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Bryce Holdaway Blog post by Bryce Holdaway

Case study: How to make $140,000 loss in 10 years

I had this interesting conversation with someone on the phone this week where they were tossing up whether or not they could justify the expense of getting a buyers agent to be involved rather than just doing it themselves. So I unpack that conversation a little bit and the good news is they were a property investor already which is great. Let’s be honest, not everyone in this country actually goes ahead and buys an investment property. And so I said to them, “How is the property going?” And they said, “Great! The property looks after itself. The rent comes in; help covers all the cost so it has been a really great investment”. So I said, “Ok, so how did the capital growth gone?” “Well, that’s the thing.. the capital growth hasn’t actually gone as well as I thought it actually would.” And I asked them to tell me a little bit more. They said, “In 2005, I bought it for $275,000”. And I said, “Ok, based on that scenario, if you have got a buyers agent to help you buy it they would have been able to help you get at least 7%, which is a 10-year doubling cycle. And here we are in 2015, so that property should be worth $550,000 now right?” He goes, “That’s the thing. It’s not. It is worth $400,000″. So straight away I said, “You have actually left a $150,000 on the table as an opportunity cost. 10 years down the track as you look back and see what you’ve done and you can’t actually get those 10 years back.” So that’s the biggest challenge about being able to make the right decision now because a $150,000 is a lot of money to a lot of people. If they have engaged a buyers agent to buy that investment property, it would have cost them around $10,000 for buyers agency fees at that point. A $150,000 less $10,000 for the buyer’s agent, they still would have been a $140,000 better off than doing it on their own.

So I always think it’s really interesting when someone says, “Look, I don’t really need a Buyer’s Agent to help” because equilibrium in this country is 70% of people buy real estate for them to live in and 30% buy as an investment.

The biggest mistake anyone can make is just because you bought a house to live in and have successfully complete the transaction, doesn’t necessarily mean you know which property to buy to get the best outcome.

Now it’s really interesting because the conversation was around, and I’ve talked about this a lot, but I would prefer to invest in apartment which has the illusion of having less land than buying a house further out that has more land because it really comes down to the land value. So if we have gone back to that scenario, 2005, he bought a house and land package in an outer western suburb of Melbourne where there are lots of lands still available to be developed versus maybe going to buy a two bedrooms apartment in an old 1970s block that has 12 – 15 units in the block. Beautiful Edwardians and beautiful Victorians nearby, all of the lifestyle drivers within walking distance. Now that $275,000 apartment would be worth $550,000 if he had bought it in an investment-grade suburb call it Elwood, South Yarra or Elsternwick, something like that versus this house and land package that hasn’t perform. So I think it’s always hard for someone to see the benefit of spending money on a buyers agent when you think that you can do it on your own.

The challenge is that you just can’t get those years back. If you make a decision now, quite often it doesn’t become obvious the ramification or the outcome of your decision until you gone down the track, 5 or 10 years later. And if you realise, say you buy it at 37 and then realised at 47 that it hasn’t perform, you can’t get those years back. So it’s really really critical that you buy the right asset and a buyer’s agent can help you do that. Equally, not only has that person in that scenario where it should be worth $550,000 and it is now $400,000 and they’ve lost $150,000. But if you leverage that $150,000 extra equity, let’s say 80%, what’s that? You can borrow another $120,000. You can release that and that can be a deposit on another investment property which means this snowball starts to gather momentum and it’s a snowball running down the mountain and your wealth accumulation over time can be quite significant. Even if you didn’t use a buyer’s agent after the very first purchase, at least you set yourself up correctly from the beginning and again, make the best use of your years now rather than going 10 years from now, looking in the rear view mirror and seeing that you could have make a different decision.

So my idea is very simple, that particular investor has potentially lost $140,000 if they don’t use a buyer’s agent. My message is clear. Asset selection is absolutely critical and getting it right now is so important and has a huge impact on your financial wealth being going forward that you should seriously, at least, at the very least, entertain the idea of getting some professional advice to help you make that right decision.

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