Aiming to buy under market value could be a mistake

Well then there's an argument you didn't overpay then...it was just market price in a rising market. Overpaying means you paid more than it was worth taking into account the rising market and current supply/demand. Comps aren't as valuable in a rising market because of delayed data. If a market is moving fast the price from a few weeks ago even might not be relevant today.

I believe it. A BA isn't a magic weaver, they are just another buyer and it doesn't matter who the other buyer is. A BA's job is to understand a rising market as much as a bargain market and know when to maybe pay more than the asking price is a part of that in certain market conditions (for reasons you outlined). This is why people outbid themselves at auction, even when there are no other bids. It's a perfectly reasonable strategy to secure a property and often used.

I think you're right though, next year is going to test all of this quite strongly as people will be missing out due to lagging data and it will become common place to put in higher offers straight up. Of course, this is exactly how prices rise anyway so it's just market dynamics.

- Andrew

 

An extract from the article...

An analysis of discounts over the 10 years from 2010 to 2020 hints at how bad it might be to chase a bargain:

• High discount cases are suburbs with at least a discount of 10%
  • Average discount for all suburbs in the analysis was 11.9%
  • They experienced 8.8% total capital growth on average over the next 3 years
• Low discount cases are suburbs with a maximum discount of 2%
  • Average discount for these suburbs was 0.7%
  • They had 22.5% total capital growth on average over the next 3 years
• Totals
  • Average saving gained buying in a high discount suburb instead of a low discount suburb was 11.2% (assumed)
  • Capital growth lost buying in high discount suburb instead of a low discount suburb was 13.7%
  • Therefore worse off by 2.5%

Within 3 years, bargain hunters would be worse off by 2.5% of their property’s value. The discount saved was overwhelmed by the inferior capital growth.

However, this is assuming the property was advertised at fair market value. But they never are. So, the discount savings in the calculations are greatly exaggerated. Bargain buyers would have been much worse off.

The data clearly shows that this strategy is a poor choice for investors to focus on.

 

Hi Car Tart, what a excellent investment! I could see that this property is being zoned for parks . Did you end up sold it to council or government? My first thoughts are government may be don’t pay that much at the early stage when the suburb being developed. But apparently that’s not the case here. Did they approach you to buy this property? I have been following all your threads and you are my big idol! I think you are a man of wisdom!

 

Daymn!

 

Australian property has doubled about every 10 years for the last 40. That's at a rate of 7.4% per annum.

Let's say an investor bought a $500k property. 10% deposit and 5% for stamp duty and other entry costs. That would mean an investment of $75k.

If the property was neutrally geared over the next 10 years and doubled in value, they would have acquired $500k in total net after-tax returns (assuming they didn't sell). That represents a return on investment of 667% (= 500 / 75).

However, over the last 30 years, the growth rate has been much slower at only around 6% pa. Assuming this bog-standard rate of capital growth, it would now take an investor 12 years to get 667% ROI.

But that's still not a bad ROI for eeny-meeny-miny-mo and then sit on your hands for a dozen years.

Picking carefully of course would give those returns faster. For example, roughly 1% of Australian suburbs have doubled in value over the last 6 years.

 

I don't get how it's different.

 

Wow! If you look at it that way, it's a real eye opener - "If the property was neutrally geared over the next 10 years and doubled in value, they would have acquired $500k in total net after-tax returns (assuming they didn't sell). That represents a return on investment of 667% (= 500 / 75)"

The power of leveraging.

 

I like to revisit this post from time to time for inspiration! Can anyone offer and evidence similar instances of success?

 

Yes, It happened to me in the rapidly rising July 2009 market in Melbourne by an Ex Dr, come "Australia Leading property Expert" Waited weeks for accepted offer to be countersigned given all sorts of excuses, then told I had to increase my offer. My agent went against company directive/policy and told me the property hadnt been taken of the market and another agent from the same agency tried to sell the unit for a higher price. My agent was appalled, had some ethics and resigned.

 

that’s shocking