I was talking to a property investor friend of mine the other day who was bemoaning the fact that rapidly increasing property prices in his area had made his buying strategy redundant, and left him in a dilemma as to whether he should even be buying and adding to his buy to let portfolio.
Until a few months before he had been able to buy investment properties for his buy to let portfolio with a significant discount to market value. It wasn’t easy but he knew what he had to do to find them. He knew how to approach agents and what to say to find the ‘possibles’ and then, when the circumstances were right, he knew how to negotiate to get his price. When he didn’t go through agents he leafleted his target area and went ‘direct to vendor’. For almost 6 years he’s always found properties which he could buy at a discount, routinely around 20% below market value, sometimes as high as 30% below market value.
All that changed about 6 months ago. Almost overnight vendors were holding out for full asking price and were getting it, and many within a few days of coming onto the market. Of course, deals with discounts aren’t gone forever, but they are harder to find and investors like him are competing to get there first, and he is loosing out.
So, he asked, what should he do? Deals with discounts are still out there but he might have to work harder to get them. He might have to build a stronger relationship with local estate agents by spending more time in their offices, and spending more time on accompanied viewings. Strategies which give the investor more control like leafleting can help, but most vendors know what’s going on in the market and will have re-adjusted their expectations.
But sometimes we just have to adapt to the changing market. Just as investors had to adjust to the market when prices were falling, and find new strategies and techniques, they now have to adjust now prices are rising. Sometimes we have to move on from the way we used to do it and do it a new way. That can be uncomfortable.
It reminds me of when I was buying in the early 2000s. My strategy was buy, renovate, refinance and buy again. To be able to get all of my money back out I needed to buy cheap and/or add value through the renovation. As often as I could I’d try and buy a renovation project as cheaply as possible.
As time went by and prices increased, and vendors expected to get full asking price or closer to it, finding deals like this became harder. As I became more confident in the market, I was able to offer more, knowing that the market would rise during the renovation period.
I also knew that the increasing market also muddied the waters from the valuers perspective, and once the refurb was finished I would get the benefit of the added value of the works, plus a little of a premium which showed the valuer knew values had increased and was relaxed enough to be fairly generous in his assessment, possibly even adding in some of the future growth he though was coming. Of course, he wouldn’t admit this, and without getting too psychological about this, it probably all happened at a deep sub-conscious level.
Don’t forget, valuation is all about opinion and is an art not a science. There are no right or wrong answers.
As I explained this to my friend he shared his second major concern. “That’s all well and good’, he said, “I can see that I will have to pay more to get deals. But what if prices increase so far that they crash again?” That’s the constant dilemma for property investors. If we know a crash is coming, then we can buy at a discount and build-in a buffer.
Conversely, when we know that the market is in full-blown recovery we can ride the wave confident, that if we watch the market carefully, we can hopefully spot signs of trouble in time to get back out.
But what do we do if we’re not really sure what’s happening? Is this a full-blown recovery or this just temporary, in which case will upping our game and our bids put us a risk in the future?
Again, these are great questions because although we might all have an opinion, none of us know for sure. All investors should always do their due diligence thoroughly and fully understand the market into which they are buying. This is another good reason for developing your relationships with estate agents, so you can get their take on the market and what’s happening. When you know them well enough you can cut through the hype and the fluff and get to the facts.
Ultimately, though, an investor is going to have to make their own mind up on this, and then commit to that opinion.
I’m of the view that we are now in a sustained recovery, for the time being at least. Potential buyers have been excluded from the market for a few years and if the banks will lend, frustrated buyers will buy. This has given me some confidence and I’ve noticed prices firming in my preferred buying areas.
However, I have stumbled across something which has given me a bit of breathing space before I start bidding closer to full asking price. On a couple of occasions recently I’ve been offered properties by agents because I’m a cash buyer. In both instances the agents had buyers lined up, but they were buying using a mortgage. In each case the properties were declined by the lenders after valuation. In my opinion, neither property really warranted this. One had an old and scruffy kitchen. The other had a couple of windows installed many years ago, but without proper lintels. Both of these problems are easily rectified but were enough for the bank to decline to lend.
The agents came to me knowing that I would only offer a ‘cash price’ and had already forewarned their clients that would be the case. In both cases I got around ‘20% off’ without breaking a sweat.
In the meantime, as I waited for exchange and completion, I could see that prices continued to firm giving me probably another 5%. At the bottom end of the market prices are fluid enough that when prices fall, they fall faster than prices at other levels of the market but, when prices increase, they increase more quickly that at other levels of the market.
So, for the time being I’m letting all agents know that as a property investor I’m a cash buyer and am happy to step-in when needed, as long as the price is right.