7 things that buyers get wrong

Recently my fellow-podcasters and I recorded a two part podcast episode about the seven things that we sometimes see buyers getting wrong. We initially thought we could cover these seven things in one episode, but as recordings often go, we had so much to expand on, we quickly realised this would span well over an hour.

Our coverage prompted me to write this blog so that I could itemise the mistakes I often see people making.

1. Insufficient planning
   From knee-jerk purchase decisions, to an oversight of the importance of the task, so many purchasers don’t give enough attention and commitment to the planning phase. Getting the criteria mapped out appropriately, having a realistic and feasible expectation to match the budget, and circling in on the right geographic locales from the start can make the difference between a great outcome and a regretful purchase.
   
   I often ask people, “How many hours/days did you spend planning your last big holiday? And what was the cost of the holiday?”
   
   Contrasting this to a much more significant price tag, have they really given the property assignment the time it deserved?

2. Overconfidence in their ability to renovate
   So often, I hear people tell me that they are happy to renovate, but understanding the cost of the renovation, the time required for the renovation, the planning approvals that may be required for a renovation, and in particular, their own ability to renovate is oven overlooked.
   
   I’ve stripped back the list of items that many buyers are prepared to tackle in a renovation, and unsurprisingly they are usually quite limited to cosmetic renovations only. And even then, some buyers would struggle with the task of painting, let alone gutting a kitchen or opening up living areas by moving walls.
   
   And for those buyers who are prepared to hire trades to complete their renovations, so many under-estimate the impact of allocating budget to the task prior to selecting a property to purchase. Particularly for a first home buyer, eroding the cash balance can significantly reduce borrowing capacity when loan to value ratios are already hitting a limit.
   
   Sadly, the worst thing that can happen for an overly-optimistic renovator is that they are forced to sell mid-renovation. The impact can be dire because a lender will consider a property very differently when it has been gutted and/or missing kitchen and/or bathroom. An un-renovated, original old house will have a far better chance of being accepted as a security property than an abandoned project.
   
   The risk to the exhausted renovator is that they sell their property at a far lower price than the price they originally paid.

3. Introducing emotion over pragmatism when it comes to investing
   There are so many examples of this I could cite. Three common ones include;
   • Imaging themselves living in it. If it’s a business decision, the investor should be identifying a property that will appeal to the target tenant, not their own personal criterion. As I often say, “I don’t need you to love it (or even like it), but I do want you to be proud of it.”
   • Thinking about it as a future ‘maybe’ home for themselves or their children
   • Being too nice about a tenant’s rent. This last point is interesting, because as rental providers, we should always aim to be nice to our renters, but letting the rent fall significantly below market rent is a recipe for future challenges. Not only will the the investor limit their own financial returns, but the renter will likely be upset when their rental adjustment is hefty.

4. Low ball offers and a quest for a bargain (instead of a quality property)
   While we all like a bargain, the quest for a bargain can sometimes blur our primary goal; to purchase a quality property that will outperform long-term.
   
   We know that when markets turn, it’s the compromised properties that often sustain the highest price falls. While price declines can impact across all price points in a given area, it’s the quality properties that usually remain the most resilient. It’s fair to say that even in our current, jittery market, the quality properties are still attracting strong buyer competition. Just this weekend I’ve experienced two highly competitive auctions that each eclipsed their reserves by a strong margin.
   
   Given the price falls are more noteworthy amongst compromised properties, we can deduce that the sharpest bargain buys when measuring the percentage price declines are for compromised properties. And as Peter Koulizos points out, it’s like buying a discounted bag of rotten apples. For sure, the discounting is extreme, but who really wants a rotten apple? Post-settlement may prove problematic too because rotten apple properties are also challenging to rent.
   
   Aside from buying bad apples, the other risks associated with low ball offers and scrooge buyer behaviour include;
   • Annoying the agents and becoming that “unrealistic” buyer on their CRM
   • Burning the vendor so badly that they won’t come back to the negotiation table
   • Missing out altogether because of being priced out of the market when conditions rebound
   • Moving in and THEN realising why it was a bargain

5. Being impatient with time
   Rushing a property purchase with extreme time pressure can lead to mistakes being made, items being missed, or worse still, a regretful purchase that is ultimately divested at a loss. Factoring in agent selling fees, stamp duty and marketing costs is a stark reminder of the losses associated with a poor purchase decision that needs to be reversed.
   
   Aside from giving the search the time it deserves, buyers also need to recognise when buying conditions are only temporarily challenged. This may relate to their own lending constraints, or could relate to seasonal market variations. For example, winter and January are notoriously difficult periods to purchase in because stock levels are typically quite low. Sometimes just waiting it out for Spring offers an easy reprieve.

6. Counting cents instead of dollars
   Looking at the wrong costs can lead us to making bad decisions. Some examples include:
   • Selling because of a tax issue/burden, but overpaying the size of the tax issue/burden
   • Getting stressed about maintenance costs and selling an otherwise good investment
   • Scrimping with property manager fees
   • Not seeing to real issues in the investment property and ultimately causing further deterioration when ignoring small issues that could have been easily fixed
   • Making an inferior investment decision when you could have bought an A grade asset for a bit more
   • Buying interstate to avoid land tax. All tax obligations should be carefully understood and weighed up, but so many people lose perspective and let go of high-performing properties in order to save a couple of thousand dollars per year.

7. DIY’ing the things that they shouldn’t
   This is probably the most frightening of all of the things mentioned that buyers get wrong. Tackling some of these tasks below as a do-it-yourself’er might seem like a good idea at the time, but many of them spell huge potential cost-blowouts, some could lead to significant financial losses, and some of the physically dangerous tasks represent genuine risks to personal health.
   • Trade work
   • Non-permitted work
   • Property management
   • Selling their own property
   • Selecting an A grade asset if you have no skill in this space and no desire to learn more

DIY has a place, but certainly not when it comes to managing large financial outcomes.