As the financial year ended, bulls were quick to announce the positive returns for the year ended 30th June.
When we shop we look for bargains, especially in today's tough economic environment. We now expect to get big discounts of anywhere between 10% and 50% off the recommended retail price for almost everything we buy. And retailers, in order to keep their businesses alive, have responded by dropping their prices and spending money on advertising and promotion to make sure we know we can get a bargain if we shop with them.
In fact, the days are long gone when we'd wait for the Christmas and New Year sales to save a few bucks. Sales are now a regular and all year round event spurred on by weakening demand from value conscious consumers, the growth in local and overseas based online retailers and the launch of numerous online one-off promotional and special/heavily discounted deal sites.
And the same principal applies when it comes to buying residential property which is now so expensive (even with the recent softening in prices) that even a modest saving on the asking price can translate into tens of thousands of dollars in interest savings over the life of your home or investment property loan.
So it goes without saying we all want to buy at the lowest price possible and getting a property bargain (that is, where the property appears to be undervalued) is a dream come true for the average buyer. But when it comes to residential real estate, caution is required because property bargains are a rare commodity.
Do property bargains really exist?
It's usually pretty easy to spot a bargain when shopping for food and clothing and other everyday items because most of us have a good idea of what something is worth. And if we're not sure we can hop online or go into different stores to compare brand prices across a range of suppliers. But it's much harder when it comes to real estate, especially since each property is one of a kind and may only come onto the market once or twice in our lifetime.
The reality is that it's highly unlikely you'll come across a property bargain unless the vendor has no idea what the property is really worth or unless there are unusual factors driving the sale. The floods in Queensland is a good example of an unusual circumstance where property prices dropped by as much as 15% in flood-prone areas. Thankfully they are moving back to track against their long-term price trend as the impact of a once in a lifetime natural disaster fades with the passage of time.
There are three important numbers when buying real estate; (1) what you want to pay, (2) what a vender is willing to accept and (3) what the property is worth to other buyers. When assessing whether a property is a bargain or not you need to ascertain the extent to which the price reflects any or all of these value drivers – so research, questioning and independent advice is vital.
It is not unusual to come across a distressed sale or off-market listing where a reduction in buyer awareness and consequently market interest keeps the price down. But the fact is that most sellers and their agents have done their homework on market value and know what the property is worth, especially in a willing buyer-willing seller transaction. And of course they will put in strategies to get the best price possible.
So if it looks like a property is selling well under market value you need to be careful. Such sales will normally occur because the seller is in financial distress and/or needs to off-load his or her property quickly (meaning you could get a good deal) or the property is a dud and the seller wants to offload a non-performing asset (which is something you should stay away from).
On balance, while there may be circumstances in which you could find yourself a bargain, in an open and transparent market it is unlikely you've got the deal you think you have.
In his next column Peter will explore how to go about finding a property bargain.
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Peter Boehm's first book The Great Australian Dream: A Guide to Buying Your First Home is now available from all good bookstores and online. It discusses the numerous challenges Australians face in entering the property market and provides straightforward advice, hints and tips on getting past them.
