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Property Markets cycle through periods when there are more buyers than sellers, and then when the market cools, the cycle changes and there are often more sellers than buyers. These market cycles depend on the supply of dwellings (measured through listing volumes and new homes being built), and the corresponding demand for properties (the number of buyers who are ready to purchase). Regardless of market conditions, the type of property that you need to target should never change. The focus needs to be long-term and buyers need to avoid getting caught in the fear of missing out (FOMO) that often creeps into their mindset in tough market conditions.

We see it often. When there are more buyers than sellers, people get frantic. The market moves quickly and prices often escalate at a pace that is unbelievably fast. Properties are listed, and within days they are under contract. Buyers are making quick decisions about spending huge sums of money on an asset that they will hold well into the future.

But with the frantic speed, we also see some people start to take unnecessary risks. Some of these are outlined below.

 

Making Cash Offers

Buyers often make offers that are no longer conditional to obtaining a final approval on finance.  Whilst this can provide a competitive advantage in a seller’s market, it also exposes the buyer to a certain level of risk.

We see buyers offer to purchase properties at amounts well over the seller’s expectations. The buyer then takes on the risk that the property valuation does not come in at the purchase price. When this happens, it means the valuer can not see evidence of other sales that support the purchase price.  Remember, a valuer is engaged to protect the interests of the bank. They provide the bank with the reassurance that the property will achieve the same purchase price if the property needs to be sold in the very near future.

When there is no finance clause to allow a buyer to withdraw from a contract, in the event that a property valuation does not come in at the purchase price, the buyer will have to put forward more cash or equity to cover the shortfall.  When buyers do not have the capacity to cover any shortfall, then it puts the buyers in a very difficult situation.  Failure to obtain the funds to settle on a property, where there is a legally binding contract in place, exposes a buyer to contract breaches, which is a dire situation to find yourself in.

Watch our video on Risks associated with making an unconditional offer

 

Overlooking a Building and Pest Inspection

Quite often in Brisbane, buyers will make their offer subject to a satisfactory building and pest report being obtained once a contract has been entered into.  When there is a lot of competition from buyers for a property, we sometimes see buyers eliminate this condition from their offer to ensure that their offer is “cleaner” and more competitive.

The obvious risk associated with this, is that there may be major defects with the building that can not possibly be detected during a standard open house inspection.  It is rarely possible to inspect the ceiling space, investigate moisture readings in walls or crawl into under-floor cavities during a standard inspection.  A lot of defects or pest issues are not visible to the naked eye, so further investigation provides a level of security that the asset you are buying is not going to come with hidden surprises.

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Accepting Compromises just to get into the Market

We also see buyers start to make compromises on things that they would not accept under normal market conditions.  Buyers become fearful about how fast a market might be growing in value, and therefore just to get into a market they consider properties that might have impacts that will affect the asset long term.

But the focus for some buyers shifts away from the long-term outcomes.  Remember property is an asset class that generally delivers superior results the longer it is owned.  Making compromises just to get into the market makes little sense if it will impact the long term performance.

 

Taking Short Cuts

Taking the time to complete the necessary thorough due diligence is critical.  In a fast moving market, it is easy to overlook the importance of thoroughly investigating a property before making an offer.  When a property is only listed for a couple of days before it is under offer, every buyer should ensure that they understand all of the potential impacts on a property BEFORE they consider it a suitable purchase.  By skimping on the due diligence, buyers can often be blindsided by issues that were evident if in fact, they took the time to investigate further.

 

Property markets always cycle through periods of boom and bust. It is inevitable that property buyers will ride the emotional journey and react in various ways that may be dependent on market conditions. FOMO is a real problem that many buyers do experience. It can really cloud judgment and cause people to make irrational decisions.

If you are feeling FOMO when looking to buy, perhaps getting professional assistance will ensure that your decisions will be focused on the long term outcomes.  Buyers should NEVER take unnecessary risks or purchase a property that is not an ideal match for their circumstances.  Remember, property is a long term asset and the transactional costs are high if you make a mistake.  You want to get it right up front

Get in touch if you would like to know how we can help you.

 

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