into the investment process with an objective mindset only to switch straight into an emotionally-driven mindset as soon as they enter the buying stage. We see it all the time; objectivity being quickly overthrown by excitement and irrational, subjectively-driven decision making. The outcome is rarely great for the buyer – especially when we’re witnessed a spate of suburb price records being smashed throughout the last year…

Most investors are only concerned with how to find and purchase property as opposed to following through with a carefully planned step-by-step process that we’ve outlined. It’s a worry because many investors who’ve rushed into buying without the requisite planning and due diligence often don’t find out the bad news until it’s too late – generally at the time of leasing for rent or subsequent revaluation for planned equity drawdown.
 

How to plan for your purchase

Irrespective of where you are in your plans for growing your property portfolio below is a simple 6 step checklist to follow in order to develop a more rounded approach to buying an investment property.

These six steps are;

  1. Develop a purchase brief – containing the specifics of the asset in mind
  2. Conducting market research – research the various elements of the purchase brief
  3. Inspecting, shortlist and select – attend open houses and short listing properties
  4. Due diligence – Contract review, pest /building and strata reports
  5. Negotiation – Preparing for agent negotiation or auction attendance
  6. Securing the property – Facilitating a smooth exchange of contracts

 

  1. Develop your Buying Brief

You need to have an objective mindset, a planned approach and decisive action when investing in property. Before you even commence your pre-purchase research, it’s important to be clear on what you’re looking for.

Know how to differentiate between your “must haves’’, your “like to have” and your downright “deal breakers”. It’s super important to understand the various elements you want in your investment and the best way to do that is to draft a Buying Brief.

Looking back at your initial investment strategy, the Buying Brief should reflect these investment objectives, budget limitations, timeframe and your risk profile. Being clear on this will help you quickly sift through the myriad of choices in the market.

Before you complete your Buying Brief, review your Initial Strategy and ensure that the Brief is consistent with this.

You’ll quickly see how realistic you Buying Brief is as you start to build up the list of “must haves” versus “like to have”. Remember; think with your head and not with your heart. This is an investment, not your own home.

If you’ve kept to your investment principles and are clear on your budget, the suburb selection process will become self-vetting as suburb median price data is pretty easily obtained and can guide you on which areas you’ll be able to afford and which areas should be immediately ruled out.

You’ll be aiming to find a property that not only meets your investment requirements but will also have broad appeal to the broadest tenancy base in that particular area.

Tenancy appeal is vital as your goal will be to find a property that will fit within your budget whilst at the same time be affordable for the predominant demographic in the area. There’s no point getting great deal through hard work and negotiation only to have your hard won gains lost through extended vacancy periods between tenancies.
 

Ticking the boxes

You should prioritise your list by addressing the most important elements of an investment brief – those element that, if absent, are “deal breakers” meaning you should rule the property out straight away. You can then include your other “must haves” and then the “desirable but not essential” items.

Keep your future tenant and prospective future buyer (you must have an exit plan in mind!) in mind. These two market segments are vital to both the success of your investment and your exit plan if/when it might be required.

  • Location (preferred state, city, suburb and street) – where do you need the property to be located?
  • Demographics – which is the dominant demographic in the area and what are they looking for in a property to rent/buy?
  • Amenities and services – What is available in the local area and how convenient are they relative to the property?
  • Proximity – proximity to schools, shopping, transport, employment, entertainment and parks/outdoor recreation areas?
  • Property attributes – (number of bedrooms, bathrooms, outdoor area, parking etc.)
  • Budget range and upper limit?
  • What yield and/or capital growth are you looking for? Consider ongoing cashflow and future equity drawdown.

 

  1. Conduct market research

Once you have your buying brief finalised, the next step is to conduct market research on the various properties you have listed in your buying brief or “property wish list”.

First thing to do is to make contact with as many of the local selling agents in your target area as possible. Provide them with your wish list and be clear about your finance pre-approval and “deposit ready” status. Agents really only want to deal with people who are finance approved and ready to buy.

The agents you’ve contacted should now have registered you on their regular alerts list and you should now be receiving a deluge of potential properties that meet your requirements. Naturally, you’ll need to keep an eye out for those agents who will simply try to sell you whatever stock they have.
 

The single biggest mistake buyers make is that they believe that the selling agent is their friend.
 

Don’t lose sight of the fact that agents are bound by law to represent the seller’s interest and to achieve the highest possible sale price for them. Your specific investment requirements run a very distant second to their desire to simply sell the property to the highest bidder…

Once you have sifted through the property alerts, you should shortlist those that you think are the closest match.

