Property offers and Auctions

Morning everyone. How you going? I thought I might do property auctions. I'm gonna have to move across to.

Smally's new big page to do these. So if you're listening and watching, just go and like the Smallies newbig page and follow it. Because Facebook has changed the way that they're going to allow videos to be done. So to do these sort of videos I now. Well, it's going to get to the point where we have to pay for them. So I'll do them through a business. They won't allow me to talk about things like property on Facebook, Live on my own personal page, which is, you know, that's. They're a very smart business. Obviously they do very well out of advertising. That's a movement into the future. But let's talk about property and making offers and it's one of the biggest mistakes. It's actually one of the things that drives the market in the wrong direction a lot of the time because people make offers according to the. According to how they feel about the property. Sorry about the Sun. How they feel about the property. And that, that being the case, it's an emotional offer, not a practical, pragmatic offer made through feasibility and understanding the market. And it's a bit of a horrible state. When you, when you look at APRA and the changes that has been, have been made recently by apra, which is the Australian Prudential Regulating Authority think it is, or something like that, they are the ones that overlook all the lenders or most of the lenders and make sure that they're all in control. And so APRA's changes recently have affected the sophisticated market and not the new investor market, which is reverse of what they should have done. So let me explain that before I talk about how to make some offers on properties. So APRA's, when they went into the banks, the banks were looking at their savings ratio versus their lending ratio. Now what that means is let's say for every million dollars they had in the bank account sitting in bank accounts from people with savings, they had X amount of lending going out. Now the lenders are comfortably, sorry, APRA is comfortable with about a 1 to 8. So that is 1 million of funds in the bank account to 8 millions has been lent out to mortgages and a few things like that. But it actually blown out to about 1 in 20. And one bank had 1 in 24.

Sorry, I've just been for a job. And so 1 in 24. They were really, really quite concerned about it. So they started to they had the heated Sydney and Melbourne market, even though Perth and Darwin were suffering. So they put some, they instigated some changes to pull that ratio back to below 1 to 14 to start with and now 1 to 9 or 1 to 10. So, so that what that meant was the way to control the market. Stupidly the banks went out and said radio well, because we've got to stop le and stop trying to put money out there. What we're going to do is we're going to take everyone's loans to be safe and we're going to look at them at principal and interest across the board, regardless of whether you're paying interest only. And not only we're going to look at principal interest, we're going to actually increase the rate to 8% because we believe that mortgages will get to 8%, which is fair enough, except that when you're someone like myself or other sophisticated investors that have a huge amount of properties, it's affected us enormously and what it's done is put us into markets where we're now looking for private funding markets rather than going to the banks. And what it did do was actually reverse the effect of what they were trying to do. So that is they any, any mum and dad investor who hadn't, didn't have any properties or might have only had one investment property were actually better off than those people that had six, seven, eight, nine properties and the outcome from that, they, they were unsophisticated investors making stupid offers on properties and forcing the market even further, which was really stupid because the sophisticated investors are standing back and going I wouldn't have paid that for that property. That's stupid. I'll pay for that. I'll pay that amount in five years time when it's worth that. And so that's artificially inflated the market even further. So stupid, stupid idea of what the banks have done. They should have said for anyone who has five or more properties, what we're going to do is we're going to look at you a lot better and we actually want more of your business because we know that you know what you're doing, we know that you're going to be able to continue producing the property. We know that, that you've been full time for X amount of time in property. Now let's talk about offers. So when I make an offer on a property, it's very, very scripted in how we do that.

I don't like auctions and I'll explain that in a second. But when it comes to actually offering on a property, it's a backwards and forwards around discussing what's the vendors expectations, getting an understanding around that. Now they've obviously listed the property price. Most of the time all they're asking offers. And that's where as a investor you have to make an offer according to what the property is going to be worth when you're finished manufacturing your growth. That is remember, hey Luke, that is lifting the price of the property from where it sits right now to where you're going to take it to. So that's where your offer has to start. And that means that you need to reverse your component. It means you have to reverse what we call your feasibility. So you take the, the end value price and you start taking off certain amounts of, you know, what you're going to do, whether you're going to renovate, whether you're going to subdivide all those components of cost. And then you get down to a point where you say, well, I want to make X amount of profit or I want to make X amount of percentage increase to the total development cost. And to do that I have to come up with this figure. So let me make that a little bit clearer and I'll give you an example. Say that the end value of my property is going to be a million dollars by the time I finish doing everything I do with. So then I've got my million dollars and then I've got to start taking components off it. So immediately I want to make a 20% increase to the price of the property so that I can refinance at 80% and get my money out and go again. So that means that if I'm going to end up with an end value of a million dollars, I'm now down to $800,000. And so from that I then have to say, well, for $800,000 I need to now make a, I need to do the subdivision, let's say. So there's $50,000 and now I'm 750. I've got some stamp duty and cost that I'll need to pay on that. So I'll have to do a rough estimate at about 3 1/2% of the cost of the purchase price. At the Moment I'm at 750, so I've got to allow about $21,000. So call it 20. So I'm down to 730. I have some interest and holding costs during the projects. 12 months. 12 months of about $800,000 is.

