Distressed vendors flying under the radar

By Catherine Cashmore

Tuesday, 28 June 2011

Are we starting to see more distressed vendors than may have been reported? Australia-wide, the delinquency rate has climbed from about 1.4% to 1.79%. It might be low in comparison to Europe and America, but it’s a figure the Reserve Bank should be paying close heed to because it seems there are other distressed vendors flying under the radar and trying to bail out before they get to the delinquency stage.

The average time Australians stay in their homes is 7.5 years (according to RPData) – although in the established suburbs of Melbourne close to the water and city it’s 9.1 years. However, there seem to be increasing numbers of vendors selling prime real estate after only one or two years of residence – something I’m seeing more and more often when I research the sales history of homes. In many cases these homes are struggling to sell, with days on market stretching into months as vendors try to achieve their “wish price” (a return on investment) in a flat conditions. These are often people who purchased when interest rates were low, and now rates have climbed, find themselves labouring to make the repayments.

Investment in real estate is long-term game plan, so trying to get a return on price one or two years down the line is a gamble no one should take, or be forced to take. Therefore in a flat market, with the possibility of interest rate rises brimming on the horizon, paying the right price and ensuring that decision by purchasing the right property is not only important, it’s crucial. Pay too much in the first place and you’ll get no short-term capital growth. Choose a “lemon” and if you need to sell in a soft market, reducing the price will be the only way to do so.

So how do you know you’re paying the right price? Just because the papers are screaming “buyer’s market” and the agent is giving you a “discount” on the asking price, that doesn’t mean a “bargain”. Drawing comparables against the weekend results in the paper won’t always help, as they only list exact addresses for auction sales, and many of those are now “undisclosed”. In fact, sales results won’t help you much at all unless you’ve been monitoring the market closely and assessing the individual properties listed – and furthermore, how do you know someone else didn’t over-pay on the property you’re comparing against? I was recently asked to help with a report into vendor discounting. This is the amount the vendor discounts throughout the sales campaign in order to sell. It wasn’t hard to find examples, however it was much easier to find examples of advertised prices (private sale) that had been exceeded.

There are three numbers in real estate – what the vendors want, what the market is willing to pay, and what a property’s reasonable market value is against comparable sales. Unless you’ve got a handle on all three you can’t negotiate effectively. If you’re a current buyer who has little experience negotiating and find yourself judging a property’s value based on the quoted range, or “reserve” price, rather than a solid base of knowledge, beware! Selling agents know all the tricks to con a buyer into paying more, from touting they have other offers on the table to convincing them the “distressed” vendor has “a very reasonable” reserve.

And what about choosing the right property? Well, even in flat markets with well-publicised drops over any one year, there are those properties that buck the trend - the roses amongst the thorns – in locations with unique aspects that drive owner-occupiers to stretch budgets. And these are the very properties investors need to target if they’re going to prosper during boom-and-bust cycles.

A suburb-by-suburb look through Melbourne highlights a few of these areas that are withstanding current conditions. Take, for example, Kew, located south east of Melbourne’s CBD. Made up of roughly 70% owner-occupiers, it’s already had a 29% jump during the first quarter in median value and a steady 74% year-to-date clearance rate, according to the REIV. Although this doesn’t guarantee every home in Kew will buck the downturn, you can be pretty sure that if you own a good well-positioned property that suits the buyer demographic of the area, it’s going to attract attention.

I would never advise someone to purchase a property unless they are fully committed to a long-term game plan, however I would strongly advise the essential need to get experienced advice before you risk becoming a distressed vendor.

Catherine Cashmore