Would you still buy a 'bargain' in an area with less-than-great potential?

[Alex2095]

If you were to find a property which was priced below market value (say by 50k), but it was in an area which might not have the best potential for growth, would you still go for it?

Im asking because ive just made an offer on a property in Port Pirie S.A. Anyone invested, or thinking about investing there?

The property itself is quite undervalued, and has been recently 'upgraded'- so newish kitchen, very tidy and completely rentable. Only issue with the property is that it may have rising damp which I know can be expensive to treat (Building report will confirm this for me im hoping)

Through a little due diligence, ive uncovered that the areas biggest industry, a lead smelter, could be facing closure, for a number of reasons.

There is also quite a few properties on the market that are listed very cheap (under 100k) which seems to be well under the median. Do you think this is a case of lots of 'bargains'? or would you assume investors are trying to sell because the area is showing negative signs?

Any help/opinions greatly appreciated

Alex

 

[Propertunity]

If you were to find a property which was priced below market value (say by 50k), but it was in an area which might not have the best potential for growth, would you still go for it?

No. What would be the point? What are you trying to achieve?.....a portfolio of things that don't grow?

 

[Alex2095]

Sorry I forgot to add....

Rental yield of 11%+

and given that there is the potential for instant equity (since property is undervalued) does low growth potential matter so much?? (i assume there will still be a little growth in the area). Instant equity= ability to buy more property faster right?

I guess what im also asking is......Should I be worried that there are quite a few below-market-priced houses being sold of?? is this some type of warning sign/indicator?

Alex

 

[Alex2095]

When I say low growth potential I dont mean zero or negative growth I mean weak-to-moderate growth (e.g. 3%)

ha ha Sorry I seem to be having trouble explaining myself atm

 

[Ed Barton]

If you were to find a property which was priced below market value (say by 50k), but it was in an area which might not have the best potential for growth, would you still go for it?

what % is 50k? If I found a place that's market value was 2m and it was priced at 1.950k then, blah!

Through a little due diligence, ive uncovered that the areas biggest industry, a lead smelter, could be facing closure, for a number of reasons.

sounds great. Buy into a dyeing town that is more than likely to severely under perform the market in CGs.

There is also quite a few properties on the market that are listed very cheap (under 100k) which seems to be well under the median. Do you think this is a case of lots of 'bargains'? or would you assume investors are trying to sell because the area is showing negative signs?

I don't believe there is such a thing as lots of bargains. Cheap is cheap, not necessarily a bargain. A bargain is something that you have managed to see something no one else has or the seller hasn't seen something.

Any help/opinions greatly appreciated

yes, pull out of the contract if you can.

 

[Ed Barton]

Rental yield of 11%+

you seem to be drunk on the gross promised yield.

Net yields on these very low price properties reduces dramatically. stoves, painting, carpet, toilets, hot water systems etc are all the same fixed price and dramatically reduce your net yield on a cheapie.

and given that there is the potential for instant equity (since property is undervalued)

but you've said most of the properties are 'undervalued', therefore it's not undervalued at all.

 

[Ed Barton]

When I say low growth potential I dont mean zero or negative growth I mean weak-to-moderate growth (e.g. 3%)

ha ha Sorry I seem to be having trouble explaining myself atm

From what you've described I think 3% growth would involve the Easter clause and the Santa bunny visiting the town at the same time.

 

[Hoffy]

and given that there is the potential for instant equity (since property is undervalued) does low growth potential matter so much?? (i assume there will still be a little growth in the area). Instant equity= ability to buy more property faster right?

Alex

I might be missing something, but your instant equity hope isn't going to stack up. Valuers are going to value it at your purchase price (at best) surely?

 

[Alex2095]

what % is 50k? If I found a place that's market value was 2m and it was priced at 1.950k then, blah!

Market value 130k (approx) so 50k is roughly 40%.

sounds great. Buy into a dyeing town that is more than likely to severely under perform the market in CGs.

