How to buy in Melbourne

How to Buy Property In Melbourne

Our ongoing series of articles on property buying in Melbourne. Be sure to check back regularly for the next installment!

We have categorized these articles according to the various steps of the property buying process.
Feel free to browse through the articles in any order as each is a self-contained chapter full of
relevant information.

Ask a question Service

We welcome your questions and feedback. If you would like to ask a question or leave a comment, please email howto@jpp.com.au. Answers will be published in future how-to articles.


Your Needs

Property Selection – Location and Style

Your home is one of the last remaining appreciating assets where Capital Gains are not taxed. Capital growth in plain and simple terms is how much profit there is between buying your property and selling it. We need to take into account all sorts of different things, but the main criteria comes down to what people will pay for your property in the future and what you need to pay to own it now.

What you need to pay now will be covered in our negotiations section of this “how to” series. What we will concentrate on in this article is how to select a good property. We have all heard “Location Location Location.” We have heard this from everyone and you will hear it from me as well.
Whether you are buying a home to live in or an investment property the same basic rules apply to location:

  • The level of services and amenities within the immediate vicinity, those within the suburb and those within the district.
  • The type and style of the property match the general area
  • The property is not out of place

Services and amenities that are fundamental to the majority of the people that will eventually purchase your property include:

  • Rail transport
  • Distance to parks and gardens
  • Small shops such as cafes and milk bars
  • Major shopping centres and supermarkets
  • CBD Road access
  • Schools

When we talk about style we are not just talking about the house. We are talking about the streetscape, the neighbours’ homes, the feel of the area within the suburb and the public connotation of that area. If the property you are interested in has no nature strips and is devoid of any colour then it is unlikely to attain prices as high as neighbouring streets that have excellent tree canopies and very wide nature strips.

Another easy way to guesstimate whether other people think there is value in the street is to look at how many renovations there have been. If all the properties in the street are run down and the gardens are poorly maintained and the houses all look as though they need attention, it usually means the other residents don’t care that much for their properties or that it may have a higher percentage of tenants rather than owner occupiers. If a number of people are doing work or have extended their homes upstairs or have beautifully landscaped gardens, then this can indicate that other people are happy to invest money in the area.

If we are looking in a new estate in Caroline Springs and a one hundred year old run down Victorian homes is on the market, then most people are unlikely to want this style of property compared to the brand new contemporary homes. This is not the case in leafy Hawthorn or Yarraville which is filled with these styles. This is not to say a unique property is not worth purchasing, it just means there is a greater risk if not as many people are going to be interested in the property at time of sale. Similarly, buying a two bedroom unit in Elwood where the predominant style of housing is units is a low risk investment choice. Buying a 2 bedroom flat in a block of 20 in Croydon would be a very high risk strategy as there would be very few of these developments and the majority of people looking in this area would be looking for homes or Villa Units.

Think about the use of the property. A professional couple that comes across a 4 bedroom 1 living zone house may be ecstatic. They have their Bedroom, a guest bedroom and a study each. However, the largest segment of the market who buys 4 bedroom homes would probably be Mum, Dad and 2 teenagers. As a father of teenagers myself, I can tell you categorically that I would not buy a one living zone house. I would be insane in fifteen minutes. Even though this type of property may suit your needs think about who is likely to purchase it from you. The more people this property would suit, the more chance you have for a higher demand, the more chance of capital growth.

What we are doing here is playing percentages. If a lot of people seem to like the area now and are happy to spend money to stay in the area, then it is likely that people will want to do this in the future. The greater the segment of the market that wishes to do this, then the larger the degree of demand, one of the two key factors in setting price: Supply vs. Demand.

There are many other factors involved here that we will tackle at another time. You can purchase something that doesn’t meet all, or indeed any of these factors, however your capital growth then depends on how well you negotiate the purchase price. You can also “value add” to a property that may not suit many prospective purchasers. If we go back to the last example of 4 bedrooms one living zone. If you can add a living zone by renovating then you are value adding and this may increase your capital growth.

Please feel free to email us if there is a specific topic you wish us to write about at howto@jpp.com.au. Over the next 12 months we will be talking about many different topics dealing with buying good property.

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Searching for Property

Searching the market for Property

Searching for property is the single most time consuming part of buying a new property. It is also where the biggest mistakes can be made. If you have ten properties to see on any given Saturday, the chances of viewing more than 4 effectively are slim. Once we know what a clients needs are and we truly understand what our client wants, even in a high turnover market, it would be rare to want to view more than 3 properties.

If you try and view ten properties the chances are you will miss out on at least half and those you do visit might not have the correct time spent at them. Also “Murphy’s Law” predicts that those you missed were probably the ones you should have visited.

When you are just starting out, walk through lot’s of houses just to get a feel of what you like. Narrow down the basics. Then choose some basic parameters that you can see both on the web or ask simple questions of the agent:

  • Land size – is this back yard too big or too small
    Once you have found the right feel ask the agent how big the block is. Anything more than 20% away from this – DON’T VISIT.
  • Number of living areas and number of bedrooms
    Work out what you like then stick to this. If you need 2 bedrooms and a study then a 2 bedroom flat with one living zone does not need to be visited.
  • Unless you only want period home or modern home then style is totally your choice.
  • Car space
    This is important in inner city properties as they make a huge difference in both price and what you want.
  • Number of Bathrooms It is either “one is OK”, or its not.
  • The last factor is price
    It is no use looking at something that is worth 10% over the top of your budget. In actual fact it will be detrimental as it can cloud your judgement on what you can afford.

