Issue 30 - 2022
Accepting the right sale offer as the dynamics in the property market are shifting quickly, comes sharply into focus.
Clearance rates were near perfect to begin the year, but have slumped to 40% since the RBA changed their position on interest rates.
Vendors and buyers are well advised to shift their respective strategy accordingly too. In fairness, one does not need to tell buyers to factor in a market shift, their mortgage broker or bank manager has probably already advised them via revised loan terms.
Buyers are experiencing very different mortgage conditions compared to the 2021 boom.
At the beginning of June, The Australian newspaper reported, ‘The prudential regulator has warned that Australia is entering a “very different” housing environment compared to the last decade, with borrowers coming off ultra-low fixed rates facing a possible repayment shock and negative equity in their homes’.
Knowing when to accept the right sale offer is the key going forward.
At the end of every boom, unfortunately there are sellers who misjudge the market, and decline an offer that they ultimately regret rejecting. Selling for less than you have previously rejected is one of the real estate game’s harshest lessons.
Below is an extract from the best-selling book Inside Real Estate that will offer some guidance on when and how to play the offer.
How to judge a sale offer
Deciding whether to accept or decline a sale offer can be the most challenging of times for owners. There is no rulebook to follow on how to play the offer scenario when it arises.
It leads back to a simple question with a complicated answer – how do we extract the best price without losing the buyer?
There are some principles that will help guide you through the process.
Market Price
What does the recent sales evidence suggest? As the seller, you may have a target number in mind, however how does that number compare with comparable recent sales? Does the sale offer seem fair, high, or low? Once you have established this very simple rating on the offer at hand, you will have a clearer view on how to handle the negotiation. Never base your response to an offer on the asking prices/price guides of other unsold listings. Remaining calm, logical, and unemotional during a negotiation is crucial to making the right call.
For further info on accurate pricing, read our previous article.
Context
Many sellers ask hypothetical questions before putting their home prior on the market. Questions such as ‘What should we do if someone offers $2,000,000?’ or ‘What do we do if we get an offer in the first week?’
These questions can only be answered in context of the campaign.
An offer should rarely be judged against time on market. The digital age has made marketing real estate an almost instant process. A sale offer should be judged against the feedback of other potential buyer’s feedback and interest. If the first buyer on the first day makes an offer on your home, yes, this can be a very tricky situation.
In reality, you cannot really plan in advance on how to play the actual offer. The offer needs to be handled in the context of the campaign.
Format
There are three basic formats in which a sale offer can be made. Verbal, written and contractual. Whenever an offer is made, remember – verbal and written offers are non-binding. Only a signed contract with a deposit cheque can be considered truly genuine.
If you accept a verbal or written offer that crashes, it’s best to consider it a non-offer as you proceed, to avoid making mistakes when assessing future offers. Be wary of the high verbal offer – easy come, easy go!
Competition
If you are fortunate enough to have multiple buyers for your property, the whole equation becomes easier. Before becoming complacent about having multiple buyers, satisfy yourself that they are genuine buyers. To decline a contract offer in favour of non-binding verbal one can put your campaign into a tailspin. Once a contract offer has been made, it’s best that all competing offers are submitted on a contract. Any buyer promising to pay more without signing a contract should be played cautiously.
Non-price Agreements
Value for both parties can be created away from price. These potential agreements that add value for both parties are worth exploring if the offer is close to being acceptable. Issues such as delayed (or early) settlement, release of deposit, lease back, reduced deposit or inclusions can bring a negotiation together. The more a real estate negotiation becomes about price, the less goodwill remains in place. If you are horse trading on terms, always remember to take a concession if you give one.
Pre or Post Due Diligence
The pre-due diligence offer catches many sellers unaware. They accept the verbal or written offer and mistakenly think the property has sold. Suddenly, the building inspection brings up a raft of issues that causes the buyer to reconsider, or the buyer’s bank values the property lower than the agreed amount, scuttling the deal. Any offer that is made prior to due diligence must be considered an expression of interest rather than a formal offer.
There Are No Rules
There are no rules around the governance of making, accepting and/or rejecting an offer. The property is not sold or purchased until contracts have exchanged unconditionally. It’s common for the seller to ask the agent ‘How long do we have to consider the offer?’ An offer is an offer until the owner countersigns a buyer’s unconditional contract or the buyer withdraws from the negotiation. It’s a mistake to think a buyer will leave the offer on the table for a prolonged period whilst the owner chases a better offer. Complacency can bite during a negotiation, particularly in a fragile market. If you do reject an offer, it’s worth noting that declining an offer does not guarantee a higher offer being made in the future.
The toughest offer to accept is the one that is lower than one you previously rejected.
