Property Investment 101: When the discount is just too unbelievable

Property Investment 101: 10 easier signs to look for when deciding on the property to buy

If we intend to buy a property, what are the signs we should look for? Nope, that sales person selling you the property who predicted the property price will double will NOT be around when your property price does not double in the future. No one knows the ‘near future’ means how many years later. If we do not buy based on what the sales person says, then how should we buy the next property? Perhaps one particular easy sign to spot, okay?

Typical cost of construction?

Based on many media reports and also conversations with people in the industry, the total construction cost including finishing etc is 45-60 percent of the total Gross Development Value (GDV). Perhaps the developer has a super duper efficient construction team, so this cost can be lowered further. That’s another story. However, this is the typical cost and it’s highest followed by the land cost itself which could be easily between 10-20 percent of the total GDV.

There are also other costs such as marketing… legal… people in the office… the CEO… and even the most important thing in property development and that is the profit margin. Maybe it’s 10 percent? If 10 percent, then this is on the low side and would depend on how big the GDV is. If GDV is RM100 million, then 10 percent is just RM10 million. Divide this into 3-4 years of planning, constructing and handing over, then it’s not a lot of money! Anyway, you should get the idea now.

Profit margin is a must, okay?

Once you get the idea, now what if you saw an advertisement telling you that the property developer is now offering a 30 percent discount from its launch price. Or sometimes even higher than 30 percent of its launch price? Well, you should now be wondering how this development can complete if this discount is given because the developer would now somehow reduce all the costs of the project and yet at the same time still carve out a profit margin, right?

No developer would build if there’s no profit yeah. They would just return the deposits and stop the development lah. Then, at least it would not lose so much money and can focus on doing other things. Either this or they take your money and they run away… That’s how the abandoned developments come about yeah. If they could build, complete and get the margins they need, of course they will continue to build, complete and take our money!

What if the discount is just too crazy?

If a new property is being marketed with a 40-50 percent discount from it’s launch price, does it not make us think why? Does this mean their profit margin was higher than 50 percent, so they can give 50 percent discount? If their profit margin is lower than 50 percent but they are now giving 50 percent, means they are selling at a loss? Erm… if you are a developer and you know you are selling at a loss, would you really still sell and then build just so that you will GAIN the loss?

If a developer is able to cut costs by a huge number suddenly, I really think we may want to buy from another developer instead?

Maybe the launch price was too high?

If the launch price was too high in the first place, then the huge discount given may only mean the price is now equal to similar properties surrounding the area. If that’s the case, then it could be better to buy something we can see, touch and feel versus something from the brochure which we have no idea of. If people had bought when the launch price was too high, this will mean in the future, they bought an overpriced unit yeah.

Again, not something to be proud of as it will come back to haunt the buyers unless of course somehow the market was super rosy when the property was completed. Rising tide lifts all boats… Pray for the best of luck in this case too.

Compare and benchmark, not just believing the discount

Look at the price versus the surrounding, versus similar properties nearby. Is it much higher than everything else? When I say much higher, it’s like 15 to 20 percent higher. If it’s just 5 to 10 percent higher, then this is still acceptable since the property will only be ready 3-4 years down the road. It is not possible to expect the pricing to be exactly at the same level as today.

Look at the rental as another course of information. Is the monthly rental way too low for the monthly mortgage? Just need to look under ‘Rental’ in the property sites to know if this is the case. If the rental is quite close to the mortgage, then it could still be a buy. The reason is because rental takes time to move upwards while price could have jumped up faster. As long as price stays stable, rental will soon catch up.

Property Investment is an expensive journey for mistakes

Buying the wrong property at an extra RM100,000 will mean the buyer having the ability to hold until the price finally catches up in the future. This is why many people will claim that property investment is not for them. At the same time, many who bought properties at the right price will be smiling all the way to the bank when they needed to sell that property in the future.

It’s a super rewarding one if we have read enough and is buying that property with some understanding about how property investment works and why this is the best way to hedge against the inflation. True then, true now and true in the future because everyone needs to have a roof over their head. Only question is whether they own the place or they rent the place. One would eventually be rich and one would eventually lose all the money they pay to rent. Decision is ours to make.

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