It is far better to walk through 3 or 4 properties and inspect them thoroughly rather than run through ten and not remember any of them.

How to search efficiently

Start with the internet. Web portals are a great place to start as they cover most of the agents

Use the search parameters to refine your search

When looking at advertisements on the web:

  • Phrases like ‘renovators delight’ or ‘restore to former glory’ can mean the house may not be liveable. If you don’t want to renovate at all these properties can probably be scrapped off your list.
  • If there are no pictures of the bathroom or kitchen then they are probably not renovated.
  • If there is no price quote listed on the add call the agent and ask him or her. Just because it appeared on your search results does not mean it is being quoted within those search parameters.

Other ways to find property in your areas:

  • Local papers – these can usually be found free at the Real Estate Agents office.
  • While you are there look on the front window.
  • Go inside and ask to speak with a selling agent. Get his or her contact details and stay in touch. Tell them what you are after but don’t be specific on price. You cannot be too circumspect, otherwise the agent will not know how to help you, but if you are too exact negotiations will be very difficult. (If he is a professional real estate agent with plenty of experience and you are not, then negotiation will be very difficult for you anyway).

When calling the agent do not be afraid to ask if there has been any competition. Ask if there have been any offers. Ask if the Vendors statement is available. Double check the open for inspection time. I have been to many opens where there have been typographical errors and thrown out my run. Always ask the agent if he or she has any similar properties to this one on the market at the moment, or are there any coming on shortly.

Check out the times these properties are open for inspection and set up a run accordingly. Remember agents are usually very helpful to make alternative arrangements for times if the open times are impossible for you. (Just not on normal weekends during 10am – 5pm when they are usually booked solid with other open for inspections). Make a list and leave enough space to make some notes.

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Inspecting a Property

Whilst I would suggest any prospective purchaser organise a building inspection, there are plenty of properties that you can look at and discount before paying for an inspection.

  • Arrive a few minutes before the start of the open if you can. Note what time the agent gets there (if an agent is regularly not on time and not organised this will assist you when negotiating).
  • Walk around the block and down any adjacent laneways before you go inside. It will help you to adjust to the area and neighbouring properties.
  • Always know the way a property is facing. In Melbourne the sun rises in the North East and sets in the North West. North is where all the sun comes from!! Don’t rely on the agents to have drawn a map. They could be incorrect or simply not there. (take a compass if you have to).
  • When entering the property you will be asked to identify yourself. This is perfectly normal and it is both a security measure for the vendor as well as the agent. They will ask for your name and telephone number.
  • If the agent gives you a brochure, turn it over and there is often a floor plan. I always walk through the house making notes on the plan.

In each room note:

  • Ceiling height: 8ft, 10 ft, greater than 10 ft
  • Floor covering: Carpet, Unpolished boards, Polished boards, Concrete, Linoleum
  • Bedrooms: Dimensions – pace it out. Built in robes? Curtains?
  • Living zones: Where will the furniture go? Where will the TV go? Where will we eat?
  • Kitchen: How big is the fridge space? What brand are the appliances? Gas or electric? Condition of fixtures. Is there a dishwasher and is it included in the sale?
  • Bathroom: Condition of fixtures. Separate shower? Or is it over bath. Is there any storage room?
  • Laundry: If it is a flat – are there facilities in the bathroom or kitchen? If a home – is there external egress? Is there good storage space? Can you mount a dryer or fit a second fridge?

Outside:

  • Any undercover area? Any shade from the afternoon sun? from the north west? How big is the back yard?
  • Look down both sides of the house where possible. Hot water service? Does it look old?
  • Look up – what does the guttering look like? What is the roof covering; tin, colorbond, tiles, etc. and What is its condition?
  • If you can see under the house easily – is there a reasonable gap between the dirt and the bearers Does it look very wet (think about today’s weather)
  • Car accommodation: Garage – Any extra storage space? Carport – Can it be enclosed? How many off street parking spaces?

Do not be afraid to talk to the agent. Be aware that any opinions he gives you swill and should be biased toward the vendor (his client) e.g. Is this a good investment, or is the price quote fair for the area. If you are asking him a factual based question: eg. How large is the block? He should give you an exact answer or find out. If you like the property ask if there is a vendors statement available.

If you have made some notes on each of the properties you have visited, you should be able to remember them easily once you have finished the day. Remember more than about three properties and they will tend to begin to blur unless you take very good notes.

You can take photos at most opens, please be polite and ask the agent first!!

Make your first photo the agents ‘for sale’ board: it will help you split up the photos on your camera

After you have completed your day compare your notes straight away whilst all the properties are fresh in your mind. If any of them are worth following up, let the agent know you are interested. Then you need to move on to assessment if you want to take it further.

