By Rich Harvey, CEO & Founder, propertybuyer.com.au
Everyone loves a bargain. Something that was once a high price now being offered at a discounted rate is enticing, almost regardless of what’s being sold.
It’s especially true in real estate.
At the moment, particularly in the Sydney market, there are some attractive deals to be found, with prices having come off their peak from about two years ago. Savvy investors can snap up a quality property for much less than they would’ve not so long ago.
But a price reduction doesn’t always represent good value. In fact, good value can be deceiving and it can stem from using sales that don’t tell the truth about market value.
Let’s say you come across a nice home in a good suburb and do some research on its most recent sales activity. You discover that some lucky soul just paid $2.4 million, despite it also trading back in early 2017 for $2.7 million.
Someone has surely bagged a deal?
Well… maybe not. This could be a classic ‘out of line’ sale, and they might have ended up with a dud.
Here’s why.
The tricky nature of out-of-line sales
Put simply, an out-of-line sale is when a property sells contrary to evidence. Its price, either low or high, is out of line with the market value reasonably suggested by all available comparables and other market factors.
Let’s say an average quality property sells for $550,000 in a good suburb, at a price significantly below the $750,000 median. That’s quite possibly an out-of-line sale. Despite all the surrounding evidence, it seems a $200,000 discounted on market value was applied to this one property – why would that be?
Well, there are a number of reasons. It could be that a family member has sold to their child or spouse at a discounted price, for personal reasons. It might have been a transaction between related entities for legal and accounting purposes – like a sale to a family trust or company.
Or let’s say there’s a unit in an inner-city suburb that sells for tens of thousands of dollars more than expected for no obvious reason. That out-of-line sale could be a case of an over-eager buyer who simply had to have the place and went in hard at the auction. They might have been an adjoining unit owner looking to expand their current floor plan. It might have been the building’s original developer wishing to portray resilient pricing because he had more stock to sell.
Out-of-line sales are only dangerous when you don’t spot them before relying on their story to make big financial decisions.
Is it really a bargain?
Let’s return to that example of the nice house that sold for $2.7 million two short years ago and assume it was back on the market for $2.4 million.
That $300,000 discount is nothing to be sniffed at. It could present a real bargain ready to be snapped up.
Or it could not.
What’s more likely is the current owner overpaid for it when the heat was really on at the tail end of the boom. Maybe they were driven by emotion and got carried away. And now, with the market having cooled, they’re trying to get out while they can.
Identifying out-of-line sales and determining why a buyer has paid an unexpected figure is a skill property valuers use every day.
They start by looking at a range of comparable sales in an area, but don’t immediately assume all represent a straightforward, ‘arm’s length’ transaction. When they spot one or two that don’t make sense, they’ll dig a bit deeper – seeking out who the vendor and purchaser were, what their motivations might have been for transaction (usually by calling the agent) and what other non-obvious physical attributes may have affected the sale price.
All buyers should do the same when determining an offer price for their next purchase. Look at the area’s comparable sales as a starting point, but don’t take them all on face value. Look for unusual outcomes and try to understand why they reached an unexpected result.
It’s absolutely critical that you assess the fundamentals of every property to determine its true value, not the price it’s being offered at or what it last sold for. These figures can skew your thinking if you’re not careful.
Sales evidence is a useful part of your research toolbox. But out-of-line sales throw a spanner in the works and distort what’s actually happening. It’s another reason why it pays to use a qualified, expert buyer’s agent who can spot anomalies and adjust expectations accordingly
Get a full picture and compare
With out-of-line sales, a discount isn’t always a bargain, and a premium isn’t necessarily a bonus.
It’s crucial that you have the whole picture to be able to make an informed decision.
Use every available resource at your disposal to perform extensive due diligence. And, employ the services of an experienced buyer’s agent to help you find the best investment opportunities and define their market value accordingly.
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