Too Weak To Defend Part 10 – New Adventure: Land Auction

Setting:

Alice Springs, Australia. November 2009. Convention Centre lobby area. Mt John Valley residential blocks for sale to the highest bidder(s). Who in their right mind would buy land at these prices? Prices starting at $265,000 for 800 square meter blocks; and that’s the starting price, you may end up paying more if someone bids higher. They won’t even issue title until Feb 2011. By then, will prices rise or – the unthinkable – will they fall?
Capital Growth?

Can anyone out there guarantee capital growth? Prior to the Global Financial Crisis, isn’t that what they were doing in the US – guaranteeing capital growth? Or, at the very least, weren’t they taking capital growth for granted? And, look at all the capital growth they’re not getting right now! In 2006, at the height of the US housing market, who would have thought it would all go sour?

Can the same thing happen here in Central Australia? Could we see a collapse in the land and housing prices? Most people would probably say “No.” But, there are no guarantees. There is always risk.

So with all this uncertainty, naturally, I put a deposit and signed a contract on one of the Mt Johns Valley blocks. Why, you ask? Good question. And, I’ll try to explain my reasoning later on in the article.

A New Adventure!

Buying land has never been such an adventure. It’s now a ritual. Such high demand, so few available blocks, the process becomes less a game of skill and more a game of chance. We were lucky to get a block. The buying process was not altogether clear and we initially thought we missed out. But, lady luck showed up and we got one.

And now, the story of our land buying adventure …

No land for you – maybe next time?

“All the single dwelling blocks have sold …” Said the real estate agent over the microphone. The lobby was fairly crowded and the best way to make sure everyone could hear was to use the microphone. I heard it and got up from my seat and headed for the door. As I walked out I casually said goodbye to a group sitting around a table and then added, “All I can say is, when’s Stage Two?” I was letting them know I missed out on the land and maybe I’ll have better luck when they release the next stage! I went next door to the “Juicy Rump” (yes, that’s the real name!) restaurant to meet my family for a relaxing meal.

Hang on; Wait a minute!

I got home that night at about 9:30 pm and checked my phone messages. I don’t normally check my messages at night so I’m not sure what compelled me to do it. Then I heard the agents recorded voice, “Hey Dave, you got a block … call me back to let me know if you’re still interested.”

So, I called him back – no answer – and left a message on his phone. I then went off to bed and started reading “Sovereign of the Seas – The History of British Sea Power.” Great book; I highly recommend it!

Then, just as Lord Nelson was about to say his last words in the Battle of Trafalgar, the phone rang. It was the agent returning my call.

“Dave, the vendor has accepted your offer and he says if you come by the office (real estate agent’s office) tomorrow with the deposit and sign the contract, the land is yours.”

“But, how did I get the block? I thought all the single dwelling blocks were gone so I left.” I questioned out of curiosity.

He tried to explain, “It was all a bit confusing, but I suppose the person who had your block chose to get another one. That left this block open for you.”

I still didn’t quite understand, but I told him I’d come by the next day and get the block. I went back to bed and fell asleep just as Lord Nelson received word that he won the day; the British had defeated the Spanish and French in one of the greatest sea battles in history.

The next day, Saturday, I told my wife the good news. “We got a block of land, dear.”

“Yeah, sure we did.” Marieta replied disbelievingly.

“We did. It’s block 112 and all we have to do is go over at noon today, give em the deposit and sign the contract and it’s ours.” I tried to sound convincing. But, it wasn’t working. I like to kid around a lot and Marieta probably thought it was just a gag. I didn’t realize it at the time, but later that day I found out Marieta really did think I was joking.

I Can’t Find my Wife?

When noon came around, Marieta was nowhere to be found. She had more important things to do. She was making preparations for our oldest daughter’s birthday party. And, she was attending an auction at the convention centre. These were her two main priorities that day. Getting a block of land was the furthest thing from her mind.

So, I drove to the agent’s office and gave my excuse. “I can’t find my wife. And, she’s got the cheque book.” I sputtered to the disbelieving agent. Marieta had been with me the night before and we tucked the cheque book in her purse. It was still there. And, I needed Marieta to sign the contract since the property will be in both our names.

The agent gave me the same look a child gets from a teacher when using the excuse, “The dog ate my homework!” I can imagine what the agent was thinking. “Sure you can’t find her. I believe you. Whatever you say.” Humouring me all the way.

Contacting Marieta when she’s out and about can be tricky. She very rarely carries her mobile phone. I’m guilty of not carrying mine much either.

“Do you still want the block? Cause I’ve got a list of 5 people right here who’ll take it if you don’t want it.” The agent dutifully informed me. And I could see the list of names sitting prominently on the table.

“Sure, just give me a little time to find Marieta and I’ll be back.” I explained.

“Ok, sign these 4 copies of the contract and then take it with you to get Marieta’s signature. We’ll be here for another hour. Just bring back the contracts with the deposit before we close up today.”

“If for some reason I can’t find Marieta, which is more important the signature or the deposit?” I asked a silly but necessary question.

The reply came quickly. “The deposit. Marieta’s signature can wait until Monday.”

