Property expert Mark Armstrong is the CEO and co-founder of RateMyAgent, and the mastermind behind the web series Property Banter, which he launched in 2018. Mark says there are two ways to interpret the phrase ‘property lemon’. “One is a property that loses market value after purchase, and the other is a property that has structural faults.” Mark outlines how to identify a property that loses market value.
1. Consider the land to asset ratio
“Every piece of real estate is made up of two components: the land and the building on top of the land. Land grows in value and this is called an appreciation asset, while buildings are a depreciating asset, as they lose value over time,” says Mark.
“If you have a property that’s worth $500,000 and you burn it to the ground, and then sell just the land (and that land is worth only $100,000), it means your land to asset ratio is only 20 per cent,” says Mark. “This is a huge indicator that only 20 per cent of your asset is growing. Conversely, if you repeat the burning exercise with a property that is worth $500,000 and you sell that land at $400,000 that means it’s good value. Always take the time to professionally evaluate the land and the property before buying.”
2. Focus on the things you can’t change about a property
“A lot of buyers are quick to focus on quality fittings, kitchen and size of bedrooms, etc. but all those things you can change with renovations and refurbishments,” says Mark. “However, there are many things you can’t change, such as the location – which can be the main indicator that a property is a lemon, or a dud. Always consider what surrounds a property. Is there a waste plant, a main road, or a freeway? If there is, avoid, avoid, avoid!”
3. Avoid new property
Brand-new properties are a sure sign of a lemon, says Mark, but why?
“It’s because the vast majority of property sell prices comprise of labour costs, meaning a large chunk of what you’re paying for is intangible (except the cheap fittings).”
“A few decades ago there wasn’t a labour shortage. We had capable labour from around the world. Now there is a skilled labour shortage with enormous pressure on the cost of labour. Buying new can mean construction materials are of a lesser quality than may be found in older property.”
4. Property that’s easy to buy screams oversupply
“If someone gives you a shopping list of 100 properties to take your pick, it’s quite a sure sign there’s an oversupply and you can be pretty sure it’ll be a lemon,” says Mark. “Good property is hard to come by, so look for property that is scarce. For example, property in areas where there is no more land to subdivide or restrictions on building new dwellings."
This article originally appeared on Better Homes and Gardens.
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