Growth

 

Case Study – Why getting it right the first time counts
We have two properties for sale, both at a $1.2 million asking price, which is fair market value based on recent comparable sales. Let's say they are two side-by-side townhouses on a good street in Kew.

Buyer One secures the first property at $1.18 million first because he made a good offer and got lucky - the developer needed some cash. Four weeks later, we are hired by Buyer Two to buy the remaining property and we secure it at $1.22 million. The developer has become more bullish, the agent tells us there is another buyer, we are aware of the first sale at $1.18 million but have not been able to secure it for anything less than $1.22 million. The client could well ask “Gee, why are we paying an advocate?” But let's look closely at Buyer One, who didn't use an advocate and paid $1.18 million and Buyer Two, who, four weeks later, did use an advocate and paid $1.22 million.

Buyer One was an older couple – let’s call them Brian and his cheery, outgoing wife, Mindy. Their children had left the family home - which they recently sold – and being 55, they had just received an adequate package on retirement. Sound familiar? This move was to an area that Brian and Mindy were unfamiliar with (although they dreamed about living there) and they both began to feel homesick after about 6 months. Brian's existing medical condition started to get worse. He found it almost impossible to negotiate the stairs up to the bedroom several times a day, so he started to "live" in the lounge room downstairs. This situation continued for another 24 months before Brian and Mindy sold their ‘dream home'. They decided this time on a "sea change" and moved to Torquay. But five years later, the isolation and lack of medical services become all too much and they sold up and spent a long time trying to get back into the market somewhere near the quality of their original home in an inner suburb of Melbourne. While living in Torquay, they had missed the big market move that happened in the suburbs. Brian and Mindy had significant transaction expenses twice during this 10-year period.

Buyer Two (Peter and Phillipa - both 42 with two early teenage children) - used the "expensive" buyer advocate but had been through a solid due diligence process in a short period of time. They felt comfortable with the floorplan (upstairs bedrooms were great, leaving more living space downstairs), location (next to a park so backyard size wasn't an issue, near to the tram stop for school and work and 200 metres from a supermarket and general shopping precinct ). Ten years later, Peter and Phillipa are still happy in the same place.

Let's look at the real life numbers in these decisions. Buyer One and Buyer Two are in a different market. The market falls for the next five years and then begins to rise in the inner city areas but remains stagnant for a further three years in regional and coastal areas. This is basically what happened in the 1990s and may or may not happen again between 2005 and 2015.

Year	NOW	1	2	3	4	5	6	7	8	9	10
Buyer 1 Capital	1,200,000	1,140,000	1,105,800	1,005,800	955,510	907,735	862,348	862,348	862,348	948,583	1,043,441
Median % movements		-5 %	-5%	TRADING EXPENSES	-5 %	-5 %	-5%	0 %	TRADING EXPENSES	+10 %	+10 %
Comment				BUYER 1 TRADED					BUYER 1 TRADED
Debt	1,249,000	1,249,000	1,249,000	1,249,000	1,249,000	1,249,000	1,249,000	1,249,000	1,249,000	1,249,000	1,249,000
Equity	-49,000	-109,000	-143,200	-243,200	-293,490	-341,266	-386,652	-386,652	-386,652	-300,417	-205,559
Buyer 2 Capital	1,200,000	1,140,000	1,105,800	1,072,626	1,040,447	1,009,234	1,261,542	1,387,696	1,526,466	1,679,113	1,847,024
Median % movements		-5 %	-5 %	-5 %	-5 %	-5 %	+ 25 %	+10 %	+10 %	+10 %	+10 %
Debt	1,278,000	1,278,000	1,278,000	1,278,000	1,278,000	1,278,000	1,278,000	1,278,000	1,278,000	1,278,000	1,278,000
Equity	-78,000	-138,000	-172,200	-205,374	-237,553	-268,766	-16,458	109,696	248,466	401,113	569,024

 

Scenario 2 Capital Growth moves consistently upwards at 6% for the next 10 years. Buyer One and Buyer Two are in the same market.