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Property Assessment

Before the Negotiation

Doing the deal is in the forefront of a selling agents mind. And the best deal does not necessarily represent the highest price. It always helps, but you must remember that a deal is made up of Price, Timeframes and Conditions. An unconditional offer of $500,000 with a 30 day settlement and a $50,000 deposit may be far better received by a vendor than an offer of $520,000 with a 120 day settlement, subject to finance and using a deposit bond.
Whenever you are negotiating a deal, whether it is to buy a home or a refrigerator, you need to understand the rules of engagement. These can be different for every selling agent. Some will tell you they are not taking offers, some will ask you to sign papers to say you have received legal advice and others will ask you to put all offers forward verbally. Some agents demand a deposit before putting an offer before a vendor. Some of these are OK but just remember there are two parties to the contract, not one.

  • Before putting an offer forward you should always ask the selling agent when you will get a written response.
  • Always ask what settlement terms the vendor would prefer.
  • Ask what the deposit needs to be.
  • Ask how much the vendor wants to sell you the property now.

These questions will show the agent that you are not unfamiliar with the system. The agent may tend to treat you more as an educated buyer and less as a “wood duck” (totally inexperienced buyer).

This has nothing to do with what to offer or when; for that you need to carefully assess the value of the property, understand all the nuances of the current market and also know how to handle a selling agent.

Please feel free to email us if there is a specific topic you wish us to write about at howto@jpp.com.au. Over the next 12 months we will be talking about many different topics dealing with buying good property.

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Negotiation

Negotiation: A Buyer’s Perspective, Part 1

Most real estate agents that you speak to have a reasonable amount of experience but very little theory knowledge when it comes to legislation that surrounds their industry. The vast majority of agents the public deals with are Agents Representatives. This represents a six day course at the REIV. Most of their ongoing training is based on their company’s mentor and internal training programs. Some of these are very good and others are sadly lacking in structure and content.

As such you will come across a vast range of good, average and poor negotiators in your Real Estate quest. If you are negotiating against a professional, fully licensed Real Estate Agent, who is the agency
principal or one of its directors, you are in competition with somebody who would be a “Queen’s counsel” in the legal fraternity. Good Luck! This agent is probably involved in a couple of hundred property negotiations each year, similar to what we are involved with. When you are negotiating with someone who has superior knowledge of the industry and vastly more experience, then the idea is to “keep your eye on the prize.” Always work out your “walk away” point and stick to it.
When dealing with the average Agent’s Representative, you still need to keep your mind on when to walk away, but don’t be too scared in asking questions. Most of the time inexperienced agents are as nervous as you are when they are negotiating. I can remember back when I was selling, how incredibly worried I was about losing a prospective buyer by asking for too much money or asking for a difficult settlement.

One of the first things you need to decide is how much risk you wish to take and what rewards that will achieve. If you have found the perfect property that suits all your needs, and the agent is asking a fair and reasonable price, then it is probably not the time to give a “one off” low price and say “take it or leave it”. There is too much risk of losing the property. Words you can live buy whilst buying property; “Paying $5000 more for a great property is far better than saving $10,000 on a poor one”.

In a flat or “down-turned” market, agents are far more likely to be cautious when it comes to shutting down and offer. If you have ever dealt with a Victorian inner city agent, in the peak of a sellers market, any offer you try to push prior to auction will usually be dismissed out of hand unless it is absolutely ridiculously over the top. We will deal with this scenario in another topic. Whether the property is being offered at public auction, private sale, “sale by set date”, “tender” or any one of a thousand other euphemisms, a legally binding deal can be reached once the vendors’ statement (Section 32) is available. In any negotiation you are involved in you must try and exercise some control. This doesn’t mean you try to be difficult for the sake of it, nor does it mean speaking “louder” to get your point across. I am sure we have all seen the person who thinks that if he shouts louder, he gets his point across easier.

Some of the ways of wresting some control from the agent
are:

  • setting the timing of the meeting to put in an offer
  • setting the timing of when the deposit will be paid
  • talking about a slightly different settlement time than the agent had first mooted

There are many other ways of doing this and you shouldn’t try for every one of these. Don’t make the agent think you are a pain for the sake of it. Just try and make sure the agent sees you as a negotiator, not a follower.

We have all seen a hostage negotiation on TV. The “hostage negotiator” always tries to get a hostage for whatever the “bad guy wants”. We do the same. The agent wants shorter settlement, we want a smaller deposit. Or the agent wants to wrap up the deal today with a short settlement; we need a pest and building clause, and a couple of days to get the deposit together. Always try and get something for any concession you make. (and it doesn’t have to be money)

Your initial offer should be in writing and in a legally binding format. Any agent who accepts or tries to solicit a verbal offer may simply be trying to see where you are at and have no thought of passing this on to his vendor yet. Verbal offers are nothing more than banter and may not reach the vendors ears. Subsequent offer may be done verbally if you have developed a rapport with the agent. When in doubt – put everything in writing.

When you get the deal you want – even if it seems easy, be careful not to become too greedy. If you develop a mentality of; If they will accept $500k then they will accept $499, you run the risk of never buying anything. By this mentality, if they would accept $499 then $495 will get across the line and so. It is the same with you – at some stage $1 more will create a walk away point.

