I had previously mentioned the benefits of an undervalued property and how it can be made into a positive opportunity. However, is cheaper always better? What are the considerations in a “good bargain” when it comes to purchasing a property?
A recent meeting with one of my readers who had reached out to me regarding his concern made me realise how common this misconception actually really is. Many people fall into this trap thinking the cheapest price has the best potential to grow when purchasing or investing in a property! And I feel a strong urge to share my views on this matter with this particular case study.
So the story goes…
This man was recently married to his lovely wife, had saved up diligently and was currently looking for their very first place to call their home.
Doing his homework, he eventually managed to find a bargain in the current market and requested for my opinion about the unit. Seeing the profile of the unit he had selected and considering the market, the deal he found for the particular unit was really rare and cheap for the location.
However, there was something about the development that rang alarm bells in my head. The development the unit was in was simply too small. The total number of units in that development only amounted up to slightly over 20 units and I will explain why this is a concern.
Before anything else, I wanted to know how he managed to come across this deal in the first place and whether he had any difficulties finding it. Afterwhich, I also asked him about his future plans for the unit and (pay special attention here) if in the case where he would want to sell the unit, did he think that his buyer would probably have a hard time looking for the unit as well?
This question is an important one to consider because if you took quite a while to find a particular unit, especially with that good a deal, why did it take a while to find? The next question to ask yourself is, if you were looking to sell it in the future, will other buyers go through the same journey you did until eventually coming across your unit?
In my experience, small developments are usually more disadvantaged than bigger developments leading to their lower value. Here’s why:
1) A small development will not become a brand in the general property market.
Picture a 20-unit development and a 500-unit development side by side.
Now, which development will attract more attention from the friendly neighbourhood and the random passer-by? Not only that, which development will have more people talking about it?
Speaking volume-wise alone, there will already be 500 owners inside the bigger development telling their friends and relatives about the unit they are moving into or simply invested in.
Moreover, with a bigger development and more units, of course, more agents will be working on the property. This is significant and there is a need for more agents to work on a development because consequently and more importantly, the attention will reach more serious investors, buyers and tenants alike instead of just the general public.
Hence, a big development will generally fare better as compared to a small development in terms of outreach. The potential of finding a buyer for your unit is higher if your unit comes from a bigger development and being a brand in the market ensures that there is a high demand of people looking to buy or rent a place in the development. This increases your prospect of renting or selling your unit in the future.
2) Number of transactions in a small development hinders the valuation of your unit.
The number of transactions of units within a development plays an important role in the value of your property. Statistically, having lesser number of units in a development would mean there is lesser number of transactions within the same development. Imagine going to the bank and making a valuation on your unit and you discover that the last valuation done was three years ago.
How do you think the bank will value your unit? Based on the pricing three years ago or the current neighbourhood pricing? And when they base their valuation on the neighbourhood pricing, will they minimise their risk to give you a slightly lower valuation?
Consider this scenario where you are looking to sell your unit and the bank does not provide a good valuation for your unit. Your prospective buyer can’t receive the full 80% loan on your expected price. In the buyer’s perspective, it would be better to request for a lower offer on the unit than what you’re asking for.
However, if you buy a unit in a big development where the number of transactions averages 3 – 7 every month, the bank will have an easier time providing a good valuation for your unit. This will allow them to easily match your asking price (Disclaimer: In the event where your asking price is realistic).
3) Management, Maintenance and Facilities
In every property, there are security, management office staff, swimming pool, gym and other facility management and maintenance to provide for. Having 500 units collectively paying for the same thing as compared to 20 units is of course more advantageous for the bigger development.
In many cases, due to limited resources, many smaller developments become more run down as compared to bigger developments. Some small developments don’t even come with security guards.
The smaller development might look very appealing now but always think about the condition of your unit and the entire development in the future. This will definitely affect the future value of your unit. Thus, it is very important to consider the capability of the facility management of a smaller development compared to a bigger development.
After considering the man’s circumstances, while I did not discourage him from purchasing the unit he had an eye on, I helped him explore other options which he was very open to. Together, we are working to find a suitable unit he can also consider to purchase. Ultimately, does this mean all small developments are not good? No, it doesn’t but you should at least be aware of the advantages and disadvantages before making a decision to invest in such units.
In every good deal, you must be careful and try to figure out why it’s a bargain in the first place. A good deal does not always mean the lowest price; there are a lot more things to consider before making the final decision.
I always enjoy looking at new properties and finding opportunities so, if you come across any “good deals” you are unsure about and would like some help with, feel free to drop me a message here. I can provide my own perspective as an external party and together, we’ll be able to deduce if the property is really a “good deal” for you. Good (property) hunting!