24 Nov 2017

Paying tomorrow's prices today

By Scott McGeever

PS Property Advisory

It’s almost an unwritten law of the real estate market that the longer a buyer is in the market, the lower the chance is that they will achieve a great result. The reason is simple, nothing is perfect, you will need to compromise on some things so establish what is really important and work towards achieving that. If demand in the property market is high and supply is comparatively low, properties will sell quickly, even the average quality ones. This creates a fear of missing out or ‘FOMO’ which occurs in markets with low levels of quality stock and properties being sold by auction.

Currently within the 8 to 10 km zone from the Brisbane CBD the market is experiencing high demand and low supply of quality stock. This is proving challenging for many buyers as they try to secure their desired property for a reasonable price. Two of the three auctions I attended on the weekend in Clayfield and Milton, sold for $100,000 and $200,000 (respectively) in excess of ‘reasonable’ market value. Each property had 8 to 10 registered bidders of which three were bidding in excess of where the value should logically lie. Of course it can be argued that with two or three people fighting it out to the end, that is the best indication of ‘market value’.

The definition of market value (taken from the Australian Property Institute) is: “The estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion”.

Generally speaking, most auctions for residential property I have been to can be described as ‘pressure cooker’ situations. The vast majority of the time buyers/bidders will be inexperienced and probably never bid at an auction let alone been to one.  Real estate agents love this because emotions are flowing, plans go out the window and rash decisions are made. This leads to FOMO and buyers paying tomorrow’s prices today, evidence of this is currently emerging in the Brisbane market. So it can be argued that the last part of the above definition (“acted knowledgeably, prudently and without compulsion”) can easily go out the window.

The key to succeeding at auction is not necessarily buying the property at all costs, it’s having a definite ‘realistic’ plan based on current market evidence, and sticking to it. This will ensure that you don’t pay tomorrow’s prices today and in the end, if that means someone else buys the property and pays way too much, then it wasn’t meant to be. Ideally a plan should be developed with a professional who can advise on value range, making offers and/or bidding at auction. Establishing a value range based on current market evidence will ensure you act knowledgeably, prudently and without compulsion even if you pay at the top of that range.