If you are negotiating verbally and you reach an agreement, you must “generate” an urgency to consummate the deal in writing. Give the agent a reason to drive to you or get in the car and drive to him to sign the deal NOW!! A deal is a deal when it is in writing. I have had the sad occasion of an agent telling me we had an agreement, he even told me the vendors had signed and that he would fax them over in the morning. Considering it was 10.00pm in the evening, I thought I would not press the point of forcing the agent to go back to the office and fax through the contracts. I learnt why that was so stupid the very next day. I rang the agent at 9.00am the next morning to ask where my copy of the contract was. He explained they had a better offer this morning and they were going to accept it. I reminded him the deal had already been done, in writing and was legally binding. His response to me was “Prove it!” Considering the thousands of negotiations I have been involved in, this has only occurred once, so don’t assume every real estate agent is this dishonest. But be careful!

Over the next couple of months we will talk about specific examples and walkthrough some typical negotiations step by step to try and help you to be a better negotiator.

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When is a Property “ON THE MARKET”

Following on from our notes on Contracts, we briefly touched on the Vendor’s Statement. We have all heard the term “section 32” bantered around at auctions and open for inspections. The correct term for this document is the Vendor’s Statement although it is often referred to in the industry as the “section 32”, since the document’s legal status and minimum contents are defined in section 32 of the Sale of Land act.

What we did not touch on last time was the significance of this document.
Each year around early December (just before 4 weeks of very few new listings) we begin to see the “Forthcoming Auction” label being used very widely. We also see many scheduled auctions for late February
appearing. Are these properties available for sale? The answer is simple: Is there a Vendor’s Statement available? If the answer is “yes”, then it is on the market; if the answer is “one should be available shortly”, then a legally binding agreement is not yet possible.
Agents love to have the greatest market share in the area, and one of the ways to show this is through advertising, paid by the vendor. If you are even remotely interested in a property, the first question to ask, even before “how much do you want” is “Is the Vendor’s Statement available?”

It doesn’t matter what the property price is, how negotiable the agent seems or you are told that if you don’t put in an offer, “it may be sold to somebody else”. If the Vendor’s Statement is not forthcoming, simply ask the agent to give you a call when it is available. Then put that request in writing. Getting involved in negotiations before the property can be sold is showing your cards before the agent has to show you his.

When a property is going up for auction and the agent tells you “The vendors have instructed us to go to auction” you should still ask if the Vendor’s Statement is available. As soon as it is: you can enter a legally binding agreement and therefore can put an offer on the table.

Just remember: Negotiating when you cannot achieve a result is not only fruitless, but actually detrimental as you have let the agent know what you wish to spend with no possibility of a positive outcome.

A property Passes In at Auction…. what do you do now?

Melbourne: the world’s capital of the property auction. Even after a record weekend of auctions the clearance rate remained above the magic 80% mark. This does not mean more than 4 out of 5 properties sold under the hammer. The “Sold at auction” that you see printed in the papers means sold at the auction, or after with some negotiation.

If there are multiple bidders at an auction, and the property is on the market, then deepest pockets will win. I have attended thousands of auctions and bid at hundreds of them and although I am rarely intimidated by anyone at an auction, I can be beaten by someone that has substantially more money than I do. If they have a similar amount then I will probably win simply because I understand the process better than most. But rest assured, in the 10 minutes that genuine people are bidding at a genuine auction, then the person who is willing to commit the most money will win. If the property passes in then you need to be prepared to negotiate to a conclusion. Never assume you will be going anywhere after an auction for at least 90 minutes.

Kyarra Street in Hampton took 30 minutes to reach an acceptable conclusion, even though the property was passed in on a single bid. before we had negotiated a fair price there were two other potential buyers waiting outside to begin negotiations. Grace Street in Yarraville took nearly 45 minutes of negotiation before a figure was reached and at Highett Road Hampton we endured nearly 45 minutes of negotiation followed by another private auction before the property was negotiated. The negotiations were conducted by extremely professional agents, probably two of the most experienced, agents, in Melbourne and they were extremely difficult to handle. That’s their job. They are working for the vendor. They try to work out through probing questions, and veiled threats of loss, how much money you are willing to spend on the property. If you simply keep on agreeing with everything they say you may purchase the property at an extremely elevated price, or indeed you may still miss out but the agent gets to advertise in the papers a much higher number and that it was a genuine offer not a vendor bid. He is simply putting himself in a better position to negotiate a higher figure with someone else.

Negotiation is not simply saying black is white or white is black. You must work with your opponent in order to reach an acceptable conclusion. I have negotiated hundreds of properties both as private sale and pass in situations and without doubt, the more professional and experienced the agent is, the more chance I have of reaching an acceptable conclusion. Whilst the agent is trying to get the most out of you as he can, his job is also to reach an acceptable outcome: A DEAL.

If you find yourself in this situation, and as of the last four weeks I have been in this situation four times, you must think your way through, calmly and with as little emotion as possible.