40 grand. So I'm down to 690. I have some extra costs of the inst of the subdivision, so call that 70. So I'm down to 620 and then I need to add a contingency just in case of 10%. So there's another, you know, say 50 grand. So I'm down to say 580. So 580 is really my purchase price. And what we do in high res, Christine's actually an accountant and has a number of different, different spreadsheets that she puts to the students so that they can use and you can play with figures. So if you want to make a 20%.

Development costs increase, then you know which is your return on your equity or return on project. You say, okay, well, let's put in at 20% now. So what I do when I make an offer is I'm very specific around the offer and it might come down to the offer being 642,565. And the reason it would be that exact precise amount is because I'm trying to hit my 20% hit. I want to increase the property price by 20%. And so to do that with all the costs that I've adjusted in my feasibility, it's actually going to be an odd number. Now when someone says that's a very odd number, you can say one of two things. You can say, I'm superstitious. Don't say that, it's a joke. You say, we've been doing this for a long time. We're very, very understanding of the fact that the properties that we do have to have a return for us and we have our limits of return. So in our limits of return, we've got to make sure that we're actually hitting those marks, that that's the number that we have to hit that actually transfers to the agent that you know, that you're serious, that you are going to get to the point of seriously looking at this project. Now, if you're looking for a 20% return, don't make your offer a 20% return. Make your offer subject to a 25% return or a 24% return because then you've got some room for movement. Now, in any form of negotiation, and I've already done negotiation, one of my videos, any form of negotiat, someone is going to want to feel like they're getting something in return. So when you offer them a price for them to come back to you, they're wanting for you to increase the price, you're wanting for them to lower the price. So there's a two way street there.

And so start at 24% and then say to them well let us know how that offer goes. Hopefully we're successful. I'd be interested to know what the seller's expectations are, the vendor's expectations are. So what you want from that point is you want the agent to come back to you and tell you that they're at this figure now.

When they come back to you, you then say okay, most of the time they're not going to accept your first offer. If they accept your first offer, don't kick yourself and don't say I could have got it for cheaper. You might have just hit the mark and doesn't matter if you got it for a little bit more than what they were willing to sell it. By the time you've increased the price of the property you've made your 20%. So everyone's going to win out of that. So don't worry too much about that. So once they come back to you, you can then go back to your spreadsheet, put in 22% and see what comes out of that and, and then go back to them with the office. And now the offer is, you know, so at 25% it might have been 628,587. Now with the 22% it's 640,000 dol 40 something. 565. And then they come back again and hopefully by the third time back. Your third time back is usually when you'll pick it up and I don't like auction and then so then you've got the figure you've, you've started where you were willing to, to pay a smaller amount to get a bigger return and now you're at, finished at the place where you're absolutely happy with your 20 return. If 20% is your number. You know sometimes we've gone lower at 18% or, or 16%. We've picked project recently is 16% we not that I believe that you should ever base your investing on capital increases. So but, but.