With that little bit of information, I came up with a simple plan. Go home, get the business cheque book and come straight back to the agent with the deposit. Then worry about Marieta’s signature later.

I carried out the plan.

Marieta finally came home from the auction at about 3pm. She was focused on getting ready for our daughter’s 18th birthday party. And, I knew the signing could wait until Monday, so I didn’t bother her with it.

Monday morning Marieta signed the contracts and then we dropped them back to the agent. Done deal. A bit roundabout. But, we got there. Finally.

Now for the Hard Part – Why Buy?

Here’s where I have to lay it all on the line and explain myself; answer the question, “But, why did you buy?” And, have the added burden of making it come out sounding reasonable. This is not going to be easy. But, here goes.

Historical Reference

We came to Alice Springs in 1998. When I got here I thought the real estate prices were outrageous. The old commission houses on Bloomfield Street were going for as high as $150,000! “Who in their right mind would pay $150,000 for one of those houses?” I asked myself. Now, looking back on it I wish I was out of my mind and had bought one or two or more. I just saw one advertised recently for $420,000. Oh, and by the way, it’s under contract. Granted this particular house has been renovated very nicely. But, it’s got only 3 bedrooms and one bathroom. Can you imagine the price if there was a fourth bedroom and another bathroom off the master bedroom?

Some things never change. For instance, I still think the real estate prices here in Alice Springs are outrageous. But, the difference now is I’ve learned something over the years. That something is this – it doesn’t matter what I think about the real estate prices in Alice Springs! What I think about it is immaterial. It’s almost like gravity – what I think about gravity doesn’t matter. It doesn’t change things. Gravity happens whether I think about it or not. And, whether I like it or not.

What do you think has lead to the dramatic increase in house prices since 1998 when I first came to town? Do you think it was the old commission house sitting on the land that drove the prices upward? Or do you think it may be the land itself that’s driving the steep increase in value? Let’s explore this further.

Land at Rydges

To give you an idea of land prices, let me share a recent story.

My wife and I just sold a block of land in the new Rydges Estate here in Alice Springs.  It was surplus to our portfolio. We were going to build on it but decided not to. So, we made the decision to sell.

My sales technique was pretty basic. I went to see Jason at TJ Signs and he made up a basic For Sale sign. It had a black background with the words “For Sale” and my phone number. I drove down to the lot and pounded the sign in the ground. Then the phone started ringing off the hook with inquiries.

The phone conversations generally went something like this, “How much do you want for the land?” They would ask.

“I’m taking offers. May I get you name and phone number?” I would reply.

Most people didn’t get back to me with an offer straight away. But, two people made offers virtually on the spot. The first one was for $191,000. The second one was better in price and terms.

“I’m standing at the lot right now. I’ll find out what the last ones sold for and give you a little bit more.” He replied to my “make an offer” statement. He called back in about 10 minutes.

“I’ll give you $193,000. I can pay cash and have the deal sewn up in less than two weeks.” He got my attention.

I called him back and asked, “So, you can pay cash and we can sew the deal up in less than two weeks. Have I got that right?”

“Yup.” Was his reply.

“Ok. Come on over to my house and we’ll get your offer in writing and then get the conveyancers involved.” I replied.

About two weeks later the property changed hands.

The buyer was happy to get the land for that price. We got a good deal, he got a good deal.

We probably could have achieved a higher price if we were willing to wait. But, we were happy with the deal and we wanted to move on. But, I was amazed that the land sold so quickly and so easily for such a great (high) price.  (Click here for the complete story of this land selling exersize.)

Why is the land so expensive? Why do the prices keep going higher?

Thought experiment?

Let’s do a little thought experiment. Let’s go back to the year 1998. I’m having a conversation with someone about real estate prices.

ME: “Prices (real estate) are too high in Alice Springs. It’s not sustainable. They can’t go any higher.” I state emphatically as if I’m an expert. But, in fact this is simply my opinion.

OTHER GUY: “Maybe, but I’ve been here for years and I’ve never seen prices go down. I would predict the prices will continue to rise.” He replies with his own opinion. But, at least it’s based on a historical trend. My opinion was based on the way I see the world; my biased viewpoint. My pay doesn’t go up that fast; why should housing?

ME: “You think prices can go up from here – how do you figure?” I ask in a very disbelieving manner. As if to imply that no matter what he says I won’t believe it.

OTHER GUY: “Definitely.”

ME: “Ok, give me an example of what you mean. Say 10 years from now, what are prices going to be like in Alice Springs?”

OTHER GUY: “Well, based on the trend, in 10 years, you should be looking at paying about $300,000 for a house on Bloomfield Street. And vacant house blocks could be fetching anywhere from $150 to $175 thousand. I think those are reasonable estimates.”

ME: Jaw dropping. “Nice talking to you. See you around.” I walk off thinking to myself, “The guy is nuts!”

Is this same conversation taking place today somewhere in Alice Springs? Course it can’t be the same conversation because the numbers today would be much different – I mean – much higher.

So, here’s one to think about. Based on historical trends (price doubling every 10 years) can we look forward to paying $400,000 or more for a block of land in Alice Springs 10 years from now?

