Chapter 2

Understanding Buying Strategies

IN THIS CHAPTER

Understanding the difference between private treaties, auctions and tenders

Tracking down off-market sales

The multimillion-dollar question has always been how do you know how, where, what, and when to buy real estate?! We have always believed the best time to purchase is when it's the right time for you personally - regardless of what the market is doing at the time. That's because you should always consider property ownership as a long-term decision, which means that any market wrinkles will be ironed out over your many years of ownership.

In this chapter, we take a brief look at some of the most common methods of purchasing property - whether as a home or an investment - and we tell you what we think about whether you should pursue these options. We start off with a discussion on how to purchase via private sales, auctions and tenders. We then cover getting a jump on the market through off-market sales.

Buying Property Strategies

Opportunities to purchase real estate are near boundless. Every city, town or suburb has people trying to sell for one reason or another. The task for the property buyer is to sort the wheat from the chaff - finding the best properties from the pool of those available on the market. This is where real estate sales agents come in - they're a central place for buyers and sellers to channel their separate interests.

When you find a property, however, how does it change hands between owners? Obviously, through a sale. Properties are sold in three main ways - private treaty sale, public auction and tender.

Private treaty sales

Across Australia, the most common way for properties to change hands is through private treaty sale, or simply private sale. When the owner of a property decides she wants to sell by private sale, she places the asking price she wants on the property listing and then waits for offers to come in, usually via the real estate sales agent she has appointed.

In most stages of the property cycle, both vendor and potential purchaser then negotiate. The seller wants $800,000. A buyer comes in with an offer of $785,000. The seller lowers her price to $795,000. The buyer raises her offer to $790,000. And the haggling and changing of position keep going until the property is sold. Or not sold. Properties put up for private sale can be sold very quickly - often before they've even really been advertised. But they can also take months (even a year or more) to sell in a particularly slow market or when the seller has unrealistic expectations of what the property is worth.

The private sale market is all about negotiation. Potential buyers usually have plenty of properties on the market to choose from. And there's usually no rush (when compared with auction, with the process of purchasing literally over within 30 minutes). Negotiations can last for days, sometimes weeks.

A non-negotiable sale is rare when it comes to private selling. For a start, most property sellers start with a price a little above what they really see as their lower limit. If they're really determined to get a minimum of $800,000 for the property, for example, they may start their sales campaign with a price of $825,000 in the hope they'll be able to negotiate a price somewhere between $799,000 and $810,000.

Prices are almost always negotiable. And it's sometimes up to buyers to be persuasive about what they believe the market value of the property is. You can try to get a seller to reduce her expectations through a number of means (although you'll usually be dealing with the seller's agent, who'll be wise to most of these tricks). Often, it's as simple as getting a builder, building inspector or valuer to point out the property's flaws, showing how much fixing these problems is going to cost.

Buyers' agents can be a very useful part of your team too, particularly during negotiations. Putting your professional buyers' agent up against a real estate sales agent can be like throwing suited lawyers into a locked room together. But buyers' agents know sales agents' tricks and vice versa. Experienced buyers' agents take the emotion out - you're likely to be emotional, especially if buying a property to be your home, but they're not. And removing emotion is always important in property negotiations where you're talking about large sums of money. (See Chapter 3 for more on finding a buyers' agent.)

Experienced real estate sales agents can be a curse to deal with, or they can be your best helper. A sales agent's primary and fiduciary responsibility is to their vendors (their clients), and they'll obviously be more loyal to their clients than to prospective buyers. But agents also often believe that their clients' expectations are unrealistic and will use all offers, sometimes even a very low one, as a way of conditioning clients that the price they expect for their property is too high.

In most states and territories of Australia, purchases made through private sale treaties come with a cooling-off period, where buyers can change their mind and get out of the sale contract. The period starts at midnight on the day the contract is signed and lasts for up to five business days. A decision to exercise your right to a cooling-off period may incur penalties (usually quite small). Sellers don't have the right to a cooling-off period.

Public auctions

Let's be honest, buying property at auction is a strategy that scares many people. But it really shouldn't, since auctions are the most transparent way to purchase real estate - everyone present sees what the market is prepared to pay for the property. A good auction can be a thrilling spectacle, with the drama played out on suburban streets and footpaths - sometimes bidding is so intense, and the price achieved so out-of-the-box, that it causes uninvolved spectators to audibly gasp and even break into applause when a 'winner' is finally determined.

Auctions are commonplace in Melbourne, Sydney and Brisbane, and they're used by real estate agents in many other parts of the country. The aim of auctions is to create an intense atmosphere for the sales process. Within a period of 10 or 15 minutes (after the particulars of the property have been read out), a property can be sold - unless, of course, it's passed in because it hasn't reached the reserve price the vendor has set (see the sidebar 'Passed in: Post-auction negotiation'). Unless you're the one making the final bid, you're not buying the property, and you have to continue your search.

The auction process is always under scrutiny. Occasionally, mooted moves are proposed to impose restrictions on auctions following media noise citing concerns from buyers who've missed out on properties or believe that agents have misled them over the likely sales price of a property. These concerns appear to be cyclical and seem to get the most airplay when property prices are rising, and people are feeling locked out of the market.

Regardless of whether you're purchasing the property as a home or an investment, if you're considering bidding at an auction, set yourself firm limits before you attend. If you've spotted the property at the start of its marketing period, you usually have about three or four weeks before the auction to do your due diligence - you can't do that after an auction. No cooling-off period (refer to the preceding section) is offered in public auction sales. Several days before the auction, nail down what you believe is fair value for the property. Then try to bid only up to that price. If your research suggests that a fair price for a unit is $800,000, set your limit at that price with the aim of only picking up the property if it goes for $800,000 or below. If you are purchasing as an investor, this purchase is about making money - it's much harder to achieve your goal if you overpay for the asset in the first place. Stay focused - and don't get emotional.

PASSED IN: POST-AUCTION NEGOTIATION

Auctions often fail to get sufficient interest or momentum from bidders to move bids to a point that's acceptable for the vendor to sell. Auctions can get off to a slow start and not get any faster. After a few lacklustre bids, the auctioneer declares the final bid to be insufficient and that 'the property will now be passed in'. What happens then?

If no genuine bidders turned up, or only one bidder, and no real auction took place, the property usually effectively reverts to a private treaty sale. If the agent can't get an acceptable bid, she'll place the property back on the market with a 'For Sale' sticker that afternoon.

If several bidders showed up, the house will be passed in. The highest bidder will probably be ushered inside (but not always) by an agent and told what the vendor's reserve is (say, $800,000). Other agents (sometimes two or three other agents, including the auctioneer, attend every auction) will try to keep the next highest underbidder (or underbidders) around to let them know they still have a chance. The highest bidder will usually have the first crack at the vendor's reserve. If she isn't prepared to pay the reserve price, then agents...