If you have watched a property related tv show, follow a property influencer on Instagram or Linkedin or engaged the services of a buyer’s agent in recent years, you would have no doubt heard the terms “under market” or “below market”. It’s become the secret sauce or 11 herbs and spices of property spruikers everywhere. Here’s the truth that those people don’t want you to hear: property valuation cost Sydney can vary significantly, and understanding this is key to spotting what’s truly under market—versus just clever marketing.
It’s all bullshit
Everyone loves the idea of getting a good deal. It’s part of the reason why “under market” narrative gets so much traction. You will often hear the marketing pitch of a buyers advocate picking up a property $100K or more under value, or a commercial property at a yield of sometimes 2-3% better than the market is selling them for. I’ll point out a recent example:
A recent commercial sale through an advocate in a metro commercial retail strip. This property boasted a passing yield of 7% when everything else was selling in the mid to high 5% range.
At first glance, this looks like the buy of the year, but if you dig a little deeper, you will quickly realise the following:
- The rental for that property was the legacy of an old lease that was about to be subject to a market review,
- Rentals in this particular location have decreased significantly in recent years due to a new retail shopping centre opening down the road, dragging a lot of the prime tenants there.
- The reporting passing rent is over market and will likely be revised on market review.
How the sale should have to be analysed is based on a reversion. property valuers in Sydney typically Capitalise the yield based on a market rental and then add back the difference of the over market rent to the review date. This calculation would end up with a yield far closer to what the market is showing rather than what is being reported by the passing yield. This story is much more boring and far less sexy than the “deal of the year” however.
With that example front of mind, if something sounds too good to be true, it probably is. I’m going to break down a few of the reasons on exactly why “under market property” is an example of “too good to be true”:
Take a step back and imagine you were selling your property. Would you sell your property for less than what you can get for it?
The reality is why would anyone do that if a vendor is paying an agent to maximise their return? I’ve seen people at restaurants arguing over a who had an extra entrée at dinner, and we’re supposed to believe that someone you have never met will gift you thousands of dollars because they want a quick sale? – Come on. Even recent “mortgagee in possession” sales these days are regularly selling at no discount from a regular transaction and they would fall in the category of a distressed vendor.
The selling agent’s job is to maximise the return for their vendor
The whole sale process is designed to maximise competition between purchasers and the eventual sale price for the vendor. From the listing presentation, the pay structure of the selling agent, pitting potential buyers against each other to create competition and urgency, to the eventual negotiations with the ultimate purchaser.
The market is much more sophisticated than even just a few years ago.
If you think you are getting a deal at the expense of someone else’s ignorance, those days are over. The amount of information available at everyone’s fingertips has turned the local punter into an expert. Property is Australia’s pastime and everyone has a pretty good idea of what their property is worth before the selling agent knocks on the door.
That aside, the level of expertise available to a vendor is now better than ever. Sales agents know their markets well, often providing all the most recent sales in weekly updates as a free service. Auction results are pinging on everyone’s phone on Saturday afternoon from realestate.com.au or domain.com.au. Valuations are also often undertaken as a check in the background by many vendors to keep everyone honest. The days of pulling the wool over a vendor’s eyes are gone.
If something is too cheap, it probably isn’t.
I recall a property being referred to me that was on the market for a little while, it was a modern commercial property to be sold occupied by a medical user in a really strong location. The asking price was almost 20% below what anyone else was asking in this location but I was being pushed to make a decision before the weekend for a client. In such situations, consulting independent property valuers Sydney can help ensure the price reflects true market value and isn’t just a rushed deal.
Instantly, it was a red flag. I did some more digging and found there was significant contamination notification over the site resulting from a leaking underground storage tank over a neighbouring property. This meant potentially hundreds of thousands of dollars to remediate, removing the tenant (or a significant rent abatement) and the stigma of a contaminated medical site. I declined the “deal of the year” and slept like a baby that weekend.
So if under market property isn’t the goal, what is?
So if under market properties are fiction, what am I looking for, or what should my buyers advocate be looking for?
Look to buy well and acquire a good quality asset.
This post got longer than I anticipated so I will create another post detailing what I mean but in short; buying well means ignoring the sugar hit of short term overnight gains and looking for something that will perform consistently well over the long term. Don’t overpay for property at the time (big difference to under market) and buy the best asset you can afford. Keep your eyes peeled for Part II and if you like to discuss the strategy in more detail, the team at Titan work with residential and commercial investors every day and can take care of the whole the process on your behalf.