I know what you’re thinking … “Absurd! Who in there right mind would pay $400,000 for a block of land in Alice Springs?”

And, I know the answer to that question. It’s fairly easy. I found out who during the last week of October Business Month during one of the sessions at the Convention Centre. I was very surprised to hear who these people were that would be so keen to buy land in Alice Springs. Are you ready for the answer? Brace yourselves …

Anyone from Darwin!

Why? Because our land prices look downright cheap next to Darwin land prices! You’d be hard pressed to get a block of land in Darwin for less than $600,000. I have an article on this very subject. (Click the link to read about the high land prices in Darwin.)

Now, the questions I ask myself are as follows:

1) In 10 years is my income going to double? If so, no problem. Essentially, even though the land prices go up, in real dollars they’re the same for me.

2) If my income doesn’t double, what can I do to mitigate the loss of buying power?

3) Are taxes and other non-value added costs going to go up in the next 10 years? If so, what can I do to mitigate these wealth destroying costs?

Then I brainstorm to come up with some answers.

The answer to question 1 is “I don’t know if my income is going to double in the next 10 years.” I’d like to think it is; I’d like to think it would triple. But, I really don’t know for sure. If it doubles – or more – then I’ve kept up with the cost of land and housing. Since, I’m not sure what my income will be 10 years from now; I’ll go on to question 2.

Assuming my income doesn’t double I can think of one way to mitigate my loss of buying power 10 years from now. It’s a pretty straight forward approach, and one that worked very well for me over the years – BUY NOW! To me, this is the equivalent of planting seeds. Buy now to get the chance to experience a harvest later on. The longer you wait to buy, the longer you have to wait for harvest time.

Finally, I’ll answer question 3 with a question. Who here thinks taxes, fees, and other associated buying costs are going to be less 10 years from now? If we agree that these costs are certainly going to go up, then I would rather pay for them now instead of waiting. Again, the “buy now” strategy seems to be appropriate.

A Powerful Word … “But!”

What about all the questions that begin with the word “But?” The ones that create doubt. “But” – that little and powerful word.

But, what if prices don’t increase in the next 10 years?
But, what if they open up a bunch of land and the land prices plummet?
But, what if I lose my job?
But, what if people laugh at me for buying now?
But, what if the land prices drop and I lose money?

But, but, but …

Here’s some good news. These are the same “buts” that have been used over and over again throughout the years. They’re not new. They’ll be the same “buts” used 10 years from now. I know. I’ve used them all.

Here’s another big “but” I’ve used over the years to help me move forward. To help me make decisions. To help me get over my doubts. Here it is …

“But, what will happen if I do nothing?”

That’s the question that gets me every time, because the answer is too painful to bear. My answer to that question is always the same. “If I do nothing, then nothing will happen!” If I do nothing then 10 years from now I’ll have the results of my actions – NOTHING.

Planting the Right Seeds

Doesn’t a farmer take a risk by planting seed during the growing season? He may or may not get a crop during harvest. But, doesn’t he plant anyway? If he doesn’t plant any seed – he does nothing – then what is he going to get during harvest? That’s right – Nothing? Is he surprised when harvest comes around and he’s got no crop? Course not. He didn’t plant anything so how could he possibly expect a crop? He didn’t.

So, I know I must plant seeds. They may not all be fruitful and multiply but at least I’ve planted. And, I plant the seed I want not just any seed. I’m planting property seeds, in order to get a property harvest. Same as the farmer who wants to harvest tomatoes; he plants tomato seeds. He would look pretty silly expecting a tomato harvest if he planted dandelion seeds!

Watch out for Unproductive Seeds

And, yet that’s what I used to do. I’d plant unproductive seeds and expect a productive harvest. Like working overtime at my JOB for no extra pay. Like working hard to get better at my JOB. Like forfeiting a holiday so my boss could go on holiday. Then, my family and I would get the “leftover” holiday time. Like performing well at my JOB to get a fair and reasonable raise and then not getting one. These seeds didn’t produce a harvest. They’re like the seeds that land on the road or on rocky soil. No crop. Never going to be a crop. Or, they’re like planting weeds. You get a crop but who wants to eat weeds?

Just quickly, I’ll discuss why I believe these JOB seeds don’t produce a financial crop.  It’s simple.  Because, you’re planting seeds in someone else’s garden.  It’s their company.  You’re just making them rich or richer.  You may improve your JOB skills and therefore can work for another company who pays you a higher wage.  But, you’ve just jumped ship and are now making the new company richer.  A JOB – in my opinion – is probably one of the most inefficient ways to make a living.  It’s ok to start with a JOB but the goal must be to get out of it if you’re to take control of your financial future.

For example, take the person who works 45 years for the same company. Then, at the end, gets a gold watch and an anemic retirement plan. A retirement plan that was supposed to provide financial security but instead provides nothing because the company has gone bust. Or, provides little because the stock market is down. Or provides less because the retirement plan changed. Or, or, or. Do you know anyone caught in this situation? Do you want to take the risk of this happening to you? I don’t. I didn’t.

That’s my reasoning behind buying the block. Planting more property seeds.

This concludes the “Too Weak to Defend” series. Thanks for reading!