Top Five Pitfalls in Today’s Market

The real estate environment as we see it today is vastly different to that of early 2000-2004 when even the most unsuspecting of property investors could make a profit from a property transaction. In that market, simply buying a property was enough to guarantee some form of capital growth. From 2004 through to 2008, the market consolidated and the rate of growth declined but investors (and home owners) could still attain reasonable growth if they chose well and bought right.

Since the Global Financial Crisis, the environment has changed dramatically and while we haven’t seen massive falls in property prices (at least not across the median price spectrum) the prospect of attaining capital growth has become slimmer, yet, as a property valuation firm, we still see people making the same decisions about their properties as if we were in a rapidly growing market. This article will look at the five major mistakes that owners and investors are currently making that are causing them to suffer financial or mental distress because the expectation they have about their property may not match the reality of the market environment.

Pitfall # 1 – Over-Capitalising.

This has got to be the number one error that we are seeing time and time again. Typically, it’s in the form of renovations to an existing dwelling and generally comes in two forms. The first is simply spending far too much money on improving the property and expecting that the increase in sale price will equate directly to the amount spent on the improvements. You may think the gold taps are simply a “must-have” but the impending buyers in the market may think differently. They are looking to get the property as cheaply as possible in order to minimise borrowings. The second is improving a property over and above what the surrounding neighbourhood aspires to. A two storey palace with a circular driveway and stables home does not have its place in a school district standard suburb or outlying country area where the majority of properties are modest single level dwellings. Owners/investors are unlikely to achieve asking price in these situations due to a limited market.

Pitfall # 2 – Not Adjusting Expectations.

A common issue between Valuers, banks and owners is that valuations are coming in below the expected market value placed on a refinance request when it is sent through. That is, the owner’s estimate is much higher than the resultant valuation because the original estimate has not taken into account the current environment. Everyone still thinks they can get the same price for their property as if it was pre 2008. The fact is, in the majority of cases, they can’t. Recent sales history is showing a decline in price, or extended periods on the market and each of these factors is affecting the valuation figures returned. If you think your house is worth $500,000, but all around you, similar houses are selling at $480,000 and are taking 6-9 months to do so, then the likelihood is that your property will value up at around $480,000. Valuers do not set the market, they report on it and in the current environment the expectations of owners/investors are higher than the market will accept.

Pitfall # 3 – Timing.

In this case, timing relates to the sales period. Not everyone has the benefit of being able to plan the sale process of their home. The current environment has meant that many people have had to undergo a forced sale or at worst, a mortgagee repossession. That being said, owners and investors are still not adding a selling scenario into their exit strategies and are subsequently being caught short if all of a sudden they do have to sell. The end result is a frantic campaign at a lower price with a mass of bargain hunters attempting to force down the price, if in fact there are buyers for the property in question, which again results in the asking price falling.

Pitfall # 4 – The Asking Price.

Where an owner is looking to refinance and has an over-inflated expectation (as in mistake number 2) the same thing is occurring when a seller enters the market with an asking price that just doesn’t reflect the market, or is based on “what the property owes me”. What invariably happens is that there are no buyers, the property sits on the market for longer than required and then the asking price starts to fall in the classic “stepped” approach whereby the owner is always one step behind what buyers are willing to pay and the price keeps falling but the buyers just don’t appear. This affects valuations of course because the ultimate selling price becomes a historical figure which can be used as sales evidence in a report. Having said that, Valuers don’t use a figure just because it is has been reported. They will investigate whether the sale price was a fair one and if it isn’t then the record won’t be used as a piece of comparable evidence. All the same, the mistake has still been made and the seller is the ultimate loser.

Pitfall # 5 – Poor Renovation Planning.

This mistake is becoming more prevalent today than at any time in recent history. The usual scenario is that the owner/investor starts renovating and then runs out of money and attempts to pull out more equity to continue the renovation. The Valuer is called in to assess the situation and unfortunately, because half the walls are incomplete and the bathroom is a mess and the back patio is just frame work, the Valuer has to put a lower figure on the property because if it had to sell in the current market it wouldn’t achieve a market rate due to it’s state of incompleteness. This is a tragedy all-round because in most cases the finished renovations would have some added value yet the property needs to be valued “as-is” in order for the valuation to be a true and accurate reflection. What happens of course, is that the bank may decline the refinance, the owner/investor has no money to continue work on the property, so it sits incomplete. Throw in a worst case scenario where the property now has to be sold and the financial pain is enormous.

Such mistakes however can be avoided by simply speaking to a number of people including a real estate agent, a bank manager and a Valuer either independently or collectively to determine a course of action before starting any process. These professionals are only a phone call way and would rather help people avoid the mistakes than experience them.