Compare the properties by location, price, attributes, rental yield and, where possible, sales history. There’s plenty of online data to assist you source sales history data e.g. APM, RP Data, Residex, Red Square. Depending on your investment objectives you’ll want to prioritise certain data as a basis for comparison i.e. historical capital growth (over last 10years) or, if you’re yield driven, then you would lean toward yield performance which you can also source from the same websites.

You should now have a concise short list of properties within your price range, that have high potential and that warrant an open inspection.

There’s nothing set in stone in relation to the number of properties you should inspect before making a decision. It will be entirely dependent on the depth of market knowledge you have in each of the targeted areas. Buyers agents and advisers recommend inspecting somewhere between 50 and 100 properties before making a purchase decision. Again, that will depend on how comfortable you are with an area and how new you are to investing. Additionally, stock volumes at the time of your search will dictate how extensive your shortlist may or may not be.

Too many buyers try to shortcut the process and turn up to an auction “ready” to buy after having only inspected a handful of properties. We often wonder how they’re able to accurately estimate value and investment grade attributes after spending such a short time researching the market.

Establishing and maintaining a close working relationship with selling agents is key. Selling agents are the gateway to creating opportunities for our clients and it’s essential to be on their respective radars. This is especially so for gaining access to “off market” or “silent listing” opportunities i.e. when there is an opportunity to secure the property without it ever going to the open market. Having the ability to buy off market gives you the opportunity to negotiate outside of a traditional competitive bidding atmosphere and usually results in a purchase below market value.
 

  1. Inspect, shortlist and select

The purpose of this step is to help narrow down the options and decide which property warrants full due diligence. Work through your list of properties to inspect and put together a report with the following topics covered;

  • Your first impression or “gut feel”
  • Aspect / Orientation
  • Natural light
  • Floor plan flow
  • Features
  • Current or estimated rental return
  • Opportunity to add value through renovation
  • Neighbourhood profile
  • Walkability (how close is it to schools, transport, shops, cafes, parks etc.)

From the 100’s of properties that you inspect you should aim to select a short list of around 10-20 preferred properties to do more research and due diligence on.

 

  1. Due diligence

Whilst we would rank this as the most important aspect of the buying process, we see too many buyers jump straight into negotiations without going over the property, the contract and the requisite pest / building and/or strata reports with a fine tooth comb.

This is a massive and often costly mistake because this is the stage where you get a full and complete picture – including the good, the bad and most importantly the ugly elements – of the property that you are about to buy.
 

Essential due diligence checklist for buyers;

  1. Contract review – Expert review with your property lawyer, solicitor or conveyancer

This review will identify and highlight the various terms and conditions of the purchase of this specific property. Not all sales contracts are the same and can contain any number of special conditions that are to the benefit of the seller and not you.  Your legal consultant will review this document with your best interests in mind and can recommend any amendments in your favour. Such amendments often include reduction in deposit (from 10% to 5%), inclusion of a 5 day cooling-off clause, reduction of penalty interest, deletion of clauses allowing the release of your deposit to the vendor etc.

  1. Have a pest and building inspection conducted (for a house) or a strata inspection report (for a unit)

These reports will reveal any issues – past, present or, potentially, future, – with the building and surrounds and will often include an estimate of the costs associated with repair costs. Buying a property without knowing the presence and extent of any issues is crazy. You’ve worked so hard to this point to find the right property. Why risk eroding your hard fought gains by buying a property that may have tens of thousands of dollars or repairs to be carried out that you haven’t budgeted for?!

Do your pest and build (or strata report) beforeyou buy the property. Once you’ve exchanged contracts, you’re stuck with the property and it will be a costly discovery process from there on…

Don’t forget that any issues you identify during your due diligence can be used in your favour during negotiations. Let’s not forget that there’s a possibility the issues discovered during this stage might be so bad that it’s time to walk away.

Better to do that before you’ve committed non-refundable deposit funds…

In a competitive market it’s quite likely that the due diligence and negotiation process will happen concurrently. If the property ranks highly on your list, chances are that others have spotted it too and you could be in for a race to the finish line!

 

  1. Negotiation

Negotiating forms part of our everyday lives. However, in business, it’s vital to your success. A poor negotiation outcome could undo all of the hard work you’ve put in to-date and leave you back at square one in the shortlisting / selection process meaning more time, effort and energy on your part.

Negotiation comes easily to some but requires a lot of practice for others. The mistake many people make is to let their emotions / pride / ego get in the way. Negotiations are no place for these – it takes plenty of research, discipline and unwavering resolve.
 

