I made my money in property through great deals. But dealmakers need to look further and further afield. Like here:
Have you tried doing a deal in Sydney or Melbourne lately?
I had an interest in a Melbourne suburban site recently. I thought it could be a nice townhouse play. But I thought the price was a good coupla hundred ‘K over what was workable.
So I tracked down the owner to see if we could make something work – if there was a way to make it win/win.
But she wasn’t interested in talking (to this) turkey. She wanted the full asking price, 30-day settlement, and for me to send her flowers every year on her birthday for the next 5 years!
And look, good on her. If that’s what she wants, she should go for it.
But this is just what it is like working with Sydney and Melbourne right now. Market sentiment is high and it’s a seller’s market. They’re calling the shots.
I’ve always been a big believer in that saying “you make money when you buy”. And so when I buy, I want to explore all the options. I want to sit down and nut out a deal.
But when market sentiment is high – when we’re approaching the Euphoria phase – then sellers don’t want to come to the table. They want you to come over to the couch and slip your offer in under their tim-tams so they can look at it in the ad break…
And so your only shot at buying well is when a seller aims too low. You might get lucky, and it does happen, but I get frustrated with markets like this.
Markets tend to move in cycles, and market sentiment has a well-worn cycle, from optimism to Euphoria to panic to capitulation and back to hope again.
Now, nothing in life is ever this smooth and predictable, but right now Sydney and Melbourne are somewhere between “thrill” and “Euphoria”. (I can’t tell you how many dart-board investors I’ve met who think they’re a genius because they bought any random property in Sydney three years ago.)
So where’s a deal-making investor going to go?
Well, take a look at this ad for a rental property in Perth from a few months back:
“Financial Black Hole for Rent”!!!
Here’s her pitch: “Despite having bought this property at a peak time in the market and paying a small fortune for a cardboard house, this financial black hole truly is an awesome place.”
It got her a bit of attention in the papers, and I think that helped her land a tenant, but my guess is even then she’s probably still bleeding cash on it.
But where is she is the market sentiment cycle? This is capitulation, pure and simple. This is, “Oh shit, I made a mistake. A big financial mistake. How am I going to get out of this mess.”?
This is what capitulation looks like.
Now, how willing would this woman be to come to the table and negotiate? The house probably isn’t even listed with an agent, but make her a good offer and she’d take it.
This isn’t a woman who would want flowers every year for her birthday. In fact, she’d probably send you flowers.
You could even do something like negotiate a two-year settlement with early access – give you a chance to get in and fix the place up.
She would just be happy to know that her financial nightmare had a definitive end date – even if that end date was still two years down the track.
In a market like this, you’ve got options and options are power.
Now people at this point might be saying, hang on Jon, prices in Perth are still falling.
And I know that. Prices are falling. Rents are falling. In fact, rents are falling faster than prices so yields are actually getting worse.
But you can still make pretty money in ugly markets. Most people think its market movements that create profits in real estate.
But that’s only one way to make money – and in fact it’s the way you have least control over, and so is therefore my least favourite way to make money.
I mean, imagine you find the property above. It’s located in an area that’s got growing appeal with young families. You buy it with extended settlement and early access. You do it up and sell it on after 12 months, pocketing easy profit that’s got nothing to do with market movements.
These kinds of markets can be great for reno strategies. If you can increase the value of the property by 30% in a year, it doesn’t matter if prices fall another 10% this year – especially if you’ve got flexibility with when your money is in and out of the deal.
Hi-Res strategies can play well in these markets too. In soft labour markets, there can be strong demand for cheaper, higher-density housing options. We’ve seen that play out in some of the mining centres.
There’s opportunity in every crisis.
And personally I was worried for Perth. With falling iron ore revenues, the state government was looking at ratings downgrades, and then things could have really hit the skids.
However, with commodity prices back at recent highs, the economy is looking steadier.
This downturn still has further to run in my mind, but whether it’s 18 months to two years down the track, I think the end is in sight.
So a market in full capitulation, with a steadying outlook – that’s the kind of thing that gets the dealmaker of me excited.