The Block was great entertainment – but for me it was also the best reality TV show in a decade because it showed the harsh reality of what happens when you break all the rules in the property investment book.
I took the opportunity to go through each property a few weeks before the auctions and assessed them according to our James Home Ratings criteria. What stood out most, apart from the fact that it was a hugely popular show that captured everyone’s imagination, was how many rules were broken. Breaking those rules has led almost inevitably to the end result, where only one of the properties sold under the hammer at auction. Sorry guys, but this was always going to a disaster in the making. For us though as viewers, it was an invaluable lesson in how not to make money through property.
So what did we learn from the show apart from the fact that Josh is getting married to Jenna?
Rule No 1: You make your money when you buy
If you’re buying property as an investment and you’re hoping to make a profit on the resale, what really matters is not the selling price but how much you pay for the original property. Okay we understand that Channel 9 was more interested in the show’s ratings than the profit they’d make on reselling the properties. But the price they paid for the initial properties was way too much. Sure it was a big block, and it had four houses on it, but at an average of around $900,000 per site, plus stamp duties of around $50,000 each, plus holding costs of 6% (another $50,000+ each), plus the selling agent fees…Well each home was priced at well over a million dollars before the first contestant even showed up and the first nail was hammered.
Rule No 2: Buy the best position you can
This for me was the real killer – the position was a shocker. Yes the properties were close to all amenities but anything in Richmond is close to all amenities. Have you been down that street at night? It’s scary. Stand in the street or look on Google streetview and do a 360 degree turn – what do you see? Industrial sites, multi storey car parks. And who knows what is going there in the future? What if it’s a panel beater shop and you end up with the smell of paint thinners in the morning? There’s a vacant block of land to the west of No 37 that has recently changed hands for just over a $1million: who knows what will go in there?
Rule No 3: Consider your target market – before you start!
The properties themselves had some real positives in terms of the land. The north orientation will bring light and winter warmth into those back living areas. So sure, that’s a tick. They all had good street appeal (tick) and the block widths were above average for the area, meaning the homes could give that feeling of space which is very important in a home (tick). However they all had another huge negative: on top of the scary street there was no car-parking. Which means that your future buyers or renters are going to have park their car at night somewhere in the street. So that is going to knock single women, young married couples, and older couples out of your target market. In fact, just about anybody except students and local lads would have concerns about living here.
Rule No 4: Don’t overcapitalize.
If you are about to spend $1million or so even before one sod of earth is turned or one nail is hammered AND you want to make a profit, you need to know whether you’re likely to recoup the costs of your renovation – and hopefully more. Otherwise you’re going to end up overcapitalising. How can you work that out? Well, look around you. What sales evidence was there in The Block area for $1.5million homes? Zippo. We can tell you this because coincidentally on the same day of the Block auction we bought a property at auction for a client in Richmond only a few hundred metres away. It was on bigger land, it had car parking and good period features – and we got it for just over $1.2million. So if $1.5million is the minimum amount you need to make serious money, but there is little or no sales evidence of properties selling for that amount in the area – DON’T BUY.
Rule No 5: Amateurs don’t make money on renos – they make money because they are lucky that the market happens to be in an upwards phase.
Whenever someone tells me they made money on a renovation, I think, well, no you didn’t, you made money by buying the right home in the first place. They would have made the same, and maybe even more, by doing nothing. It’s the market that makes you money. If the market is not in your favour, most amateur renovators lose money and the Block confirmed this. The bloke at 35 Cameron St Richmond (the vacant block) made more money than all the renovators combined by doing little.
Rule No 6: Don’t think short term with property unless you like excessive risk
The Block also highlighted the risks of short term flipping. Besides the fundamental error in the initial choice, the market was also unkind to the contestants. Which again highlights the short term risks in property. To buy this year, tart up and flip next year is a strategy fraught with danger and can cost you a packet. Each of these homes lost at least $200,000 if you factor in all costs – and they probably lost a lot more.
Rule No 7: Choose local selling agents, who are experienced at your price range – and choose the best not the cheapest.
The four auctioneers chosen to sell The Block properties are all very good at their job. But it was interesting to note that the only home that sold under the hammer was sold by a local agent, Russell Cambridge. He is a good operator, as is his partner Sam Davenport, who got the buyers there. Glen Coutinho is a really good auctioneer but his patch is Hawthorn, which may be close but it is quite a different market to Richmond. Ruth Roberts is a top female auctioneer from whom we bought a property less than a fortnight ago – but she is well known in Carnegie, and that’s a long way from Richmond. And again, while Clayton Smith is a strong local agent, he was always up against it having to market the weakest home in terms of floorplan. There can’t be that many people wanting to buy in Cameron St and he was always going to get the leftovers. Tough gig. (By the way: well done to Jellis Craig and Biggin and Scott for their very generous donations to charity.)
Rule No 8: Good Buyer Agents are of value.
Apart from Frank Valentic who is a smart operator with Advantage, the buyers agents who showed up to The Block auctions were just embarrassing. Our apologies – this is not how normal quality buyer agents represent the clients and just shows that when you put a camera in front of an idiot, they are still an idiot. Notice how you didn’t see quality buyer agents like Morrell and Koren there trying to buy rubbish or making a fool of themselves – they simply didn’t recommend The Block homes to their clients.
Rule No 9: Substance v Puffery
In homebuying, digital TVs, paint colours, furniture etc come and go. If you view our online ratings you will notice that we give a total of 1 point out of 1000 for stuff like cabling and shower screens etc. The other 999 points are for land, position and floorplan. And if you’ve learnt one thing off The Block then hopefully it’s that it is the price, property, and positional fundamentals that really count.
Unfortunately on all those three counts the contestants were doomed even before they started.
Printed each week in The Weekly Review, Melbourne’s million plus property magazine.Email This Article to a Friend