Preparation

One of the most important parts of the negotiation process lies in the preparation for the negotiation itself. Know the full story on the property you want to buy and, equally as important – who you’re dealing with in the negotiation itself. Play to your strengths and their weaknesses.

Use your due diligence to get the actual market value of the property. Forget the agents’ guides. They mean very little when it comes to establishing fair market value. Knowing your facts will stand in you in good stead during the negotiation.

We’ve written a number of articles on the topic, where the gap between agent price guides and actual sale prices are growing further and further apart. Set the agent guide aside and rely on your research.

If the agent senses you’re a little hazy on detail or market knowledge, they’ll often capitalise on this to weaken your position and create a sense of anxiety or fear of missing out.

Sadly, we hear plenty of stories from buyers who say they got a “great deal” and saved $10,000 – $20,000 off the asking price. Often, had they really done their research they might have been able to negotiate $50,000 – $60,000 off the asking price.

To avoid this unfortunate situation if you’re unsure about the fair market value of the property, organise an independent valuation of the property. You could also investigate recent comparable sales that have occurred within close proximity to the subject property i.e. within a half kilometre to 1 kilometre radius (depending on how densely populated the area is and how many comparable sales there are. Armed with this info, you’ll have a good idea what the property is likely to sell for.
 

Developing your negotiation strategy

Again, remember to leave your ego and emotions at the door. Enter the negotiation

Knowing your max limit and what contract terms you want e.g. deposit and length of settlement.

Don’t be too over the top with contract amendments as not only might it be off putting for the vendor it may also limit your chances of securing the property at a sharper price.

Find leverage. Why is the vendor selling? Have they bought or have they found the place they want and have to wait for their sale to go through before they can proceed? Is it a seller’s market or are there more properties than buyers in your local market?

If you get pushback on your request for amendments to certain contractual terms, ask yourself if they’re deal breakers or just amendments that would be nice to have? You may be able to soften on this element in exchange for a few more thousand dollars off the price.
 

Before entering into negotiations on your own, below are a few guidelines to keep in mind;
 

  • Be clear on your strategy and stick to both it and your maximum limit.
  • Once you’ve picked the property, attend several open for inspections and gauge interest levels from other buyers. In a buyer’s market, reduced buyer interest will strengthen your negotiation standpoint. The reverse occurs in a seller’s market where there’s plenty of buyer interest which means you’ll need to move quick and be fair with your offer and terms.
  • Leave your ego and emotions out of it – especially for investors for whom the property represents a wealth accumulation vehicle.
  • Investigate the reason for sale. Here’s where you can gain great leverage if you know how to match your offer and terms to the vendor’s specific needs i.e. shorter settlement, release of deposit etc.
  • The agent is not your friend – don’t forget they’re bound by law to represent the seller’s interest! Don’t overstate your interest and desire to own the property as this will only weaken your negotiating position.
  • Strengthen your position early by demonstrating your market knowledge and expertise. This will reduce the agent’s attempts to confuse or discredit your argument.
  • Your first offer is the most important as it will set the tone for the negotiation. Make it bold and relatively aggressive. Make it low enough that it shows serious intent and leaves room for negotiation. Don’t make it so low that it discredits your research and closes the door on the possibility of a counter offer from the vendor.
  • Once you’ve made an offer you should expect either an acceptance or a rejection (and subsequent counter offer). If rejected, request a counter offer as it will force a change of position on the vendor’s part.
  • Put it in writing – By law, an agent must submit all offers in writing to their vendor. BY submitting your own offer, including all terms, in writing it creates a paper trail and will discourage any agent from not submitting it to the vendor directly. Offers should not be disclosed to parties other than the vendor and their solicitor. Reiterate this in your email. You don’t want your offer being shopped around to other buyers.
  • Be patient even if the agent or vendor is not. Don’t look like you’re in rush to secure the property. It could work against you.
  • Aim for a win-win outcome. Be fair. If you have a good understanding of the vendor’s motivation, you can incorporate appealing terms into your offer as a fair trade-off to a price reduction. Be prepared to give a little in order to get what you want.
  • Know when to walk away. Not every negotiation will go your way. Some vendors get stuck and won’t relent. Walk away. Let the agent work on the vendor if you believe they’re being unreasonable. If the vendor is keen to sell – and let’s be clear that the agent will want to get the deal done – they’ll reapproach you. If not, walk away and learn from it for the next time.
  • Consider hiring a professional. If you’re uncomfortable with negotiation or haven’t done it before, you may like to consider recruiting a professional negotiator to level the playing field. (See the below section on buyers’ agents for more information).