  • If you are not alone, keep some of your party outside.
  • The first question you want answered by the agent is: How much does the vendor want in order to sell this property today? This is the quintessential question that you have earned the right have answered. In other words, what is the reserve? If they do not answer this question, and they have this right under certain circumstances, do not move on your initial price that the property was passed into you at.
  • If you do not know the reserve at this point, then you need professional advice. You have certain rights, as does the vendor, and I have only been placed in this situation a couple of times. Assuming you do know the reserve, then you need to decide whether it is fair and reasonable.
  • If the reserve is below your expected limit you should not leave the property without owning it. If you do the odds drop markedly for you to be successful. It does not mean you have to pay the asking price but, be aware that as soon as you decline to pay or counter offer, then you have lost the first right of refusal at the vendors reserve. This is what you earned by having the property pass in to you. And this is why we go back to leaving one of the decision makers outside. You can express emotion at the point when the agent gives you a ridiculous number for the reserve. The largest I have had recently was nearly 30% above the quote price. This number is quite often for “shock” value. If the number is very high, say more than 15% above the quote, then you should show some emotion: even if you were expecting
    this. If you do not you have just tipped your hand to a very sophisticated and experienced negotiator.
  • Do not let emotion rule the negotiations. Just because you were the only one to bid and it passed in at $700k, it does not mean the vendor can’t ask for $900k and stick to his guns. Especially if you had assumed it was going to go there anyway.

It is impossible to teach the art of negotiation in 5 minutes in a written article. Some of the points above will save you tens of thousands of dollars. Some, even though you know the theory are very difficult to put into practice. Much of negotiation is putting your mind into the right place. Do not think of the agent as better than you. Do not feel as though he is always right and you are always wrong. When I first started out negotiating properties with some of the best people in the state, it was easy to assume everything they were saying was fair and reasonable and that they are experts and therefore know more than I do.

Keep you head together, remember the plan you came with and do not deviate too far from this.

Professional negotiators will save, or cost you thousands of dollars depending who’s side they are on.

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The Auction process

Having not been successful prior to auction, or it was your preference to go to auction…

The Auctioneer is usually a relatively nice person – do not treat him poorly for the sake of it. If he is good at his job he will usually win a war of words, especially in public.

If you have a question, put it to him or the agent you are dealing with before the auction. Only if this fails to satisfy you should you ask the question during the auction.

Auctions have four parts:

  • Pre amble
  • Opening bids until the property has reached reserve
  • Closing the auction after the reserve is met
  • or Passing the property in as the reserve was not met

Pre Amble – consists of reading the auction rules, the particulars of sale, any changes to special conditions and then an oration about how fantastic the property is, a few jokes and why you should bid loudly and strongly.

  • Listen for settlement terms
  • Any special conditions
  • Any special announcements
  • Gauge how nervous the auctioneer is

Opening Bids – Very rarely does a member of the public open the bidding. This is usually done with a vendor bid. This is the last insight into the vendors reserve if the property is going to pass in. An auctioneer doesn’t want to leave too much distance from opening bid to the reserve.

  • The property is not yet on the market – You are only bidding for first right of refusal at the vendors reserve.
  • You do not have to go up by the auctioneers amounts – nor does he have to accept your bid.
  • Do not out bid a vendor bid the second time – Be bold, tell the auctioneer if he has nothing better – he should deal directly with you. Do not be fooled into believing he wont deal with you because the vendor bid is the highest – not you.
  • Bid slowly and conservatively – Remember you are bidding for the right to negotiate – fast high bids will not give the impression you are running out of money, but that’s what you need to convince the best negotiator in the agency (the auctioneer) of, if the property passes in.
  • If two other people are ‘fighting’ out the bidding you do not need to get involved. You will not convince them to stop bidding until they reach their reserves – far from it, you will let them know there is more interest and make them feel better about the property.

Is the property ‘on the market’?

  • Ask the question when you have made a bid, once the property gets close to what you think it is worth.
  • Once the property is on the market, your bidding tempo must change. You now do not have anything to worry about from the auctioneer or vendor. Bid hard and fast all the way to your reserve.
  • Convince everyone else there you have ‘more money than sense’.
  • Everyone will bid to their reserve – nothing you do will stop that. The idea is to make them feel like they can’t win and they will tend not to push too far over their reserve.

If the property passes in to you:

  • The auction has finished – auction rules no longer apply.
  • You can change conditions, terms, lapse times – you are now back in private sale negotiation.
  • You have earned the first right of refusal at the vendors reserve.
  • You do not have to go inside to negotiate – if you feel intimidated – stay outside with friends.

Negotiation is two way communications attempting to reach a mutually beneficial result. If you keep this in mind you have some chance of achieving your goal of securing a property at a good price.

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Case Study – When Auctions Go Bad

What do you do when the auctioneer brings down the hammer and you have the highest bid? You have bought the property. You can bask in the applause from the crowd. You can begin celebrating and sign the papers. There are the formalities of documentation but usually these take only a few minutes.

The auctioneers team rushes the winner inside, takes their deposit writes up the contracts and has the buyer sign them. The agents then have the vendor sign and the contract is complete. The SOLD sticker goes up and the sale of the property is over.

On a slightly overcast day in April, the JPP team arrives in Glen Waverley to assist one of our clients to purchase their dream home. We have analysed the property, we have negotiated the terms we will sign under if successful and we are prepared to bid. While we were representing the purchaser, the vendor was being represented by a ‘Vendor’s Advocate’

The auction begins with the usual ringing of the bell and then the auctioneer begins his show. He reads from the rules of auctions, he tells us a bit about the vendor’s statement and the contract and he also espouses how sensational the area and this particular house is. So far no different to the thousand or so other auctions I have attended.