The property market is feeling the full effects of increasing interest/mortgage rates. Combined with 5 months of near relentless rain, many prospective vendors find themselves wrestling with the decision of whether to sell in winter or wait until spring this year.
Traditionally stock levels are tight in winter and usually expand rapidly from August onwards as spring beckons. It remains to be seen if rising interest rates and falling clearance rates cause stock levels to expand and swell during winter.
One of the supporting factors in the current market is the low stock levels relative to buyer demand.
Surprisingly though, sub 50% auction clearance rates at a time of both low stock levels and low interest rates is historically rare, but that’s what we have at present. Let’s not forget the unemployment rate is the best it’s been for several decades too. So, there are many conflicting signals at present for buyers, sellers, and agents to absorb.
Many vendors across Sydney who have failed to sell or achieve an acceptable price have withdrawn their property from the market. Some, not all, will look to re-list in spring. Staring down the market feels like the right thing to do at the time, but if one is really determined to sell and the market falls in between campaigns, not accepting a good offer from the first campaign can prove costly.
The benefit of selling in winter this year as opposed to spring is you will avoid some of the forthcoming interest rates rises that are universally predicted. The downside of a winter sales campaign is the property presentation, and the weather conditions are not optimal – hence the reason spring is always viewed as the season to sell.
Getting tradespeople and/or a handyman to assist in preparing a property for sale is also challenging, inadvertently blowing out many vendor’s timelines in the process. Many sellers that wanted to sell in autumn find themselves only ready to come to market in winter, given the difficulty in preparing a property for market and getting enough sunny days for the works to actually occur.
The reality is vendors will face higher interest rates and higher seller competition this spring than during winter. However, there are still ample number of buyers looking to secure a home and lock in a Home Loan Rate before rates go much higher, which sets up a window of opportunity for those ready and willing to sell this winter. If you are looking to buy and sell, selling in winter with a delayed settlement and then purchasing in spring seems like a good ‘set play’.
Many first-time investors are caught out when they purchase an investment property.
The reason being the yield is simply miscalculated in many cases, leaving the new investor having to find additional finances in order to cover the mortgage repayments.
The stated return in the agent’s advertisement seemed a plausible 4 or 5% pa. With mortgage rates at around 3.5%, the prospective investment property seems to stack up. But does it really? It all depends on what basis the yield is based on. The gross yield, or the net yield?
The quoted gross return of 4% can be whittled down to as little as 1.5% once expenses are factored in. Whilst the investor may take 4% pa in revenue from the tenant, after running expenses they are only keeping 1.5%, before paying the mortgage. The investor is left with an unexpected gap between income and mortgage repayments. The landlord finds themselves having to ‘top up’ the mortgage on the property every month.
Capital Growth or Income?
Research shows that the majority of residential real estate investors buy an investment property with “potential capital growth” being the main investment criteria. Income is largely overlooked in favour of capital growth. It is close to speculation when an asset is purchased with the income stream completely overlooked in favour of ‘potential capital growth’. Many investors unintentionally do so though.
Capital growth is an investor’s reward for owning the property over the longer term. A good rental return in the interim is crucial to the overall success of the investment.
Now that the property market has stopped rising at the frenetic pace it did in 2021, investors are becoming more circumspect. The rental income matters because that is what will underpin the investment over the first 3 – 5 years. The good news for investors is rents are now rising for the first time in quite a few years. Furthermore, a rising rental market at the end of a property boom is absolutely crucial to ensuring a soft landing. Over the next few years, expect more investors to enter the market as prices fall and rents rise.
During the boom last year, the opposite was occurring – landlords were selling out with owner occupiers being the buyer profile in 80% of cases. This sustained trend during COVID has seen the overall rental supply tighten, particularly in housing stock.
Real estate agents will often quote the weekly rent and/or the gross yield. As an investor, you need to focus on the net income you will receive. The tenant is not going to pay those exorbitant strata fees, and neither will the agent who sold you the property.
Establishing the net income figure
Costs that need to be factored in up front include vacancy (allow for 2 weeks vacancy p/a), agent’s management and leasing fees, strata, water and council rates, property maintenance, land tax if applicable and landlord insurance. Therefore, the income that you hold after these expenses have been paid is the real rate of return. The expenses that a landlord must cover can almost halve the income the property generates.
How does the investment look now? You can also apply this zero-based thinking to your existing investment properties. Are you getting a good return on your equity?
Inside Real Estate pulls back the curtain on real estate transactions for everyone looking to buy and sell a property – from baby boomers who are ready to downsize to millennials buying their first home.
Inside Real Estate will take you on a journey of discovery through the property game, examining how you can ensure your real estate agent earns commission through adding value to the transaction.
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