In our daily routine of talking with potential vendors, the dreaded ‘V’ word – valuation – always comes up for discussion with many vendors cringing at the thought of a valuer putting a low price on the residence.
Comments ranging from ‘do I need a valuation’ to ‘but I paid $500,000 for it and I would like to at least get that back’ are commonplace. The other one is ‘because it’s the manager’s unit it should have a premium of 20% like it did when we bought six or seven years ago’.
The one thing we are not is a real estate agent and most managers will know what units are selling for in their building or complex much better than we do and our advice is exactly that, advice, not a valuation.
… For the first time in memory |
With the volatility in the real estate market since the global financial crisis everything has changed in almost every industry. For the first time in memory the multiplier dropped and combined with lower real estate prices, some vendors actually lost money. Many were very proactive however and utilised the various marketing tools available including Facebook and Twitter, to not only increase their business but also their net profit and, when a sale was complete, they achieved reward for their efforts reflected in the sale price.
With such a change to the marketplace it is desirable to set a price based on a current multiplier and, whether we like it or not, a valuation on the residence. It doesn’t matter what was paid for the residence and management rights however many years ago, the fact is they are worth what has been paid in very recent times for comparable rights and the residence may attract a premium of between nil and 10% if the office is on title.
We all like to negotiate a price once and go to contract but the risk without a current valuation and current profit and loss is a second round of negotiations because one or the other or both didn’t value up at contract price. Keep in mind once we are at contract the banks will automatically have both the residence and business valued and then make a decision whether to lend or explain to the purchaser that they may need to renegotiate the price in order for the loan to be approved based on valuation.
We recently sold a management rights where we had a contract price with an old net profit figure and a vendor’s value of the two real estate lots. This business was renegotiated down twice: first, because the current net profit was down and then again because the real estate did not value up. This could have been avoided if everything was up to date at sale time and we would have had a much smoother sale process.
Sometimes we all forget that in this sale process getting to contract is the easy part, then there are two solicitors, the bank, an accountant, broker, body corporate committee, vendor and purchaser all trying to achieve the same result and all working to a timetable. Throw the valuer into the mix as well and it can go well if everything is current or it can be drawn out and extensions asked for if more negotiation is needed.
The heading at the top of this article is Let’s get it right and common sense in a volatile real estate market helps us all in that regard. Brokers are in the field all day and generally have a good handle on the industry so vendors have great advisers to utilise. Brokers don’t list management rights for the sake of it, we list them to sell as that is our only source of income so as often as possible we do try to get it right.