Saturday, February 5, 2011

Desperate times calls for desperate measures!

"Desperate times calls for desperate measures" - was the sales pitch for a property which just sold last weekend at Mountain Creek on the Sunshine Coast.

Desperate times calls for desperate measures!
No if's or but's, owners require an immediate sale and has instructed us to submit all offers! One thing is certain - the sale of 26 Glenfields Boulevard' will represent EXCELLENT VALUE in today's market.
Lets examine just how desperate it was for these property owners and the claim that property prices double every 7 -10 years which is the mantra for property spruikers all around this wonderful country of ours.

Its a beautiful property, here is a link and a little photo on the property.
This property last sold in July 2005 for $425,000 and the sales history clearly indicates what property spruikers are saying - 'that property doubles every 7 -10 years'. Lets have a look:

So between 1995 and 2005 the property has gone from a vacant block of land sold at $72,000 to a block of land with a beautiful home sold for $425,000. Now judging the size of the home with the extras such as a pool I think it would be fair to estimate that there were around $250,000 of improvement to the land. A total acquisition cost of $322,000 and assuming a Real estate Agent sold the property we can add an extra say $13,000 to that amount for commission and therefore over 10 year period the capital gain made would have been roughly $90,000.

So what was the return. Well if we divide the capital gain by the acquisition cost and times 100 we get the answer as a percentage. This figure should be close to 100% (which is a doubling) to line up with the spruikers double every 7 - 10 years. Therefore the return over 10 years was Return = $90,000 / $335,000 = 0.2686 * 100 = 26.86%.

27% is along way short of 100% and according to the spruikers would have been an awesome deal. Why? Well you have just purchased a house at the end of a 100% cycle for an increase of only 27%. The new owners stand to make a motza over the coming years. Right...???

Lets see.
The property has just sold some 5.5 years later in Feb 2011 for $480,000. A gain which after you take out real estate agents commission, lets again say $13,000 and stamp duty of say $12,000 the total capital gain equals a pathetic $30,000.

What was really amazing was how hard it was for the owners to sell! Lets look at the listing history:

So in March 2010 they started with a auction - Result - FAIL
Then they list for $598,000 in newspapers and magazines - Result - FAIL
Then online for 'Incredible Value $549,000' - Result - FAIL
Finally they are able to sell at auction for $480,000 (reported in My Property Review)

11 months and a total end discount of 20% and SOLD!

So with this much effort to sell the property the $30,000 capital gain might have been a little less after auction and marketing fees, but we'll just assume that these things were free. (I'm a nice guy)

And the return as a percentage. Return = 30,000 / 425,000 = 0.0705 * 100 = 7.05% for 5.5 years. This equals 1.28% pa!
Unfortunately this property didn't even keep up with inflation let alone double in price and I was being very nice. I didn't take into account rates, insurance, interest on a home loan, lost interest on the deposit, inflation or the cost of lost opportunity.

It's no wonder these owners were desperate. At no point in the history of this property has it lived up to the hype of the property spruikers. Not even on the Sunshine Coast.

All in all this property is a very nice home in a very nice areas, but as a place to park your cash it is a dud.