When are comparable sales NOT to be relied upon?

As Buyers Agents, we mention Comparable Sales all the time.  But there are some that we should disregard altogether, because they are either significantly inferior based on an invisible feature, existent due to an anomaly sale, or they aren’t technically authentic.

So how do buyers identify the reliable sales from the unreliable ones?

The first category of unreliable comparable sales are those that have an invisible difference. They may be zoned in an alternative zone to Residential. If the zoning type precludes the borrower financing the property with a residential loan product, the property must be treated differently. A loan that requires commercial lending arrangements will be far more limiting for buyers, because commercial loan products require significantly higher deposit percentages and attract higher interest rates, tighter repayment time lines and often require challenging extras such as additional security and/or company guarantees. Other ‘invisible’ issues can include title type (ie. Company Share or Stratum), or geographic issues that aren’t obvious at the first inspection. Such issues might be flight paths, underground tunnelling, road widening orders, compulsory acquisition plans, or the property could be in close proximity to an infrastructure project that may be too close for comfort, i.e. a new school, a freeway onramp, a changed nearby zone now allowing high rise, or a significant development over the fence. It is important for due diligence to be done on all comparable sales before assuming that a past sale represents a reliable indicator to the price that the subject property could be worth.

The second category relates to anomaly sales. Sometimes a property price tag is a reflection of an unusual circumstance. It could be a desperate sale with difficult conditions for the agent to work within; for example, an investor who has found themselves in troubling financial times, with a tenant in tow who presents the property badly and blocks reasonable access for the selling agency. In a situation like this we could anticipate a lower-than-normal price. Other examples include sales that have more than one emotional, irrational buyer vying for the property. Last year we were bidding on behalf of one feuding party who wanted to buy the other party out. The price flew past the reserve and each party had decided that they’d fight beyond reasonable price estimates for the asset. This particular sale could never be relied upon for future purchases of similar type dwellings in the area.

The third category is most troubling. It relates to data that is not technically authentic and it mostly strikes with new developments. Developers who sell high-rise apartment blocks or multi-townhouse developments may have some strict requirements associated with their project funding, and one common requirement is “pre-sales”. The lender may require some Off the Plan sales to be executed before funding the project. For more advanced builds, developers may no longer require pre-sales, but will want to be assured that the vast majority of their apartments or units have been sold unconditionally. The cashflow of the project and their ability to leapfrog into the next project will depend on it.

In order to maintain a sense of fairness and competition with buyers, they will price-set on their stock lists, and similar units will be priced identically. Prices will generally be visible to all buyers and the fluorescent SOLD stickers will be proudly shrouding each unit on the enormous sheet of plans as each sale is finalised. 

The last thing they want any buyers to see are discounted prices.

There are two ways that Off the Plan prices can be discounted. Either the developer allows a purchaser a discount, or the purchaser has a change of circumstances preventing them from being able to fund the purchase. In this situation, they must on-sell the property to a willing buyer before settlement day to avoid recision and possible damages.  A desperate buyer who has no option but to sell could find themselves anxiously scrambling for agent-assistance with the task, and in a tough situation, could accept a price that is considerably lower than the price they negotiated to pay. In this instance, they would sustain a loss and pay out the differential upon settlement, releasing the purchase opportunity to the new purchaser who will pay the renegotiated purchase price. 

Developers don’t like this though.

It not only sends a dire message to the other unit buyers who paid the full price, but it undermines the valuation part of the process when the property is finally approaching settlement. Unlike an established property sale which undergoes the immediate finance approval steps as soon as the contract is signed and submitted along with the loan documents, an Off the Plan sale cannot undergo formal approval until the project is finalised and the title is cleared from the Land Titles Office. This could mean that the distressed sale that resulted for that initial buyer forms part of the valuer’s comparable sales analysis for the other matching or similar sized units in the development. 

All of a sudden, it is determined that everyone who has a comparable unit paid too much.

And it is for this reason that some Off the Plan contracts have special conditions that prevent the purchaser from on-selling with another agency.

That way, the reporting of the sale price can be managed (or hidden).

And when a developer has decided to sell the remaining units for a discounted price, it is not unusual for them to insist on writing up the contract with the full asking price, and to include a rebate special condition for the balance of the discounted amount, to be paid to the Purchaser at the time of settlement.

We do not pursue Off the Plan purchases for our investors; and though we neither like, or admire this kind of sale, it does happen out there. Relying on these reported sales is naive.

Talking to opposition agents who specialise in Off the Plan sales in the target area can be a handy insight into these tricks and tactics for buyers who set their heart on buying such a product. Many opposition agents could shed light on the amount of discounting for a particular block and the breadth of the percentage discounts for varying types of units in the block.

If we have a change of Federal Government, and if negative gearing is reserved only for new purchases, many buyers will find themselves facing the smoke and mirrors that exist in this segment of the market.

It is highly advisable that they seek the help of someone who is appropriately licensed, not involved in the sale of the stock, and independent to the developer or selling agents and marketers.