The lead smelter provides just over 800 Jobs to Port Pirie (population 15 000 and steady according to council) so worse case scenario not too many jobs are retrenched.

but you've said most of the properties are 'undervalued', therefore it's not undervalued at all.

Not most just a handful (>10)

Sorry I should have elaborated a lot more than I did. Thank you though. still working on my Due Diligence

 

[boomtown]

The lead smelter provides just over 800 Jobs to Port Pirie (population 15 000 and steady according to council) so worse case scenario not too many jobs are retrenched.

Do you understand what happens to a town where the anchor employer closes?

800 blue collar breadwinners. Average family size 2 kids mum and dad. That's 20 percent of the families in that town losing their breadwinner simultaneously. That counts as an apocalypse event for property prices and local businesses.

Worst case event is very bad indeed. And it's a former lead smelter. It's not exactly going to transform into an Eco tourist Mecca.

 

[alexlee]

The lead smelter provides just over 800 Jobs to Port Pirie (population 15 000 and steady according to council) so worse case scenario not too many jobs are retrenched.

Job losses have a multiplier effect. The loss of steady, probably relatively well paid jobs in a small community has a domino effect on all the retail, services, etc smelter workers spend their money on.

In a small community, >10 properties that are 'undervalued' is a lot. A property 'worth' 130k selling for 80k must have something seriously wrong with it. One or two might be problems with the owner, but that number suggests it's something else, probably the economy. 11% yield can disappear f there are job losses and vacancies increase.

If you think the community has a future contrary to current views, that's one thing. e.g. people buying in mining towns when mining was crashing, for example. But if it's because you think people are being too pessimistic because 800 above-average wage jobs in a community of 15,000 isn't a big deal, you're asking for trouble.

 

[strongy1986]

Alex,

The point you are missing is south Australia's future mining projects. DO some research on these. I reckon you won't go wrong with port pirie but you will do better in Augusta or whyalla.
Pirie is the wrong side of the gulf and is a shallow water port as is Augusta. Port bonython near whyalla is the only deep.

Yet Augusta is closer to Olympic dam

 

[wobbycarly]

Alex,

The point you are missing is south Australia's future mining projects. DO some research on these. I reckon you won't go wrong with port pirie but you will do better in Augusta or whyalla.
Pirie is the wrong side of the gulf and is a shallow water port as is Augusta. Port bonython near whyalla is the only deep.

Yet Augusta is closer to Olympic dam

So go for Augusta or Whyalla, then, no?

I suggest looking for a bargain in a good area is better than one in a poorer area.

 

[Alex2095]

Job losses have a multiplier effect. The loss of steady, probably relatively well paid jobs in a small community has a domino effect on all the retail, services, etc smelter workers spend their money on.

This is a great point which I overlooked. I guess now I have to determine how likely the smelter is to really close (there are other plans in place for it)

Alex,

The point you are missing is south Australia's future mining projects. DO some research on these. I reckon you won't go wrong with port pirie but you will do better in Augusta or whyalla.
Pirie is the wrong side of the gulf and is a shallow water port as is Augusta. Port bonython near whyalla is the only deep.

Yet Augusta is closer to Olympic dam

This is something that I have overlooked, again. This is why I thought I would ask! Will definately have a look into the mining prospects. Which is better for mining, shallow or deep?

 

[strongy1986]

Deep is better as it can handle larger ships which means they are able to ship more resources in one hit.
So with Olympic dam resource will be shipped from bonython (whyalla)
However Augusta is currently receiving materials and machinery

I have an ip in whyalla as I believe that all increased mining will lead to an expansion of port bonython (there are some articles on this). Also bhp are going to build a desalination there if olympic dam gos ahead. There are also other mining companies involved in the area.

Augusta will receive a road upgrade and electrical distribution upgrade to Roxby downs as all road traffic has to go through Augusta to get there.