The bidding begins and within a few minutes of myself and one other person bidding at $627,500 I asked if the property is on the market. The auctioneer gave me a usual deflection line and did not answer the question in either the positive or the negative. I did not put in a further bid and waited. The auctioneer, with no further bidding went inside to consult the vendor. When he came outside he asked the other bidder in the audience to confirm their bid at $627,500. They did and he turned to me and announced the property was on the market. If there was no further bidding the property would be sold.

I bid and so did the other interested party. We fought out the auction and finally I was successful with a bid of $670,000. In fact it was my very last bid as we had agreed with our client this was a fair and reasonable price to pay for the property. We had already done a 20 page report and this is where comparable sales put the price point for this particular property.

When we began to move into the house the agent came up to us and asked if we would mind filling in the paperwork around the corner at his office. It would be more comfortable and easier. Alarm bells were going off in my mind and that of my colleagues. This was most unusual but not unprecedented.

Antony accompanied our client to the agent’s office and filled in the contract whilst we waited for the Vendor Advocate to bring the vendor up to the office. Subsequently, the Vendor Advocate arrived alone, but with a valuation certificate. He explained to Antony that his client was unaware their property had been put on the market. He explained she actually wanted $690,000 as this is what the valuation certificate stated and he put it on the table for all of us to see. Both the sales agent and Antony were flabbergasted. This Vendor Advocate had come into the office without the vendor and intimated that to complete the purchase on the property we would need to pay $690,000. Antony immediately asked him to put the paperwork away and demanded they all go back to the vendors house to finalise the contract by getting the vendors signatures. He proceeded, with our client, and the Vendors Advocate in tow back to the property.

Whilst this was going on we had already sought and received legal advice. We had made it very clear to both agents that they had a legal and moral responsibility to organise the sale at the price that was agreed at the auction. The selling agent we had been dealing with throughout the campaign was absolutely fantastic. At no stage did he think anything else but get the deal done at the agreed price.

After three and half hours of further negotiation, threats and discussion we finally received signed contracts. Our client and her daughter, although quite shaken, were ecstatic. Without a buyer advocate assisting I believe the deal would either not have happened or the purchaser may have been persuaded to pay more than the price bid under the hammer or worse still, ended up in a lengthy court battle. By remaining focused and calm we were able to secure the property for the agreed price of $670,000, for our client.

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After Purchase

Settlement

Settlement Period is the time between when both parties sign the contract, and Settlement. The actual settlement is a rather boring affair between solicitors and financiers when money and title deeds are exchanged and ownership changes from the vendor to the purchaser. As a normal purchaser, you would not be required to attend this meeting.

As the vendor, you have a right to use the premises during the settlement period, but you warrant leaving it in a similar condition to that which the purchaser has seen at the date of sale. As the purchaser, you do not take up residency until settlement has occurred, however you have the right to a “pre settlement” inspection 2-3 days before settlement. At this time you should check that the property is in a similar condition (fair wear and tear similar to a tenants rights) as to what it was at day of sale. If it is not, you need to seek immediate legal counsel. Be very careful that you do seek counsel as there can be significant ramifications if you do not agree to settle on time.
Most settlement period time frames within Melbourne are about 60 days, but 30 or 90 days are also relatively common. When do you want to settle? When does the vendor want to settle? We have seen deals fall apart after reaching a price agreement because this time frame was not discussed. This should be the first thing that you find out after you know the property is within your price range.

If the vendor has not bought another property they may want a long time frame – 120 days or more. If the vendor has already bought, then they may need an exact date to coincide with their new purchase. If the
vendor is selling an investment property they usually want to settle as soon as possible. If you have finance “pre approved”, then 30 days is usually an adequate time frame for a solicitor or conveyancer to organise paperwork between the vendor and your financier. If you are paying cash, check with your solicitor but it should be possible to settle in 15 days. (Most banks would not be able to settle in this time.)

What is better for you? If you are an owner occupier, then the preferred settlement is simple: When can you afford to settle and when would you like to get into the house? If you are an investor, then unless
your financial consultant tells you different the longer the settlement the better. During the settlement period the property will continue to appreciate and you are not funding the cost.

In one negotiation the vendor would not budge on a price that was probably a bit high. The property was however fairly unique, and our client wanted to buy it. He was overseas at the time and did not envisage using the property for at least 12 months, and was going to rent the property out for this time. We agreed to pay the full price that the vendor wanted, but organised a 20% deposit and a twelve month settlement. This effectively saved our client nearly $50,000 in the difference between interest payments over the year and the money he may have received for renting out the property. It is not only negotiating on price that will save you money.

Just remember: When negotiating a deal it is not just the amount you pay: It is the “right property at the right price in the right time”

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Your Questions Answered

Friedl Writes:

Hi there.

First of all let me say I find your website both informative and entertaining and look forward to your regular updates.

I was interested in particular in regards to you case study titled When Auctions Go Bad as I have friends and relatives who have had bad experiences using vendor advocates at auction in particular.

