While many people ran into financial difficulties during the 1997/98 Asian financial crisis, financial coach Azizi Ali leveraged on the dire times to secure one of his best property buys. At a home fair, he met the developer of Bangsar’s Sri Penaga condominium.
"The developer had originally kept some units for rental income. However, since they faced cash-flow problems, they decided to put up some units for sale," he recounts. Azizi managed to buy it for only RM360,000, a far cry from the market value of RM500,000. Currently, it’s worth about RM600,000.
"I’m renting out the fully-furnished unit for RM3,500 a month and it gives me cash flow all the time. Best of all, the purchase came together with tenancy," adds Azizi. "The only regret I have is that I didn’t have enough money to buy all of the units!" There are opportunities to pick up good deals at bargain prices during a downturn. But then, when something is going cheap, it doesn’t mean that it’s a good deal. How do you identify a good buy, then?
The prerequisite to making money from property is buying it at a discount, says Azizi. "My definition of a bargain is a property that is going below the market value by 15% or more. Obviously, the lower the price, the better it is." Chu Hong Keong, who is with a foreign financial services company, is another bargain-hunter. In 1984, the astute property investor had his eye on a 7,000 sq ft bungalow in Section 5, Petaling Jaya. The asking price of RM500,000 to RM600,000 was way above his budget. "At that time, I jokingly told my real estate agent to call me immediately if the house were going for below RM300,000. I said that he could even call me in the middle of the night. But the agent said there was no way the seller would sell it as such a low price," Chu chuckles. The property market crashed in 1986 and Chu was informed that the owner was willing to let the property go for RM350,000. After negotiations and a promise of swift payment, he bought the property for well below RM300,000. In 1996, Chu decided to sell the property (his residence) as property prices were moving up and his leasehold property’s tenure was ending. By the end of the year, he managed to sell it for well over RM700,000.
Why are there bargains? Properties may be sold at cheaper prices for various reasons, according to Elvin Fernandez, managing director of Khong and Jaafar Sdn Bhd. They include upgrading to a better house, dissatisfaction with changing conditions in the neighbourhood, asset shuffling, moving abroad and divorce. "But the main reason for forced-selling at bargain prices is the inability to service loans, especially the ones [sales] that you see at auctions," Fernandez points out. Given the softening of the property market in the country, it may be an opportune time for bargain hunters. With many people adopting a more cautious approach with regard to big-ticket purchases, it is likely to be a buyer’s market. In Azizi’s view, any time is a good time to buy below-market-value properties. "There are people getting into financial difficulties and people transferring to different countries all the time. But, of course, there will be more people like that in bad times," he explains. "Sometimes, you can spot them through keywords like "owner migrating" or "must-sell" in classified ads.
Finding the bargain
To identify a bargain buy, you first need to know the price range of the property you’re eyeing. Azizi recommends comparing property values in the same area. Ask around the neighbourhood and check the classifieds. Chu scans the classifieds once a week. "I try to remember the details of the property and check out the trend at the same time. For example, you’ll know the market is hot if you see ads disappearing fast. If, however, you see the same house being offered at a lower price ad after ad, then you know the market is not so hot," he points out, adding that he also talks to different agents. "There are some agents who are very knowledgeable and honest. They can tell you a lot, but you would still have to do your own homework to judge for yourself."
While a bargain is usually associated with buying at lower-than-usual prices, it is imperative that you look beyond the price tag. Even under the current circumstances, the golden rules of property investment should not be thrown out of the window. Says Azizi: "The price is only one point. If you buy a property in an ‘ulu’ place, even if it’s at a good price, it may not be a good purchase. Location and price are both important. It’s not good enough to buy just because it is cheap." Chu agrees. "If you find a property that is very special, one that everyone would fall in love with when they view it, or one that is in a very good location, it will be a good opportunity to get it when times are not so good," he says. "But don’t expect a big price drop if you’re going for good locations." Likewise, Fernandez points out that getting bargains in prime locations is extremely difficult. "One has to spend a considerable amount of time, even when you are in close contact with a competent real estate agent."
"To find the right property that is below market value, there is more work. You need to do more searches, be willing to wait and take a little more time to buy," says Azizi. For first-time homebuyers who are searching for a bargain, it pays to view the property from a buyer-cum-investor’s perspective. "When buying a house, look at it both as a place for you to stay in as well as an investment. Don’t just buy it because you like it. Ask yourself if other people will like it as well," Chu explains.
While bargain properties can cost you a lot less in relative terms, they are not without their issues. Azizi notes that properties sold at auctions always present some kind of problem for the next owner, especially since they are sold on an "as is where is" basis (see October 2007 issue on buying at auctions). Likewise, if you’re buying directly from a motivated seller, it pays to suss out structural defects, Chu cautions. Scams abound during these trying times. Don’t let the thought of securing a bargain get to your head. Be careful about who you’re giving your deposit to.
This is an excerpt from an article first published in the March 2009 issue of Personal Money, a personal finance magazine published by The Edge Communications. - by Lim Siew May (The Edge Malaysia)