06 Feb The only free cheese is in the trap – Brett Warren
An incentive to buy a property is generally offered for a reason. Guaranteed rent or a car or a holiday with the purchase. The only free cheese is in the trap. We discuss that with buyers agent Brett Warren.
Kevin: When we see the market the way it is now – a lot of pressure on it, a lot of over-supply and stock – it’s quite normal for developers to start offering incentives – we won’t call it bait, but that’s pretty much what it is – to buy. I’ve seen people offering “Buy a unit, you’ll get a car,” or “Buy a unit, you’ll go in the running to win a trip overseas.” Brett Warren from Metropole Properties joins me to talk about this.
Brett, do these work? And I think I know what the answer to this question is going to be. Is that a good enough reason to buy a property?
Brett: The answer is no, but to some people, it does. People think of it as a big bonus. I think the biggest one at the moment, especially for investors, is that incentive to rent back for two years, so they’ll actually pay your rent for the next two years even if your apartment is vacant.
Kevin: Why is that a problem if you’re going to be given a really good return for a couple of years?
Brett: The problem is who’s paying for that return? That’s actually built into the price. Developers don’t give away things for free. They don’t give away cars. They don’t give away trips. They don’t just pay your rent to be nice for the next two years. They actually factor that into the price.
Quite often, in the past, we’d get calls from agents telling us about a property that’s coming up. The client paid $550,000 and it’s only going to be selling for $500,000 or $520,000, so it’s a bargain. And when you go back and look through it, they’ve paid probably 5% to 10% too much for the property, because of those types of things – the incentives, the rent backs, the trips, the cars, and those types of things as well.
Kevin: In the event that you are looking at a unit, you genuinely think it’s a good buy and there is a good rent-back on it, how do you make sure that the rent that’s being offered is not over-inflated or, in fact, it is market?
Brett: That’s a good point, too. I’d always get a second opinion. Speak to a reputable agent. Obviously, the sales agents are going to have their rental appraisals that would have been done, but like everything, I’d always get a second opinion on those types of things from an independent third party.
Kevin: I guess the bottom line is if you’re looking to make a purchase, make sure it’s on the quality of the property and not what surrounds it – in other words, not what’s on offer to get you to buy it. I think, generally, if there is something on offer that’s like bait or an incentive, there’s probably a very good reason why that has to be offered.
Brett: That’s what I probably tend to agree with too, Kevin. The higher the incentive, probably the more I’d steer clear of the property itself.
Kevin: Can we just very quickly talk about auction? How do you go about purchasing a property pre-auction? Is that something that’s becoming more common?
Brett: Yes, it is. Again, it’s about having that communication and understanding with the sales agent of what the seller’s needs are. Sometimes they’re desperate to sell; other times they’re going to see the auction through. A good question to ask is “Would they sell before auction?” Most agents will say yes, but you want to understand their needs for selling and things like that.
A little tip would probably be to do all your due diligence at the start and if you are going to make an offer, do it at the start of a campaign rather than towards the end. If you’re going to make an offer a week out from auction, that’s probably here nor there; they’re probably emotionally committed to the auction.
Whereas if you’re putting all your work together at the start, there have been fewer offers, there’s been less time on the market, and there’s more time until the auction, so they’re probably more open and receptive to actually doing an off-market transaction.
Kevin: Would the offer that you make have to be a premium offer? Because agents will tell sellers that the reason they’re going to auction is the opportunity to get a premium price, so to stop an auction, the seller’s agent will probably tell you that they’ll take an offer but it needs to be a premium offer.
Brett: It does. It needs to be a reasonably solid offer. You probably won’t get a second chance at it. It’s not like you’re going to be able to negotiate too much, if at all.
Kevin: Because just the pure sense that you’re going to negotiate is an indication that they’re actually giving away their reserve, which a good agent wouldn’t let them do.
Brett: Absolutely. Your offer probably will also have to be under auction conditions or very close to…
Kevin: Which is cash unconditional.
Brett: …Cash unconditional, so you want to do your building and pest. That’s the first thing I’d do. If I liked the property, I was going to bid at auction, and it was four weeks away, I’d be getting a building and pest done immediately. That way, you’ve ruled it in or ruled it out straight away, and then you can actually put an offer forward without having to do that.
Kevin: Because one indication to a seller’s agent that they have bidders is the number of building and pest inspections that are done prior to auction.
Brett: Yes, absolutely. Also, have there been other offers prior to auction, as well?
Kevin: What is the value in asking that, though? Because you’re not going to be able to find out what the offer was.
Brett: No, but if you were putting an offer together in the last week and there have been four or five other offers, they’re probably not going to take it off the market unless it’s a crazy price. But if you’re doing it at the start of a campaign and if you’ve put a good, solid offer together without all your conditions and things like that, your chance of getting an offer accepted is probably slightly higher.
Kevin: So you really have to be buyer-ready, don’t you?
Kevin: Have you finance in place, have the building and pest inspection done, and get a reasonably good estimate of what the value of the property is.
Do you find, generally, that most buyers know value or do they need to get a valuation done?
Brett: Quite often, valuations are very conservative. Particularly some of the auctions we go to, it’s the last man standing kind of thing – high disposable income areas, things like that. People tend to pay considerably more than what the property is worth just to get into that area, that school catchment, that kind of suburb, and things like that.
They have to have an idea of what the value is but also be comfortable with what they’re spending at the end of the day.
Kevin: Valuations tend to be quite conservative. Why is that?
Brett: The bank is not going to over-value and over-stretch themselves.
Kevin: But it’s not a bank; it’s a valuer.
Brett: It is a valuer, but they report to the bank and things like that, so if it comes in considerably more or less, then the valuer is going to have a few questions to answer.
Kevin: Is it possible to say to a valuer, “You’re not doing this for a bank; I’m doing this so that I can get a feeling of what the value of this property is because I want to buy it at auction.” Will that valuation be different, do you think, from a bank valuation?
Brett: I think so, yes. I think it definitely would. Again, it’s about communicating your needs to the valuer and making them understand what you need this for. I think once they realize that they’re working for you and not the bank, then it would be a different story.
Kevin: Brett Warren is my guest. Brett, thank you very much for your time.
Brett: Thanks a lot, Kevin. Good to be with you.