There’s something in common with everyone when it comes to investing. We all invest for the same reason – to make money. And to make money investing, investors need to know two key things: when to buy and when to sell. Large profits await when you buy low and sell high. However, it is easy to make mistakes valuing a property, and transaction costs can eat up your profits if you are even a little bit off in your assumptions.
Buying low and selling high is the oldest investment cliché, but it is very hard to do. Why? Two things drive this: fear and greed. Fear is a powerful emotion that causes people to sell investments and seek comfort and safety in cash or gold. There is a lot of fear today in light of the current global economic uncertainties. However, greed is an even more powerful emotion than fear. Fear is temporary, greed is permanent. Greed always overtakes fear. Greed also lulls us into a false sense of security. For most people, logic and reason go out the window at both ends of the spectrum.
In the secondary market
When it comes to buying property, making an offer can seem like a huge step. Whether you are buying your own home, or looking for investment properties, it’s important to get comfortable with making offers. It has been said often times that people make or lose more money in real estate when they make the purchase, and less when they sell. The reason for this is simple; when you buy you can negotiate the price (i.e. the price you pay is in your control) but when you sell, the price a buyer is willing to pay is not always in your control. Of course you can reject low offers, however, at some point it has to come to a willing seller, willing buyer situation. Getting used to making offers allows you to make some that are unsuccessful, and the less emotional you are about the outcome, the more willing you become to make more offers.
Don’t be afraid of making low offers. By itself an offer is not insulting. In making an offer, you are simply saying what you would be willing or able to pay; you are not actually saying you only think the property is worth what you are offering. The manner in which the offer is presented is also very important. The last thing you want to do is to upset the seller. A seller may choose not to sell to you no matter what price you are willing to offer after that because of it. A good and experienced agent will present offers so that the seller is not offended.
Why would a seller accept a low offer?
There are many reasons why a seller might accept a low offer, such as:
· They have already purchased another property and they need the money from the sale to close the deal or they will lose their deposit;
· The property has been on the market for twelve months with no offers and the seller is more willing to consider any offer;
· They are relocating and don’t want to leave the property empty;
· They are leaving the country and need to sell before they go and etc
What these sellers have in common is that they are highly motivated i.e. they have strong motivated reasons to sell.
When a property is first listed for sale, the seller is hoping to get offers around the asking price. After it has been on the market for several months, the seller becomes more willing to consider offers that would have seemed unimaginable when they first advertised the property for sale. As a buyer, the key to buying low is to understand the seller’s needs.
Discover the following key facts about the seller:
· Where are they moving to?
· When do they need to be in their new property?
· Why are they moving?
· Do they need to sell this property to be able to move?
· How much equity do they need from the property to be able to make their move?
· What will they do if they don’t sell their property? And more…
Having said this, it is not always the case that the seller must always lose out for you to gain when you buy. Sellers can be in a compromised profit situation where they can accept lower offers and still make profit or hold on to it for better profits. When a seller is willing to consider a compromised profit situation and leave something on the table for the next buyer, then all parties stand to gain.
Know the market you’re keen on investing
It is always wise to invest in the location or area that you are familiar with. There are gems and opportunities in every location. You need not keep up with the Joneses to make good investment decisions. By having a good understanding of your area, you will know the kind of prices being offered for sale, transacted prices, also the number of properties being put up for sale and how long they take to be taken off the market. These are useful information. Only then will you know that the price you offer will be at the right price. It is not always the case that you need to buy at below market price to ensure profits. Should the area hold certain advantages that you come to know of from your research of the area, property prices could go up because of that i.e. the opening of a new renowned international school in the area, or new roads improving connectivity to the area. Once you own that property, be sure to keep track of its marketability and the goings on of the area.
Locking in suitable mortgage interest rates
When in comes to buying low, you will also need to consider the other costs involved in purchasing property and the largest would be the financing of it. Buying low also means keeping the cost low. Today, BLR (base lending rate) is in the region of 5.55%. Not too long ago it was at 6.75%. In addition to that, most banks are offering BLR – 2% and even more which means your borrowing cost is now only at 3 - 4%. What this means is that your monthly loan repayments to the bank is lower than a year ago.
Improvements on the property
There are some investors out there who thrive on purchasing dilapidated properties and then putting in some money to improve the condition of the property before reselling it for a profit. This is another mode of the Buy Low, Sell High strategy in action. The average man on the street is afraid to purchase such properties because of its lack of appeal plus they may not have the expertise to assess to what extent the repair, renovation, refurbishment or a complete new structure works may cost. You will need to have expertise here and a team comprising of contractors and architects for this project. The difference with this is that you will need to have the extra cash in hand to work this mode.
Packages offered by developers (Primary Market)
There are many packages now offered by property developers making it even more attractive to purchase properties at this time. Check on what is being offered and where the savings are. Look out for Legal Fees, Stamp Duty, Car Parks (should it be a strata property), Completion Period, Maintenance Charges and the like. In some attractive offerings, I have come across packages where a lot of these charges are borne by the developer. These packages can reduce significantly your upfront cash commitment and thus allowing you to buy at a lower price. It goes without saying, you have got to check on the price of the property to ensure that it is at market price based on your research of the area (which is why point No. 1 earlier is very important).
It is not always possible to time your purchase so well that you truly buy at the lowest and sell at the highest possible. The Buy Low, Sell High – oldest investment cliché is easiest said really. A good guide would be to determine your entry and exit point. Similar to investing in the stock market, upon purchase, determine your goal and once it is met, sell. Never mind that after you have sold, the price continues to increase. Don’t let greed get in the way of your investment and you’ll be well on your way to successful investing. When a good opportunity presents itself and you have done your homework and it looks good, remember to commit to the purchase otherwise no matter how many investment strategies you know of, will be of little or no benefit to you at all.
Chan Ai Cheng
General Manager, S. K. Brothers Realty (M) Sdn Bhd
Registered Estate Agent, Board of Valuers, Appraisers & Estate Agents Malaysia
Member, Malaysian Institute of Estate Agents (MIEA) & the Institution of Surveyors Malaysia (ISM)
Registered Financial Consultant, International Association of Registered Financial Consultants (IARFC)