It appears from this case study that you have recently been involved in such an auction yourself buying a home on behalf of a client in good faith only to be told later by the advocate that the reserve price was not met at auction or in fact as you state the vendor was not aware that the home was for sale.

This seems quite bizarre to the layman like myself as I would have thought the auctioneer would have known the reserve price on the property before placing the house on the market.

Its a big difference between $627,500 and $690,000 for your client and the vendor I am sure you would agree.

The fact it took some three and a half hours to obtain a vendor signature on the contract after the auction had finished suggests that there was a massive piece of miscommunication between the vendor the vendor advocate and the auctioneer on the day.

Can you please give me your thoughts on whether a sale should or in fact must proceed if the vendor has not given permission to the auctioneer to place the house on the market and he/she does so in any case?

Can you also kindly elaborate to the uninformed like myself whether a vendor should sign a contract of sale under such circumstances especially if they are told by the selling agent and the vendor advocate that legal action will be undertaken against them to ensure they honour the conditions of sale if they do not sign the contract of sale.

It seems to me that while you were acting in the best interests on your client in this case study the selling agent and the advocate were not in the case of their client.

Finally do you believe vendor advocates add value to the sale price from your experience or rather just add to the commission a vendor pays.

Kind Regards,

Freidl

Our Response:

Thanks for your input Friedl,

Firstly, I think it is ludicrous that neither the vendor advocate nor the auctioneer would proceed without some type of written authority to do so. If they have this, then they will not be liable, if they do not then they most likely will be sued by the vendor. However, the vendor did not have to sign on the day. Her agent, solicitor and her brother were apparently telling her to sign. And she did. This sale should go through.

I see two different issues here. Firstly, if the ‘Vendor Advocate’ who is not a licensed agent has cajoled the vendor into putting the property on the market, as he is not licensed, the vendor will not be suing him. She would most likely go after the agent. I am assuming the vendor advocate was thinking with his ‘wallet’ not his clients best interest in mind. If indeed the vendor gave the indication that she was happy to sell, the agents should have changed their authority and then it will be the vendor that is in the wrong. Either way, it should be no problem for the purchaser if it ever gets to court. (Apart from the fact that they may need to go to court to get what is rightfully theirs).

After speaking with at least ten different Estate Agents who have recently handled Vendor Advocates jobs, all have said they were offered the job on substantially higher commission than normal. Most commissions up to 1% or more higher than normal allowing to pay the vendor advocate up to 40% of the full
commission and still making their normal fees. On top of that the average advertising campaign is huge, as long as the vendor advocate’s signage is on all advertising. In other words, two agents get paid good money for one person’s job. The only people benefiting are the vendor advocates. And the vendor is footing the bill.

How could the sale price be altered by engaging a vendor advocate? If the vendor advocate gets the commission lowered from the normal amount then they have been useful. However this lowers their own fee!
If the vendor advocate sets the reserve because he knows better than the expert agent he has just chosen in the area. Then that would improve the deal for the vendor. But why would you use the local agent if he didn’t know how to appraise the property in the first place. If the vendor advocate does the negotiations, again, why would you engage the local agent?

Use a local agent who is an expert in the area you wish to sell in. Look for someone with a proven history, who has been in the area for at least 3 years. Get three different appraisals from different agents and check out the going rate of commission and advertising.

The excuse, you don’t want to deal with a real estate agent, doesn’t wash if you are going to hire a real estate agent to oversee another real estate agent.

Regards,

Ian James


Michelle Writes:

Hi there.

I am a 28yr old who does not understand the property market or the legal side of things and am trying to educate myself along the way. I have found a property that needs full renovations and is on the market for public auction.. The real estate agent has told us that the vendor will take offers prior to auction but only offers on the high end. That will be out of our budget but we would like to put an offer in around the middle of the price range with a clause subject to a building/pest inspection. The agent has told us that we can not put that clause in when the property is for public auction. Is this true??? Can you give advice that explains these sorts of things…

Inexperienced and scared potential home owner…

Our Response:

Hi Michelle,

Ask the agent if the Vendor’s Statement (section 32) is available. Once he has given you this then you can put an offer forward. You can put forward any offer you want to. The agent is obliged to pass on any offer that is genuine. A genuine offer would be something in writing, which has a name, price, settlement terms, deposit amount and date. An agent will pass any offer forward. No matter what the amount. The vendor does not have to accept, but they will see it.

To specifically answer your question: If the offer is in writing, with the prescribed amount of information, regardless of price or conditions, the agent must put this offer in front of the vendor. What the agent is really saying is that is very unlikely to be accepted.

As far as conditions go: any offer in the last week of the auction campaign that is conditional where the condition time runs past the auction time will almost always be turned down. Even during an auction campaign most conditional offers are not accepted. But it all depends on the time frame and what your offer is. Look at it from the vendors’ perspective. The agent has said ‘I’ll get about $400k for your property. In the middle week of the campaign he brings an offer to you of $370k subject to Pest and building within five days. If the vendor accepts he is taking a lower figure than that which the agent said he would get, it is not guaranteed and even worse he won’t be able to take a better offer if one comes along until this offer expires. It is the conditional offer that is highly unlikely to be accepted during an auction campaign, not a lower price offer.