Year	NOW	1	2	3	4	5	6	7	8	9	10
Buyer 1 Capital	1,200,000	1,272,000	1,348,320	1,248,320	1,323,219	1,402,612	1,486,769	1,575,975	1,525,975	1,617,534	1,714,586
Median % movements		+6 %	+6 %	TRADING EXPENSES	+6 %	+6 %	+6 %	+6 %	TRADING EXPENSES	+6 %	+6 %
Comment				BUYER 1 TRADED					BUYER 1 TRADED
Debt	1,249,000	1,249,000	1,249,000	1,249,000	1,249,000	1,249,000	1,249,000	1,249,000	1,249,000	1,249,000	1,249,000
Equity	-49,000	23,000	99,320	-680	74,219	153,612	237,769	326,975	276,975	368,534	465,586
Buyer 2 Capital	1,200,000	1,272,000	1,348,320	1,429,219	1,514,972	1,605,871	1,702,223	1,804,356	1,912,618	2,027,375	2,149,017
Median % movements		+6 %	+6 %	+6 %	+6 %	+6 %	+6 %	+6 %	+6 %	+6 %	+6 %
Debt	1,278,000	1,278,000	1,278,000	1,278,000	1,278,000	1,278,000	1,278,000	1,278,000	1,278,000	1,278,000	1,278,000
Equity	-78,000	-6,000	70,320	151,219	236,972	327,871	424,223	526,356	634,618	749,375	871,017

 

It's even worse if you're an investor and Capital Gains Tax is involved. Good property buying is about getting it right the first time. Over ten years the “professional advice” fee pales into insignificance. We have been hard on ourselves, saying that Buyer One was a good negotiator and we were unlucky. In reality, it is usually the other way around, making the figures even more contrasting than they already are.

Yes, we try and save you money and most times we do, but are we doing our job if we buy you a bad property with a $50,000 “saving off the sticker price”? Are we doing our job to try and be smart and lose a great place for .05%? No. We can go for a lower price but the risk is high. Our recommendation to you is to secure this property for the long term and in time you will see the true bargain value it represents.” This is a comment some of our clients see in their detailed 20+ page Property Reports.

 

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Case Study 2 – Why buying right the first time counts – Balwyn 2005
We bought this property because our clients had specific needs owing to a disability. This property was the first one in a six-month search involving several suburbs that met all of our client's needs: a feeling of luxury, a quality build, modern conveniences, a close location to the supermarket, tram and village shops, good views and four good-sized bedrooms with easy access to bathrooms. It also had wheelchair access, security and a heating and cooling system (all changes to the existing design that the builder included in the price). But what made this a great long-term purchase for us was that the builder had thought about his market and had included a downstairs bedroom and ensuite. In the 2000 market of ‘slap ‘em up and flog ‘em off', this was an unusual product. For that reason, we paid close to the asking price because our client did not wish to miss out on the property and we felt that they could do no better in the long-term. In fact, it may have been months, even years before we found something as suitable for them.

 

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Case Study Three – Why buying right the first time counts – Middle Park 2005
We bought this property because our clients wanted to live in Middle Park or Albert Park. They were also expecting their first child and planned to have more. We could have bought a house that would do for five years or we could have bought this property. We acknowledge that, with two children, our clients might well want to move in 5 years but, with this floor plan, they won't have to if the market or their circumstances are not conducive to such a move. Upstairs is two bedrooms - the master and one that will serve as the nursery until the children are old enough to move downstairs, when it can be converted to a study and form part of a “parents retreat” area.

Downstairs is a nice open-plan living area and a formal dining room that can be converted into a second downstairs bedroom. If they only have one child, they can keep the formality of the study and formal dining room if they choose or they can have a TV room. If they decide to have three children, they could survive in Middle Park with this floorplan for a time. That is the reason why after a year of looking by themselves and six weeks with us, when the agent offered a good deal for his client and ours, we recommended that they accept with no arguments – and they did.

 

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Case Study Four – Why buying right the first time counts -- Mordialloc 2005
We bought this property because our clients wanted a ‘buy and forget' investment property that would be easy to rent out and could be used by their children when they grow up (in about 15 years). Here the floor plan is OK (not our favourite), but the property has been recently renovated, well maintained and would be easy to look after in the future. On top of that, it has a renovated bungalow and an en suite out the back. However, all that is minor compared to the location and price scenario. This part of Mordialloc is continues to move upward. It has a good location to the beach, river, shops, rail, schools and the main arterial road, the Nepean Highway. When the agent told us the price (which represented not much above land value), we recommended that our clients buy it immediately. The upside was that maybe some money could be saved; the downside was that somebody else would surely have snapped this one up. We had been looking for 5 months in a 1 kilometre radius, so we knew the values, we knew what people were paying for the old Epsom race course (a lot more and lot further away from the action) , and we knew what was wanted. So did our client and they bought it 2 days after it hit the market. A great result!

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