What is a fair competitive stretch?

Yesterday was a Super-Saturday for Melbourne, officially termed for weekends with more than a thousand auctions. Not only that, but it was our largest auction number so far for 2019. A whopping 1400 auctions were held across our state yesterday.

Most of us would have anticipated a slight decline in the auction clearance rate, given the relatively large number of auctions held, yet our clearance rate remained high.

Bidders were out in force and our auction success rate was only 25%.

The two auctions that we did secure were for owner-occupier clients who both apportioned a stretch budget. Even then, we had to fight hard against multiple other bidders to get the keys.

Our investor clients completely missed out.

It is evident that the increased sentiment, three consecutive interest rate cuts, and softened servicing buffers have stimulated our market again.

Properties are selling above expectations, above recent past comparable sales, and above many buyer’s already-stretched budgets. To increase their chances of success, buyers now realise that they need to apply a stronger budget than the appraised value of the property, (based on recent comparable sales analysis).

In a moving market, sale prices will increase each week.

This property in Kingsville sold yesterday for $1.27M. Four bidders fought it out. I was bidding in a sea of owner occupiers, who according to the local agents had been swarming around since the election. They were emotional, passionate and prepared to stretch. The property was announced on the market at $1.2M and we had appraised it at this level. We prepared our investor buyer for a competitive result and felt that our $1.25M budget could have enabled success, but it wasn’t to be. Two buyers fought above this level for the keys.

So in this case, the property sold some 5% over our appraised level.

This superbly located villa in Reservoir was quoted sub-$500K and announced on the market at $480K. We had appraised it at circa $520K-$530K and our owner occupier client applied a competitive stretch in an effort to secure it. Selling to our client for $541,500, we were literally down to our final pennies.

Her 5% stretch over our appraised value just secured her the property.

So it would seem, on the balance of these two examples, that a five per cent stretch may be the required stretch, but every property is different. Auctions can often throw curve balls.

Take this property in Bentleigh as a case in point. Appraised at $1.8M by us, and quoted $1.55-1.65M, six bidders, (many of whom were Chinese) drove this property price tag to $1.985M. Noting the street number, (18), the fact that the house was brick, (not weatherboard) and the McKinnon High School zone was an important consideration for us. The sales result was certainly a surprise, but Chinese buyers often have hefty budgets.

In this case, the property sold some 11% above our appraised value, and over 20% above the top of the agents’ quote.

This stunning new build on Ivanhoe East’s The Boulevard sold yesterday for $3.525M, 12% above the reserve price. Four bidders fought it out and despite the Chinese buyer’s determination, it was a local buyer sitting nonchalantly on the couch throughout the auction who secured it with his one and only slam bid of $25,000 as he chimed in over the agent’s third auction call.

The crowd gasped and the Chinese buyers clutched their Gucci bags and walked out before the hammer fell.

The questions are – how large a stretch is OK? And what are the risks?

In a moving market we prepare our buyers for their competition. Pending their circumstances, we sometimes endorse a stretch budget up to 5% above our appraised value if the purchaser is an owner-occupier. For investors, we suggest a cap of 3%.

But there are risks, and stretch budgets won’t be options for every buyer.

The risk of a valuation shortfall is still a very real one. Valuers are not factoring in market growth, and if anything they are still cautious based on overriding economic conditions. If buyers can’t comfortably sustain a shortfall, they need to apply caution to a stretch budget. In circumstances where they feel compelled to stretch and can’t mitigate the risk, it’s advisable to approach private sale properties and utilise a finance clause, (or a valuation clause).

The risk of a crystallised loss is a significant threat for any buyer who’s circumstances change and force them to sell. If they have overpaid for a property and sell for a price reflective of a softer market, they will likely sustain a loss if the purchase date and sale date have a tight differential.

The risk of overcapitalisation on a project is one force that renovators, developers and flippers face in a strong market. Projects are forecast based on sensible pricing, and a heightened cost base will erode margins and throw the viability of the project into question.

Applying a stretch becomes a necessity in a moving market if the buyer has a purchase time frame to work to.

Waiting it out for cooling market conditions is potentially an even larger risk if the buyer finds that the market then outpaces them and restricts their ability to buy into their chosen suburbs.

Buyers need to carefully weigh up the market conditions, timing, competition and their own personal risk as they navigate this aggressive market.