Whenever you are negotiating real estate, before you put an offer forward, think about it from the vendors’ perspective. ‘What would I do if I received this offer?’

With your specific situation: You have said the property needs a lot of work. Have you looked at similar properties in the area? What did they sell for? Not what the asking price is, what they sold for.

Once you have calculated the approximate market value then you can think about negotiation. Be aware, the vendor may need to fail at auction in order to come down to a realistic price. You may think the property is worth $400k but the vendor may be thinking $450. If it passes in at auction then you may be right, if it is sold under the hammer for $450 then the vendor’s agent was probably right.

It is the market appraisal that is the key here. A good offer close to the bottom of the vendors reserve will usually secure the property before auction, if the vendor is realistic. If you are too low, you will be unsuccessful: if you are too high, you may not be successful and you may have raised the expectation of the vendor.

Ian James


Jessy Writes:

Hi there.

First of all, I’d like to say what a great website this is. It has so much useful information. My question is “Is a mortgagee auction any different to a regular auction other than having stricter conditions such as 10% deposit and 30 day settlement period, and would you approach such auctions any differently?”

Thanks,

Jessy

Our Response:

Hi Jessy,

A mortgagee sale usually means that the finance company has taken possession and are selling the property to recoup their money that the initial owner has not repaid.

You need to be extremely careful regarding the paperwork. I would never sign anything to do with a mortgagee sale unless my solicitor (not unlicensed conveyancer) had checked every word of the contract.

There can be much greater risks involved with a mortgagee sale than a normal sale. Chattels are not generally included in a mortgagee sale. This means carpets, light fittings and window furnishings can be removed. If there are any legal entanglements at settlement with the finance company they can sometimes defer settlement whilst these are worked out. They can usually do this without your agreement or any compensation to you. It may be possible for you to be locked into a deal for up to 6 months and then not secure the property. Whilst your deposit is not at risk, your time is.

If you are buying at mortgagee sale you want to make sure you get a bargain to offset the very obvious risks. If you pay ‘fair’ price you are taking a much greater risk with no reward.

Ian James


Leisa Writes:

Hi there.

Just after some information please. My husband and I have our heart set on an Edwardian property up in Country Victoria. Beautiful home, but, the vendor whilst putting it up for sale, after it sitting empty for 9 months, decided to rent it out…on an annual lease rather than a six monthly. Long and the short of it is it is now tenanted until May 2014. We are first time home buyers, though not entitled to first home buyers grant due to my husband having a home in the past with his ex.

The bank will not loan the amount we require if there are tenants in it house, it will be deemed an investment loan, we would have to put in $60,000 to get to the sale price and we just don’t have that sort of money.

The real estate have advised they’ve had a bit of interest in the property but once people find out there are tenants in the house for the next 10 months, they move on, no doubt like us, want to live in it immediately not take out an investment loan.

Is it possible to see if the vendor would entertain the idea of a 10 month settlement? Is there a timeframe by law one has to abide by for a settlement period? I figured if this was a possibility, the vendor will continue to earn rent, knowing there is a definite sale at the end of the lease period, we then would be able to have a normal home loan based on the property being our principal place of residence, win win in theory. Though it raises another question, where would we stand in regards to the bank, does this have an influence on settlement timeframes?

Regards,

Leisa

Our Response:

Hi Leisa,

It is perfectly normal to have a ten month settlement. The longest settlement I have negotiated was 14 months.

However, your biggest issue may not be getting the deal. Most banks will not give you more than a three month loan pre approval. If your circumstances changed during the settlement period, your bank may not give you a loan at time of settlement even though they are happy to do so now.

Whenever I have anyone looking for a long settlement I remind them they do so, usually without a pre-approval safety net.

Regards,

Ian James


Geoff and Katrina Write:

Dear JPP Buyer Advocates,

Your online articles are both very useful, and good reads. Thanks very much.

Our questions relate to the common practice of vendors remaining out of sight during the conduct of a house auction (usually tucked away within the house).

What is the reason? Is it simply protocol, or is there some perceived advantage for the real estate agent in the conduct of the auction?

What about relatives or friends of the vendors? Is there some benefit in the vendors knowing immediately what has transpired at the auction (rather than just hearing what the estate agent might pass on to them)?

Regards,

Geoff and Katrina

Our Response:

Care will always be taken by a selling agent to keep their clients “buffered” from the prospective purchasers. If the vendors were in the audience and I knew, I would be watching them like a hawk for changes in expression when each bid was made. The vendors will hear what is going on at auction by simply leaving a window open. It is the same in a negotiation. When an agent throws a wild number at a prospective purchaser he is looking for an emotional response in order to get a handle on where their budget really is. In saying this, when a property is passed in to me after an auction I always have my clients remain outside away from the agent. When the agent gives me a ridiculous reserve, he is not going to get an emotional response from me. He will get the same response no matter whether it was lower or higher or exactly as I expected; “You want how much?” It is always delivered deadpan and with plenty of sarcasm!

You should always put a buffer between yourself and the agent. This is simply what the agent is doing by sequestering the vendor during the auction and any post auction negotiations.

Regards,

Ian James