17 Apr Areas buyers falter in their due diligence
Amy Mylius from Cate Bakos Buyers Advocates, takes us through some areas she sees buyers falter in their due diligence.
Kevin: I was talking to Amy Mylius recently. Amy is a buyer’s advocate with a very good friend of ours, Cate Bakos, at Cate Bakos Property in Melbourne. We were talking about due diligence. Amy is featured in the latest edition of Australian Property Investor magazine. We recorded a Skype interview, and I wanted to take a particular part of that and just talk to you about it, Amy.
Firstly, welcome to the show, thank you for your time.
Amy: Thanks for having me.
Kevin: It’s always a pleasure. We were talking about the mistakes that people make when they attempt to do their own comparable sales, or CMA analysis, which is a very important part of the due diligence process. I wonder if you’d quickly take me through those.
Amy: Yes, absolutely. What I find is sometimes people make the mistake of not comparing like with like properties, so comparing apples with oranges. They might take a property that they think is going to sell for a similar price to another one but has completely different attributes, such as a townhouse that is on a small piece of land, quite new and shiny, versus a house that is on a larger block that might need a full renovation. Both houses might be selling for the same kind of price in the area but for different reasons, and it’s very hard to extrapolate those reasons based on those sale prices alone.
Also, when they have a look in a suburb, they might compare a property on one side of the suburb to a property on the other side of the suburb that has completely different attributes and demands. It might be two kilometers away from the station rather than walking distance, and it might be a completely different kind of demographic who are looking there, such as families in one part of the suburb versus young professionals in another part.
Not comparing with one sale is really important, as well. We find that buyers sometimes grasp onto one sale that they’ve seen that they think is quite relevant, but we don’t always know the reasons behind that sale price. The property could have sold for a massive price because two buyers got carried away at auction, or it might have sold at a really discounted price because the agent lost their key buyers a day prior to the auction. Unless you know that information, it’s very hard to create a trend just out of one property sale.
Not applying a range is a mistake that people make, as well. It’s very hard to pinpoint an exact sale price of a property to a dollar figure. It’s not a science, and it’s completely based on a lot of different variables, so I always say to people to give yourself a bit of a range and also apply a little bit of a stretch price, as well, because if properties have been selling for around $700,000 in your area and the growth has been strong lately, you need to apply a bit of a premium to be competitive, as well.
Kevin: That’s an interesting comment, Amy. What’s your experience about how much of a premium should be added now if we’re looking at a recent sale within the last two to three months?
Amy: It depends on how strong the capital growth has been in that area, and it also depends on whether someone is an investor or a home buyer, as well. We say to investors that up to a 3% stretch we feel is quite fair in a moving market, and up to 5% for home buyers, as well.
I always think that if we are going to auction, we need to be competitive, otherwise you can waste a lot of time and money and energy into pursuing properties and being the underbidder each time, as well.
Kevin: Of course, these competitive market analyses are nothing new, but they’re becoming more and more important. Quite often, you’re going to turn up to an open home and you’ll find that an agent will give you one. I’d be interested to hear from you, Amy, about what we should be looking at or what we should be placing importance on if in fact an agent does give us a CMA. What should we be wary about there?
Amy: Absolutely. We always need to understand what the agent’s motivation is. They are there to get the best price for their vendors, and sometimes that does mean picking and choosing from the comparable sales that they think will best support their property. It’s often properties that have sold for slightly less, if not quite a lot less than their anticipated sale price. Sometimes they only choose properties from their own company sales, as well, and I see that quite often.
Even if they’re good comparable sales, they’re not necessarily representative of the entire market. They might also pick and choose comparable sales that will have attributes that aren’t necessarily related to this property. So it might be on significantly smaller land or might need a renovation, but it’s not so evident in the little printout they give to you, as well.
Kevin: Very good advice, Amy. Thank you so much for your time. Amy Mylius from Cate Bakos Property in Melbourne.
Thanks, Amy. We’ll talk to you again soon.
Amy: Thanks, Kevin. See you later.