Join Australia's most dynamic and respected property investment community

Real life example of buying under market value

Discussion in 'General Property Chat' started by D.T., 16th Aug, 2015.

  1. D.T.

    D.T. Specialist Property Manager Business Member

    Joined:
    13th Jun, 2015
    Posts:
    6,799
    Location:
    Adelaide, SA
    Hi,

    Thought I'd share a story as there seems to be quite a few people asking about buying under market value or otherwise interested in Adelaide positive cashflow / development deals.

    Back when i was living in Perth, I was back and forth to Adelaide frequently as some of you know. On one of the trips, i went to a home open in Smithfield Plains. The home was a 3x1 (with an extension that could be used as 4th or rumpus). It was occupied by an owner occupier and as such was in pretty good nick (although quite dated). They were asking $185,000. The place was ok, but that was above target so crossed it off the list and went and looked at (and purchased) others.

    I watch the Adelaide market like a hawk so eyes and ears are always open to whats going on. A few months went by and I heard from a friend of a friend of a friend that it'd been offered on. The property had become damaged - the ceiling mounted hot water system had rusted through, causing the ceiling to get weighed down with water and the whole unit fell through the ceiling and into the toilet. Ohnoes!
    [​IMG]

    This other party had offered $155,000 which had been accepted by the vendor. They did their building and pest inspection and found out about the above, causing them to amend their offer to $135,000 which the vendor declined. I called the agent and advised that I knew what had happened and was willing to offer unconditionally. No finance clause, no building/pest inspection or anything. The vendor was getting desperate as they'd already moved out of the home and needed money for their nursing home contributions. I saved the day by offering half way between the 2 above figures and eventually signed at $147,000.

    Some people will say I took advantage of a little old lady or whatever they want to say, but I honestly believe this was a win win situation. This is a direct copy and paste of the Agent's email a few months afterwards, when I had a different enquiry:

    "Also, I have recently spoken with the Vendor, and she has asked me to pass on her thanks for your purchase of the property. Although the sale did not get the price she had initialy hoped for, as things started going wrong she had lost hope of selling it at all. She has said that the sale has given her her life back"


    Being that I have a very savvy mortgage broker in @Corey Batt , he setup a loan at 80% LVR with valuation based on the contract. He knew that if a valuer was to inspect the place, they'd crash the deal due to the damage that'd be done. I think anyone who tries to get something like that through at their local bank branch would be shooting themselves in the foot.

    So the numbers
    Purchase price: $147,000
    Repair cost: $3,000 (plumber to supply and install new hot water system, handy man to patch up ceiling to toilet) (all completed pre settlement)
    Rent: $250 achieved within a week of settlement, ~$13,000 per annum (Have increased it to $255 per week just now)
    Interest: 80% x $147,000 x 4.24% = $4986 per annum
    Council rates: ~$1200 per annum
    Insurance: ~$600 per annum (building and LL)
    Water: Passed onto tenant
    Property Management: None (Staff discount ;))
    Do the sums on whether it's cashflow positive :)

    [​IMG]

    So the proof that it was purchased under market is in the reval done shortly after settlement. It was revalued at $171,500 to which I topped it up to 90%. This provided enough cash out to take my skin back out of the deal and/or reinvest into the next one.

    But wait, there's more...
    This house's block is 610sqm which can be divided into half and two 3bed 2bath homes built on it in the future.

    But wait, there's even more...
    There was a vacant block of the same size next door to this house, which is the topic of a future thread, stay tuned ;)
     
    Last edited: 16th Aug, 2015
    Lance, charttv, Colin Rice and 46 others like this.
  2. Leo2413

    Leo2413 Well-Known Member Premium Member

    Joined:
    18th Jun, 2015
    Posts:
    6,947
    Location:
    Sydney, Brisbane, Taiwan, London
    I love the whole deal. Well done.
     
    York and miked like this.
  3. D.T.

    D.T. Specialist Property Manager Business Member

    Joined:
    13th Jun, 2015
    Posts:
    6,799
    Location:
    Adelaide, SA
    Thanks. Just around the corner there's stacks of commercial stuff gone in recently too - big Medical Centre, gym, bunch of speciality stores. Woolworths coming soon. Gives me good hopes of future growth even though I've already extracted my skin back out :)

    This is in Playford council in the outer northern suburbs (same council as Elizabeth) for those not from SA.
     