 

If you’re going to auction…

  • Auctions are an entirely different kettle of fish and takes iron resolve and nerves of steel. The auction environment is deliberately orchestrated to ratchet up the tension and nerves and to put people under pressure in a competitive atmosphere.
  • We’ve seen hundreds and hundreds of buyers buckle under the heat of an auction and make crazy decisions and bid well beyond their maximum limits. We’ve seen arguments; tears… even fisticuffs on the auction floor. It’s a tough environment for people to keep their cool and the usual winners are the vendors and their agents.

 

Here are a few tips for auction goers;
 

  • Attend the pre-auction inspection and keep your eyes and ears open. People will often be there with friends or family and will often be discussing their strategies and bid limits there in front of you! Don’t be afraid to walk around and see what intel you can glean as you go. If you see associates of the selling agent there, ask them what they think the property will sell for. You never know what info might slip here…
  • If the auction is being held onsite, being early means you can also get a better sense of who and how many people are registering to bid. It’s a bit harder if you’re attending an in-rooms auction.
  • Find a good spot to stand so that you can see the auctioneer, agent and other bidders. Body language and projection of your voice can make quite an impact on less experienced bidders.
  • Don’t let the agents hassle you. They will try. They’ll hover, pester, cajole… all to get you to make a bid. You can simply ask them to leave you alone so that you can stick to your plan and concentrate on what’s going on.
  • If no other bids are made (rare in the current market) don’t feel obliged to do so. If the property passes in with no bid you’ll have an equal right to negotiate afterwards.
  • Bid confidently – make it clear and loud. You want other bidders to believe that you mean business and know exactly what you’re doing. Remember, many people attending auctions are nervous and easily rattled. You want to do what you can to discourage them from continuing to bid.

 

BUYING TIP: If you’ve found the property you want and are clear about what you want to do, don’t make any offers unless you’re certain the vendor will sell at that stage. The last thing you want to do is show your hand early and be a convenient pricing benchmark for the agent to use with other buyers. Most vendors won’t take early offers on their property – particularly in this current market – unless, of course, you’re paying way over market value which, hopefully, you won’t be doing. Take your time, do your due diligence and wait for the right time to make your first offer. Typically, around week 2 of the campaign is a good balance point between adequate market exposure for the vendor and you wanting to take it out early enough.

 

  1. Secure the property

Close the deal promptly. Once you have an acceptance to your offer move to contract exchange as quickly as possible. The agent is required to notify all other interested parties and will have their eyes and ears open for anyone who might like to make a higher offer. Gazumping (where the agent/seller sells to another party despite having already accepted your offer) is a dirty word in the industry, but it happens on a daily basis. Leaving as little time as possible between offer/acceptance and exchange will reduce the chance of it happening to you.

Once your finance is unconditionally approved and contracts have exchanged unconditionally, the next step is to book in a pre-settlement inspection with the selling agent. This is usually done the day prior to settlement and is to enable you to inspect the property and make sure the property is as per the contract and that nothing has been altered, damaged or removed.

Again, we’ve seen it all before… On one occasion, we attended a pre-settlement inspection and noted that the vendor had rolled up all of the fresh turf they had laid for the sale and had taken it with them. Having taken pictures of the property at the time of exchange and, armed with the contract for sale which notes all of the inclusions and exclusions, we were able to identify the issue and notify the solicitor so that the matter could be rectified before settlement took place.
 

Should you hire a professional?

Buying property involves an element of risk. It’s up to how you manage and control the level of risk in your investment as to how this will ultimately affect the overall success of your purchase. Hiring the right team of professionals to represent, guide, counsel and educate your throughout the process can greatly reduce this risk. Accountant, solicitors, financial advisers, mortgage brokers and buyers agents should form part of your “team” and who will represent your best interests.
 

Consider using a buyer’s agent

When purchasing a property there are many advantages of engaging professional help such as a buyer’s agent. A buyer’s agent is a licensed, independent agent who is engaged by you to represent you throughout the entire researching, sourcing, negotiating and buying process for your property.

Buyers Advocacy is a profession has been relatively unknown until fairly recently and has been gaining popularity as buyers are becoming increasingly frustrated and disillusioned with both agents and the market in general. More and more buyers – including seasoned investors and home buyers – have realised the benefit of outsourcing this process to a market expert to handle their property purchases.
 

The benefits of a buyer’s agent can be simply put;

  1. Save you time and energy
  2. Buy the right property that best suits your goals and investment objectives
  3. Buy properties at the right price

In next month’s article, we’ll explore in more detail buyers advocacy and some of the associated benefits of engaging a professional buyer’s agent.
 
 

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