Lies, damn lies and statistics 13/05/13

No one really knows who actually coined this phrase, but Mark Twain was the man who made it famous.

The truth of this statement is that statistics on their own don’t lie, however the essence of the statement is that anyone can interpret the statistics at hand to prove their case. Or more importantly misinterpretation of statistical data can lead to a false understanding of the situation.

Huge statements full of vague accusations and doom and gloom, I know, but it’s time for a little reality reminder guys. It is important to realize though that the statistics we are all told to heavily rely upon in real estate may be the actual reason we pay too much at Auction, or miss the bargain we should be buying. Let me explain.

A lot of potential buyer’s chase market data on the area and type of properties they want to buy. That’s a smart thing to do really and something I suggest to all the people I coach. However taking what you read on the internet and in industry publications as ‘gospel’ without asking a few follow up questions can lead to all sorts of problems.

Let’s say we were looking to buy a place for investment in the inner North of Melbourne. We wanted a three bedroom place that was ready to rent, was actually a house on land, and was within our budget. The smart way to search and qualify would be to do the following:

Look through existing listings, searching inside your buying requirements so you are able to match properties on price and style that are all alike.

Look through sales results for the weekend in the area you are looking at. Only paying attention to the 3 bedroom places as a guide, because that’s what you are chasing.

Using any number of on line resources to confirm the demographic of the area, including average wages, median prices on comparable properties, and online valuations on some of the things you were looking to actually purchase.

Using this data to determine the top end and bottom end value of your target purchases based on statistical results

A pretty simple start and sensible plan of attack wouldn’t you say? I think so, and based on the data you receive, a pretty qualified way of asserting the worth of whatever you were looking at.

Then you have what happened to me on the weekend. A property I went to watch at auction was listed at $390,000 plus. An ex Government place that had new carpet and new paint, it was a ready to rent home that could have used a little renovation later down the track. It was on a big block of 750m plus, but that was its only super feature.

The auction was at 11 am and by 11:05 am the bids were flying. The dust settled and our $390,000 special was sold under the hammer for $519,000. No that’s not a misprint. 54 people at auction saw it happen. So while the auctioneer was signing up the paperwork we all walked around the corner for the second auction at 12:00pm, and when I say around the corner I mean it. 300 meters approximately.

Same house, same upgrades, same vendor, same quote range, same reserve, same auctioneer, same people at auction. The only difference was that this block was 570m2 plus so it was 180m2 ish smaller. It did have a new fence though, so that’s got to be worth something?

The Auction opened smack on Midday with a vendor bid at $350,000 and subsequently died with only two bidders pushing it to $370,000 where it was passed. That’s $149,000 difference in 30 minutes! Even if they went in and negotiated to the reserve of $395,000, that’s still $124,000 less for property two. Now before you al tell me about the land component let me just say this. Both properties had a party wall with next door so demolition of the original place was going to be tough, and the subdivision wasn’t guaranteed. That’s a hell of a risky bet at $150,000!

The point here is simple. RP data, PDOL, or anyone else for that matter, would take both of those results and define a median somehow. That median would be way over the cheap place, making it appear to be a bargain, and way under the expensive place, making it seem like it was overpaid. Yet the first auction had the most genuine buyer activity and was pushed right to the last $1000 bid, where as it appeared no one could be bothered at auction two.

If I am going to make a suggestion here regarding what all the experts call “due diligence” it’s this:

If you want to reduce our risks, spend some time in the area you want to invest in or speak to someone who knows it inside out. Don’t JUST rely on figures data to make your decisions or you may find those decisions come back to haunt you. Like the guys that bid $519,000 on the weekend. Let’s see him convince his bank the place is worth $519,000 when the place around the corner went for $370,000. Good luck with that.

Garry McPherson

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