WealthEsteem.org :: Psychology of the Deal

Ok so I’m late on the details. If you were hanging out so much you could have left a comment on the original entry. But it’s ok the logs tell me a lot of you are coming back regularly.

The advertising was for a deceased estate auction $160K+ buyers for three 1 bedroom units. I know the building in Potts Point as I owned three units there until 1991.

I bought a unit in the building again in 1999 and sold it as a wrap. So I’m quite comfortable with the building. It has some problems: a dodgy hot water boiler and roof leaks. The strata levies have gone up 400% in 3 years not counting special levies. There is also a current bunfight between owners with proxy battles at every meeting.

Oh and the units are 33sqm each. That puts them in the difficult to finance category.

I hate going to auctions. There is no point in preparing for them because most times I am outbid. I went along just in case and to see what they sold for.

I wouldn’t mind buying the building piecemeal over the next 10 years or so.

The current rent is $170, $180 and vacant. The two existing tenants are willing to sign new leases at $200 as is.

The vacant unit is one I owned until 10 years ago! It was sold by the mortgagee in possession in 1991 for $81K (a song at the time). I bought it in 1987/88 for $47K.

I made an asking price offer of $179K last year on another unit in the building but the vendor decided not to sell. So I figured anything up to $179K was good buying.

Anyway I picked the first and third up for $167,500 and the second cost me $165,000. Now I’m busily organising finance and legal structures for the ownership. The gross yield comes in at 6.20% making them negative cashflow to start with.

More as it progresses

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I bought 3 Kings Cross units at auction this evening. I’ll post the details tomorrow. I always get scared when bidding. “What if I this is all a very big mistake?” goes my self talk.

I’ve bid at more than few auctions, been under-bidder often but only won an Auction four times before this. Maybe it gets better with experience, but real estate is not the sort of investment people normally do hundreds of transactions in.

Now I’ve bid successfully at unclaimed jewelry auctions. The emotional roller coaster was the same. That’s good practice if I’m moving into an auction buying phase.

These auctions are advertised in Saturday’s SMH, pawn-brokers use them to clear unredeemed pledges. Most of the regulars are jewelers and traders so it can be fun. I have not seen screaming bargains but I did buy an electric guitar and and a swiss watch at good prices.

It’s been a year since I’ve been to these clearences. Time to find a SMH.

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This poor server seems to be struggling a bit. So it will be replaced in the next week. During that time and for about 1 hour the site will be off-line. I’ll post an update before it happens but I don’t know how much notice you’ll get.

In the meantime thanks for persevering with the poor response times.

Surprisingly I added a log analyser and there are a few of you reading this.

Leave some feedback gang. You don’t have to register or leave and email address.

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“The past 12 months has seen huge growth in Sydney’s western suburbs, with the top five local government areas for growth Concord (nearly 26 percent), Camden (23 percent), Fairfield (nearly 21 percent), Blacktown (20 percent) and Burwood (nearly 20 percent).” A Current Affair story.

So is location^3 a lie? Well, mostly yes. Every suburb has good and bad areas. Returns are influenced by relative location factors. Down beside housing commission estates and train lines, up near the beach and on quiet roads.

The median price in an area is the greatest factor in price movement. Sydney’s west has played catchup this year and “close to schools, buses and transport” has nothing to do with it. Lower priced houses appreciate more as the median price moves.

That doesn’t mean buy median and below. Steve Navra advocates buying 30% above median house price with apparent success. Good profits can be made in all market segments if you invest wisely. Just don’t fall for the location, location, location line.

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Negative gearing has a lot to answer for. I was sent an article with this quote buried deep in it.

“If you desire to identify potentially overpriced markets, compare
the monthly cost of owning a given home to the monthly cost of
renting that same home. After factoring in taxes, if owning costs
significantly more than renting, than you’ve got more potential
downside risk,” Tyson added.

The original US Realty Times article is here.

In Australian capital cities renting is normally cheaper than owning. There is a premium paid for potential capital gains. But reread the quote… “after factoring in taxes” and “significantly more”. So add the tax refund at 30% to 48.5% on the loss and ask if the cost gap between renting and owning has grown?

I’d guess it has, but I don’t know where to get the data. It’s another point to ponder when assessing a market.

Long term investors deal with this uncertainty through buying quality for the long term. Short term market fluctuations do not concern them. “Time in the market” not “timing the market” is their slogan.

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In Housing Boom I touched on a price-to-income measure for the state of the housing boom. For those who missed it, I simply questioned the disconnect between property prices and household wages.

There is a flaw in my logic. Median priced homes are not bought by median income earners in every suburb. In Sydney’s eastern suburbs especially, many people say they could not afford to buy the home they are in today if they had to pay today’s prices.

This may mean the prices are unsustainable but it more likely means owners will stay in their current homes for at least another 7 years (the average first mortgage life). At 10% compound return, an investment doubles every 7.2 years. Coincidence? I don’t think so. Historically that is what Sydney has done.

Median incomes include all income earners. School-leavers and low income earners skew the figures lower. Home and investment property buyers are not in that demographic.

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Andy, my full service broker called me today. There must be something about having an unused margin facility that makes these guys nervous ;). Anyhow he gave good spiel so I thought I’d give it a go.

Andy’s 5 good reasons to buy BHP under $10.00

Following brokers tips is not the way to riches, but if you don’t take some of their tips they might stop calling. Not necessarily a bad thing that - but I don’t trade full time so things that save me time are good.

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I don’t know what the immediate future of the Sydney (and other Oz capitals) property market is.

Will it continue to boom? Historically low interest rates, poor stock market performance and the need to increase suburban densities suggest business as usual. Superannuation and commercial/industrial property funds are adding asset allocation pressure as well.

The counter argument points to rising vacancies (with falling rents), and the obvious disconnect between household wages (or rents achieved) and property prices.

Every past property boom has corrected. Why would this one be any different? I just don’t know when and by how much the correction will occur. Therefore I don’t know anything, right?

My guess is provided credit remains “easy” there should be a soft landing. In the meantime the market could surge ahead enough to counter the correction. Waiting around for the market to bottom could be an expensive exercise in missed opportunities.

How do I use this? Have a plan of action in case things go worse than expected. What will I do with my investments, my residence an my business if the market corrects? If the worst occurs then I’ve got a plan. If things keep booming then I’ve lost nothing.

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I suffer from analysis paralysis — a delusion that if I get enough data and study it enough, I can remove risk from an investment.

To deal with this shortcoming I talk to myself. More than normal ;). I remind myself that Mark Twain has an answer for every occasion. In this instance he said

Good decisions come from experience
Experience comes from making bad decisions
– Mark Twain

What a neat concept. Click comments and let me know what you think of that.

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As some of you know, my site is not about community building. Go visit the Somersoft Forum or chat room to meet some wonderful people. I also like the Freestyler Network for meeting like minded people in the real world.

This site is more a journal or diary. A stream of consciousness philosophy if you will. Therefore the PostNuke CMS which ran the site was overkill. It’s a very good open source Content Management System however.

Also the layout gave visitors the impression that I wanted them to register or somehow be accountable.

Therefore I installed new software — b2 - a classy weblog tool. Hopefully it will be a bit easier on my server and less intimidating to readers.

Wish me luck.

All posts in the old forum will be ported to the blog over the next few days. The blog will continue to be hosted on my server. I may have intermittent outages, but what better way to know about them?

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