    Gockie, WinDyz., ellejay and 2 others like this.
  4. Leo2413

    Leo2413 Well-Known Member Premium Member

    Joined:
    18th Jun, 2015
    Posts:
    6,947
    Location:
    Sydney, Brisbane, Taiwan, London
    All great signs especially Woolworths. I've been told they really do their DD as well. Its great to know you've already done well with the deal and not relying on organic CG. I really like the whole deal. And the beauty is, its not costing you anything!! God I love real estate!:D
     
    Last edited: 16th Aug, 2015
    D.T. likes this.
  5. ellejay

    ellejay Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    1,547
    Location:
    Kimberley and NZ
    Very nice work, can't go wrong :)
     
    legallyblonde, D.T. and Leo2413 like this.
  6. Scott No Mates

    Scott No Mates Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    7,995
    Location:
    Sydney or NSW or Australia
    There's no harm in taking advantage of Little Old Ladies (so that's what 'LOL' stands for).
     
    ross100, Esh, Nemo and 1 other person like this.
  7. WattleIdo

    WattleIdo midas touch Premium Member

    Joined:
    18th Jun, 2015
    Posts:
    2,339
    Location:
    Riverina NSW
    Well done. I think my recent vendor was a LOL in a nursing home too. But you didn't rip her off or talk her out of her ppor - you just bought a house that'd been previously overpriced and therefore stigmatised and then damaged. Good on you for knowing what's going on.
     
    Last edited: 16th Aug, 2015
  8. legallyblonde

    legallyblonde Well-Known Member

    Joined:
    23rd Jun, 2015
    Posts:
    790
    Location:
    TAS
    Thanks for the details. Examples like these are highly educational!
     
    KayTea likes this.
  9. stumpie

    stumpie Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    141
    Location:
    Paradise
    @D.T.
    Awesome story and fantastic outcome. Well done.
     
  10. Tim86

    Tim86 Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    1,283
    Location:
    Brisbane
    Nice work. It's when the place is damaged a little more than just a cosmetic reno that you can manage to get things under market value. People run for the hills with that sort of damage.
     
  11. MGF

    MGF Well-Known Member

    Joined:
    13th Aug, 2015
    Posts:
    403
    Location:
    QLD
    It's not taking advantage at all. I went to a property about two months ago now and the owner (wheelchair bound) has gone to a nursing home. His brothers (both quite elderly also) have listed his home to sell it. I have no doubt the sale money will be used to fund the nursing home.

    But it hasn't sold! No only that, we were the only people who inspected at the first open house. The agent has ceased open houses now so it's just sitting there vacant.

    I'm sure the family would love to sell it and of would be a big burden off them. I think the little old lady in this case feels the same way.
     
  12. Esel

    Esel Well-Known Member

    Joined:
    4th Aug, 2015
    Posts:
    405
    Location:
    Melbourne
    That story made me a little sad. Reminds me of my grandmother who was badly ripped of as a widow.
     
    bez23 likes this.
  13. Waldo

    Waldo Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    225
    Location:
    South Australia
    While I do sympathize, no one makes them sign the contract. If anything DT offered them a good deal compared to the original buyer who counter offered the original contract at 135k.
     
    D.T., legallyblonde, S.T and 4 others like this.
  14. OC1

    OC1 Well-Known Member

    Joined:
    6th Jul, 2015
    Posts:
    212
    Location:
    Melbourne
    Leo2413 likes this.
  15. Westminster

    Westminster Tigress at Tiger Developments Business Member

    Joined:
    13th Jun, 2015
    Posts:
    3,895
    Location:
    Perth
    Good work. I do think it was a win-win for the Vendor. It was unfortunate that the HWS chose that time to jump through the ceiling and what looked like a structural issue caused the original offerer to offer much less to the Vendor.
    Luckily you knew that it could be fixed fairly easily and it was still a viable deal at the price you offered and they could move on.
     
  16. KayTea

    KayTea Well-Known Member

    Joined:
    10th Aug, 2015
    Posts:
    539
    Location:
    Brisbane
    Well done - a great result for both the buyer and the seller (I'm not sure that happens too often). It's great to hear of people's success - gives me a bit of a 'warm and fuzzy' moment :)
     
    legallyblonde and D.T. like this.
  17. ellejay

    ellejay Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    1,547
    Location:
    Kimberley and NZ
    No disrespect intended but neither DT nor the vendor would make a fortune overnight with this property. It's not rip off material, it's a buy and hold with good future potential, which the vendor did not want to hold/was not at the life stage where they were in a position to hold. DT will do well with this property medium to long term with money and time spent on repair, maintenance and tenants.
     
    Leo2413 and D.T. like this.
  18. Leo2413

    Leo2413 Well-Known Member Premium Member

    Joined:
    18th Jun, 2015
    Posts:
    6,947
    Location:
    Sydney, Brisbane, Taiwan, London

    I agree. And buying the property in the state and market its in also assumes the risk with it that is accepted by the buyer.
     
  19. ellejay

    ellejay Well-Known Member

    Joined:
    19th Jun, 2015
    Posts:
    1,547
    Location:
    Kimberley and NZ
    Exactly, and the vendor wanted the cash rather than the house.
     
    Leo2413 likes this.
  20. AndrewTDP

    AndrewTDP Urban Planning Consultant Business Member

    Joined:
    1st Jul, 2015
    Posts:
    765
    Location:
    Newcastle
    I disagree. @D.T. paid more than the other party despite there being damage that wasn't present when the original offer was made.

    It's a win/win. The vendor got more than they originally expected despite a catosphrey and the purchaser got a solid house that they could improve.