Group Buying: How Does it Work and What Are the Hidden Traps You Need to Be Aware of
By now, you’ve probably heard about the strategy known as group buying as a way to buy under market value.
Currently the flavour of the month for first home buyers struggling to break into the property market and for investors looking for juicy deals, group buying is taking over the property market by a storm.
While there are obvious advantages to this strategy, there are also hidden traps for the unwary.
Nila Sweeney, managing editor of Propertymarketinsider.com.au explains.
How does group buying work?
Bulk buying is a simple concept. You band together with friends or people you know who are looking to buy similar investment to you and present yourselves to an agent as a group.
From here, you can use your people power to negotiate on price.
The other option is to work with companies that are offering these service.
“The easiest route would be to go to a buyer’s agent who has existing relationships with numerous agents and developers,” says Samara Metri, Head of Property Acquisition at DPP. “You would usually have a buyer’s agent, a property consultant or sales agent negotiate the deal.”
Bulk buying has been around for years and has been used successfully by buyer’s agents such as Nathan Birch, co-founder of BInvested.com.au.
“You buy food at shops in bulk and save so why not with a property? This is a proven strategy that’s worked for us for almost a decade now,” says Birch.
But here’s no such thing as free lunch. These deals come with a hefty price tag.
Depending on the buyer’s agent, you can be charged anywhere between $10,000 and $15,000 per deal. This is roughly how much you pay a buyer’s agent to find a property for you.
What types of properties are up for grabs?
Some buyer’s agents target older and established apartments while others like Birch works with developers who need to get enough pre-sales to get finance from the bank.
This means buying off-the-plan.
“Developers planning to build an estate typically need to sell off a number of properties before they can begin development, in order to secure finance from the banks,” explains Birch.
“A lot of legwork, marketing and promotion go into finding and securing these buyers ahead of the build. Some developers have seen us as an easy outlet for removing all the stress and pain from doing large marketing campaigns.”
Birch explains that by bringing a significant number of buyers together to approach the developer, “you can negotiate a deal on a significant portion of the blocks of land in the development and secure property well below market value.”
Metri used the same strategy to secure a recent deal in North West Sydney.
“Recently I came across a land release in North West Sydney, where there were only 9 lots available. Knowing I had 9 buyers (including myself) ready to go, I was able to negotiate a price with the developer where there is usually no negotiation off the set price when the lots are sold individually,” she explains.
But there are hidden traps for the eager buyers
While buying a property under market value through bulk buying is attractive, there are pitfalls you need to be aware of. These include:
Buying an inferior property in a low growth area
What looks like a ‘good deal’ and ’negotiated price' could turn out to be a dud property in an area with no growth potential.
“You need to ask why that property developer or seller need to bulk sell,” warns Zoran Solano of Hot Property Buyers Agency. “Is it an inferior property that they’re struggling to sell? Is it something to do with the location? Cheap isn’t always good. In fact, cheap can often be bad.”
Buying in a poor development
It’s easy to get dazzled by the hefty discounts but you could be buying into a poor development. “Make sure you research the area you are purchasing in, they may be giving you a great deal, however, this could be due to slow sales movement in the area,” says Metri.
Heightened competition from other investors
You might be getting a bargain by buying with other investors, but you’ll also end up competing with them.
“Let’s say a buyer’s agent managed to secure 10 investments for a group buy. Those are 10 properties right next to each other, vacant and on the market all at the same time. This could result in long vacancy periods and you may have to compromise rent in order to get a tenant into the property.”
The sudden flood of rental supply in the area creates an oversupply and likely result to drop in rental yield and value according to Solano.
“That ripple effect of dropping a big stone in a small still pond could make an impact on the existing dwelling especially if they’re buying below market value,” says Solano.
You may not get finance to settle the deal
At a time when the regulators are clamping down on investor lending, you might find yourself unable to secure a mortgage to settle your property.
If your financial situation changes altogether such as starting a family or going from dual income to single income, your ability to borrow a loan be severely affected.
“If one purchaser fails on finance it could compromise the whole deal,” says Metri. “Make sure everyone is pre-approved and ready to go so you can move quickly.”
That’s also why Birch says he spends a significant amount of time vetting each buyer beforehand to remove any likelihood of last minute rejections. However, he admits there is never a complete certainty.
“I vet everyone’s financial position through a finance strategist to make sure there’s no chance they’re knocked back,” says Birch.
Your buyer’s agent may be double or even triple dipping
“If you’re outlying that much money, say $15k, you need to be confident you’re getting service and value for that fee,” says Solano.
“Is the person facilitating the deal getting income from other third parties? Are the builders incentivising them to refer building works for them? Are they getting kickbacks from the selling agents who might be brokering the deal to sell these 100 or so lots? These are all questions that you need to ask.”
The discounted price you pay becomes the new value for the property
One thing that most buyers don’t realise is that once you’ve bought a property at below market value, the low price you paid becomes its new value.
This will make it difficult to onsell it as the next buyer will see how much you paid for and will know the real value of the property.
The development may not proceed
Even with pre-sales already secured, there’s a chance that the development may not go ahead if the developer goes bust or decides to bail out.
It’s important that you do rigorous due diligence on the property developer to make sure they have a solid track record of delivering quality products on time.
Buying an overvalued property disguised as bargain
It’s entirely possible to pay too much for a property even at a steep discount. Because property values depend largely on comparable sales, all it takes is for one valuer to over-estimate a particular property or development to justify a higher asking price on your target property.
The property may be unsuitable to your own strategy
Any investment property you’re buying needs to be tailored to you as an individual purchaser, not the other way around.
There’s a risk in trying to make the area or property fit to your strategy.
Therefore, you should choose a property that will deliver your desired result, not just because it’s discounted.
It’s risky to think you are picking up a bargain but it may underperform over time and cost a lot of money and opportunity cost in the long term.
As you can see, buying a discounted property can be risky if you’re going into it blindly. Make sure you do your own due diligence and examine the deal vigorously.
Managing Editor of Property Market Insider and a former editor of Your Investment Property Magazine.
Published:10 July, 2017.