05 Mar Mistakes property buyers make – Patrick Bright Part 2
In part 2 of our discussion with Patrick Bright on classic buyer mistakes, we look at the mistakes made by owner occupier property buyers.
Kevin: Okay, let’s look at the second part of the feature in the show. We’re talking to Patrick Bright from EPS Property Search. We’ve already been through the classic mistakes that Patrick has seen property investors make when they’re buying a property. Let’s swing it around and talk about owner-occupiers.
Are there any similarities there, or are they totally different mistakes, Patrick?
Patrick: Kevin, there are some similarities, mainly I guess in the research side of things and investigation of properties. A parallel there would be like for an existing property purchaser, relying on data report. You buy these reports for $50 off these data companies that are online, or you get them free from the big banks that are now offering them. You see the ads, “Be property smart, get this free report from such-and-such bank.”
And these reports are what I call a “name, rank, and serial number” report. They tell you the land size, they tell you how many bedrooms, how many bathrooms, but what they don’t tell you is the important stuff that really has a bigger influence on value.
Like is the house positioned at the front of the block of land, at the back of the block, or the middle of the block? So what’s usable? You want it at the front, so that you have more back yard.
Is the land sloped, or is it flat and level? Does it fall a certain way? Does it have a view? Is it renovated, unrenovated, or partly renovated? What does the floorplan look like? What are the bedroom sizes? Is it private, or is it exposed? Have you got four neighbors looking in? Do you have a good outlook?
Same with apartments. They’ll tell you about the square meterage, but are you looking at a brick wall? The same applies with renovated and unrenovated. Is someone looking straight into your kitchen window? Or if you go to your balcony, do you feel like you’re a bit exposed? These things all play a heavy influence on value.
Now, those data reports don’t pick up on any of that. They can’t. You have to physically go and have a look at these properties. We’ve all seen the photos online and then gone to the property and scratched our head and gone “Have they photographed the same property I’m standing in?” They always take them from a great angle. The lenses that are used. It’s marketing. They’re allowed to do it, funnily enough. But you have to go and look at these things. And don’t substitute proper research for a data report.
These reports will typically give you a guide on value based on an algorithm, based on all the other four-bedroom two-bathroom houses that have sold in the area. But if they are any way close to reality, it’s just down to luck.
Kevin: Yes. It’s crazy, isn’t it? Sometimes we spend more time researching smaller items we buy – like clothes, computers and so on – than when we go and spend potentially $500,000 on a property purchase.
Patrick: Yes. I see people do it all the time. So, that’s something that’s really important. That will lead you to not doing enough research.
The other thing is just taking a percentage off the agent’s guide. I’ve seen people and clients do this, and they come to me and I’ll say “Why did you pay $1 million for that?”
In fact, I’ll give you a real example of one recently. The guide on the property was $1 million plus. The lady ended up paying $1,050,000 for it. She wasn’t a client of mine, but she was thinking about being a client of mine. I looked at it for another client. She came back and said to me – I followed her up a few weeks later – “I bought such and such.” And I’d looked at it and thought it’s worth mid-$900,000s, maybe $950,000 tops.
I said “Well, why did you pay that?” “I thought it was going to go for that and the agent said that they had interest at that.” And I said, “What research did you do?” “Well, the agent’s guide.”
Look, they’re doing their job. That agent did a great job. He got a great price for the seller. That’s his job, that’s what he’s paid to do. He or she is not there to help you, apart from help you transact at the highest price they can get out of you. That’s their job.
You need to do the research, otherwise you’re going to get caught out. And you can’t just look at a price guide or an asking price and take, say, 5% off and if you can get it at that, you’re doing okay. Because some agents price probably 10% and 15% over what they’re actually worth just to get the business to sell it. Don’t rely on that.
Kevin: On that point – and I’d love to get your feedback on this – I’ve spoken to many buyer’s agents who are quite regularly going down dry gullies, because they’ve worked out what a property is really worth and what they’re prepared to pay for it, and then it’s passed in at auction, so they have to move on to another one. You just can’t let emotion take place. This is how people pay too much for properties, Patrick.
Patrick: Oh, yes. Absolutely. And it happens. There were a lot of properties that have sold in the last 12 months that I’ve seen that would still be in negative equity today on a fair valuation, even with the market increasing 10%.
You have to be aware. I say to clients, “If you’re buying your own home and this is going to be your family home for 15 or 20 years, and you’re prepared to pay over the odds, here’s where fair value sits, here’s what you can afford. It’s up to you; make the commercial decision.” And some do, but most people can’t really afford to be paying over the odds, but most do.
The other thing I see them doing is over-capitalizing on the property renovations. That’s something that people do. They spend too much money doing up a property, and then when they come to sell it, they look at the purchase price they paid, they look at market growth, and then they look at what they spent on renovating it and expect that they should get a premium on that. It doesn’t happen very often.
It’s very often I say to the agent “How did you come up with the price on that?” “Well, they paid this for it five years ago, they spent this on it.” I’m like “Yes, that’s all interesting, but you didn’t need to put an $80,000 kitchen in.” A $40,000 one would have been just as appropriate and fitting for the value of this property.”
The same thing happens with under-capitalization, which I see people do, as well. They go too cheap. They pay a lot for it, they’ve paid so much, they’re going to renovate it, and they want the new kitchen. They’re not going to wait a few years to save up for it and live with the one they have, they’ll go and get a flatpack or a cheap kitchen, and it’ll always look cheap. So, those sort of things.
Far less goes wrong with buying an existing property than buying the investment property. So just have that awareness. There are a lot less mistakes to be made. Going back to the investor conversation, if you’re buying something existing in an established area, there’s more pricing information, there’s some history, so you’re far less likely to get it way wrong. You can still get it wrong, but it’s much less likely. Your chances are much higher if you’re going to be buying new.
Kevin: Some great advice there, Patrick. Thank you so much, mate. It’s been great spending some more time with you. Patrick Bright is from EPSPropertySearch.com.au.
Thanks for your time, mate.
Patrick: My pleasure, Kevin.