I said it the we, we expect that there's going to be an increase in price in this particular area. So from the research that we've done so you go okay, so now auctions, I'm not a fan of auctions. I hate auctions. I don't like them at all. I love them when we're doing them but we hardly ever sell anything. So auctions are not that important. I always try and make an offer before auction and that offer is usually subject to some sort of condition. Otherwise, you know, if I have to turn up an auction and buy, I will. When I'm really hot market, it's unlikely that you'll get it before auction, in which case turn up the auction, you've already done your figures, you already know that at 20% you can't afford to pay more than that amount of money. And so the best auction tactic that I've found is to perhaps put a bid in earlier. But you don't really need to put a bid in early. I, in the last few auctions have not put a bid in, I've just waited to see and interestingly enough, I haven't bought an auction for a long time and that's because I'm willing to hang out for the price that I'm willing to pay for and if it goes above that, it goes above that. So I register. I've already before the auction negotiated terms that I'm happy with. So that might be a thousand dollar deposit, it might be a 5% deposit, it might be extended settlement of an extra few weeks, it might be a letter of authority from the vendors to make sure that I can go to council immediately. So I've already negotiated that through the agent, through the solicitor and they will know that on the day usually the auctioneer will announce that there has been special. There are people that are bidding today that has, have negotiated separate conditions. Those conditions do not, not, not for anyone else. They're simply only for those people. So those people in the crowd are automatically going, holy, someone negotiated stuff. I'm already at a loss here. So you're, you're already playing mind games with people and before you turn up the auction, not that you're out there trying to do that, I suggest that you always negotiate before auction. The only time I haven't been able to negotiate before auction was with the public trustee. They're very arrogant in Queensland particularly and they just basically say turn up and bid and really care. They really don't care. No worries Fiona. They really don't care about anyone else being affected. When I say that the public trustee looks after the wheels and the states of people and then you know, they get paid regardless and it doesn't matter where they sell very low or sell very high, they still get paid. So they don't really care. So at the auction I would best tactic is to actually stand by the auctioneer so that you can see the rest of the crowd. Now don't stand right next to them and touch their bum, but stand, you know, you can stand side of them. But at least you get to see the entire crowd from what the auctioneer is looking at. And you get what that means is that you get to see the two bidders that are really quite active and you get to see one of them talking to his wife and his wife saying, push it up, push it up. And you've got one talking to the other, to the other partner and they might be business partners and they're going, no, shaking their head, going, no, we're not going to go any further. Now, I don't generally put a bit, like I say, put a bid in just so people know that you're there. And then as soon as you put a bid in, you're going to get pressure from a real estate agent and their groupies are going to come around and say, oh, you know, are you willing, are you willing to up the price? And I simply say to them, I appreciate you coming over here to talk to me. I've got a very fixed price and you don't. You know, I've done this quite a few times. I know how the auction process is. I appreciate that you're doing your job and you're doing a great job, but if I, if I can just be left alone, I want to concentrate on the auction. Usually they leave you alone. If they come back, just repeat it again. If they come back a third time, just go, listen, I've told you twice already and you're actually in a position of actually harming the auction right now. I'm trying to concentrate. Please, can you just give me my time? So by standing next to the auctioneer, you're watching what's going on. And like I said, generally nowadays I haven't been putting an original bid in. Now the original bid, if you were to put it in, would be a very low ball bid and probably the first bid. And at some auctions they actually give away some wine or they give away a champagne or something. So why not put the first bid in just to get the ball rolling. You're gonna get something, a gift, take it. You know, it's, it's quite likely that the price that you're going to put in is not going to be the price that's above the reserve auction price anyway. So you might as well get something out of it anyway. So as soon as that happens, I would hold back and then watch what goes on. And what you're looking for is if it is a hot, hot B bid in a hot bidding frenzy in the auction, what you're looking for is two of the bidders working their way down and, and working each other off until you see that one is going to drop off. Now, when you get to that point, this is where it takes, this is where, you know to take an old adage is to have your balls up in your throat because you got to be, you got to be really.

You'Ve got to put yourself out there and you're going to have a, you're going to have a lot of anxiety about doing what I'm about to start to say. Now it is, if you're unsure and the price gets to a point and you see that one person has dropped off, then what you need to do is wait to see whether the property's on the market. Now, in some states it's actually law that the auctioneer will say the property will be selling today or the property is on the market. Now if you're unsure at the point where one of them drops off, just ask the question to say, is the property on the market? Has the reserve been reached? Unfortunately, what you've just done is probably put the auctioneer offside, but you've put yourself in a position to work out whether they actually are about to sell it or not. Now you could wait for the auctioneer to put his hammer up and go, going once, going twice. And it's very typical of many auctioneers. And they'll go, going.

