Don’t Get Distracted By Supposed Discounts

I was checking over some properties last week, and the first thing the agent I met said was, "How much discount would you be looking for?"
 
Now what does this mean?!
 
Discount from what?
 
An already inflated price?
 
A surveyor's value?
 
Or current market value?
 
All 3 will generally be different.
 
When you see off plans being marketed at 15-20% discounts, remember
this is marketing.

All this generally means is the prices were too high in the first place, and have had to reduce to sell, or are trying to attract business with a promotion.

No different to a shop that cannot shift its stock, and has to have 20% off sales, or even half price sales. Because the Brits love a bargain they often buy at these "discounted" prices - but just because you have got a
discount, this does not mean you have bought below market value!
Even the large supermarkets have been accused of putting the prices
up one week, and then discounting them the following - is simply a
marketing method.
 
You have bought at market value, as that is what investors were
willing to pay.
 
Yes - occasionally a discount can be negotiated, but often this
will be at the start of development, if the developer wants to sell
the first phase quickly. I prefer to see developments where the
prices go up during the development as get a truer feel for the
values.
 
I then hear people say - well it must be below market value because
a surveyor has valued it at £20,000 more than I paid. In fact about
a week ago, I received an email offering some completed new builds
in Nottingham, which I have driven past several times. It had
copies of the surveyors valuation done, and were offering these
properties at around 15% below this valuation.
 
 
But clearly although you could buy at 15% below the surveyor's
valuation, this is totally different from market valuation. The
market valuation is what someone is willing to pay. Perhaps if
there is just 1-2 units left, but not when are 10-20. I'd be very
concerned at buying a property 15% above the market valuation,
which in effect is what you are doing as the 15% discount is being
used as a deposit. Why would anyone pay a finders fee for that?!
Especially at around 5% yield. This tells me these properties are
too expensive for first time buyers, and not attractive for
investors, so prices will only go one way as supply will outweigh
demand. Remember the value a surveyor gives a property will often
be different to the value a buy to let investor, who is more
interested in yield, gives a property. I have seen some horrendous
examples recently where investors are buying buy to lets solely
because they think they have received an attractive discount.
Unfortunately 6 months later the valuation is even less than this
supposedly discounted value that was given and they are struggling
to get anywhere near the rental figures quoted. This can be very
dangerous, as can find yourself in negative equity very quickly as
have paid too much in first place, even with a supposed discount.
 
I'll give another example of the differences in different markets.
As most of you will know I target areas in UK where yields are
still strong and capital growth is still strong - although is
getting very competitive. Currently properties that say are being
valued by a surveyor at £40,000 are selling on the open market for
nearer £50,000. Why is this? Well because yields are so strong, and
demand is higher than supply. So again, you have not paid above
market value, you have paid market valuation. This is often the
case in a fast growing market, where surveyors look at historic
data and do not grasp fully the value to buy to let investors, in
this country and overseas.
 
I know I'd rather be buying in a market where market valuation is
10-15% above the surveyed valuation, rather than 10-15% below it,
as this is a very good indicator of future prices and values.
 
These discounts should not be confused with genuine distress sales,
where one offs will come up, where the seller is desperate for a
quick sale and will sell for below the market value.
 
So I would say take any discount with a pinch of salt - always look
at the actual figures paid, the yields, and the comparable prices
in the area when making a decision.
 
Alan Forsyth runs the two websites at www.property-investment-tips.com and www.property-investment-deals.com and send s out weekly newsletters to over 8000 subscribers – sign up for free at both sites!  He also writes for several property magazines and gives free consultations to investors – for more information, email info@property-investment-deals.com or call 0115 9474155.