Let me seek advice from the vendors. And they walk off right now if you've actually gone in too early, they realize that you're available to be bidding and what you don't want, what you want to do is actually get down to the point point where two, two bidders have hurt themselves so much that they finally dropped one off. And you've got to be sure that they've dropped off. And the, the one that, that one that's left is going, beautiful. There's no one else here that's ready to bid. And if they haven't reached your 20 mark, you're now in the game. And the beauty with that, that is that if you're in the game and you've got a little bit to play with, you can really hurt them. And when I say that, that they'll go elf, they seek instructions from the vendor and they'll come back and say, the vendor has now said that the, the property with another bid of X amount will be on the market. We need one more bid to get it to there. And hopefully the, you know, the last person that's left will up their bid to that and you're still under. Now let's say that the bid is at 665 or something like that and you're willing to pay 690. And the first thing I would do if I'm willing to pay 690 and go, I'd go from 665 and I'd hit them straigh up at seven, at 675, I'd knock ten grand straight on it, straight away. Now you've already done your figures to make it 20. So that means that the person that's now the only person left to bid against you because the other ones are dropped off is now going, holy crap, that guy just lifted 10. We were just bidding 500amounts and this person's just lifted at 10 grand. Wow. So then they'll come in with, you know, 675, 500 and you go six, eight and, and everyone's going what? 680. Can't believe it, can't believe they just increased the price. And then another guy will, another, that same person will come in or go 6, 8, 500 and you'll go 685 and they go holy crap. And then they'll go 6, 85, 500 and you'll go $690,000. Now you just reached your limit. Now remember, you've already done your figures, you've done your numbers, you're not going beyond that. If they decide that they're going to lift another $500 dollars, you've done one of two things. Firstly, you've withdrawn out of the auction, which means you're not going to lose your money and lose your 20% of increase. And secondly, what you've just done is assisted the vendor to get a property price to where it needs to be. So understand that in an auction process you should never, never, ever get caught up in emotion. Sometimes it's worthy of you getting someone to bid on your behalf. So you stand next to the auctioneer, you watch what they're doing. Now I would get someone who's done it many times before for, and usually get a buyer's agent to do that for you. A buyer's agent's really brilliant. They've been to many, many, many auctions and are very good at what they do. And so you just sit there and look at it and go, radio, stand next to the auctioneer, have the property buyer across from you and you know, at a point where they know that they're going to pull out, pull out now that's my way of dealing I believe with auctions and how you should best deal with auctions. There are a number of different tactics that, that work in auctions. That's the way that I found best and that's the way that I've seen other people do them really well. So what's the key things out of today? Make sure.

Make sure I'm, I'm at home now, so before I get out of the car, make sure that you offer on a property subject to the, the increase of percentage that you want on the property. So.

I'll be buying your book today. No problems if you, if you do want to buy my book, just get on the small is a new big website and you can get it out there. We'll send it out today. The girls will post it out to you. So, so when you're buying a property, ensure that you've making the amount of money at the back end. So have your end price that you're willing to pay for the property and then take your deductions off that. So that is your, your interest, the cost of the project, the cost of the stamp duty, the cost of interest. All, all those things need to come off where your end value is going to be and then make a 20% profit. And from that you'll be saying, radio, I'm willing to pay this much. That's the maximum I'm willing to pay for the property. And ensure that when you first go in on an offer, if it's not an auction, if you're just offering, when you first go in for an offer, make sure that you've allowed for 25% increase to the price of the property, which means your offer will be lower. And if they come to back then you hopefully will get to a point where you hit your 20 mark. And that figure is going to be an odd figure because you've done it in feasibility. So it'll be, it'll be 642,587 and someone will go, holy crap. Okay, that makes a lot of sense. This agent's going to be saying why did you offer that? And say because we work on numbers and we need to get a minimum return out of the property. And that's how we've done it. So when they come back to you again, you go, look, I've managed to move the numbers around. I've spoken to the, the, the God in there, who's Christine, my wife. And we're now changing the, the offer. We've actually reduced the amount of money that we're going to be making on this project so now we can offer this much and then when they come back to you again, you go, look, I've really pushed her. She's not happy with me going to the percentages and the return that I've, that I've now changed the feasibility to. This is going to be probably, this is going to be an offer that is really tight for us, but we need to make this work. And by this time the agent, you've already gone backwards and forwards, you've built rapport with them and they're now basically working on your behalf because they know that you're serious, they know that you want to get it done. And they're saying to the agent, you know, these, these guys know what they're doing and if they're, if they've figured out the numbers and they're full time in property already, you should seriously be listening to this offer because I'm sure I'll. And you're basically breaking the confidence of the real estate agent down by doing this now at an auction. Remember, stand next to the auctioneer, look out into the crowd. Don't make a bid is generally what I do nowadays. Don't make a bid until you see that the last one of the last two, one of them's dropped off. And wait till you know that it's on the market, that the property will be selling on that day. You know you've fixed your rate at 20% make or whatever percentage you're going to make on it and, and bid strong. So when they come back on and they say the property's on the market, you're down to you and someone else, the other, the someone else doesn't. You're about to come into it, hit hard hitting five or ten grand lots and remember, you've already done your numbers, you've already said that I'm willing to pay this much and I'm not going above that much. And from there you can then successfully go into the property and own it and do what you need to do to it. Remember also with auctions, always negotiate terms around a smaller deposit or a longer settlement or whatever you can in there to make it work in your favor. So I've got a seven o' clock meeting and it's six o' clock now in Queensland. So hopefully we'll see you very soon. See ya.