Would you risk $1,000,000 to make an extra $100,000?
Assume you have a guaranteed $1,000,000. Would you risk all of it, for the chance to make an extra $100,000?
We all have a different risk appetites, so you may be thinking, "Absolutely I would", "No way would I ever do that", or you may want to know more about how to calculate this risk.
Is the risk 10%, 50%, 90%?!!
I purchased a property on recently on a Friday on behalf of a client - a property that was scheduled to have its first public open home on the following day (the Saturday). I saw it on Wednesday, my clients came to see it on Thursday & we purchased it on Friday. Before anyone else had a chance to even step foot inside, we had completed all our due diligence, negotiated a great price & exchanged contracts.
I knew if the property came to market it would sell outside my client's budget. I thought it was a long shot we would be able to buy it at all. But…
We took a shot… and scored!
We purchased it for the lowest possible price the owner was willing to accept. The negotiation was intense.
Why would the owner accept it? The day before they are due to go to market, why would an owner accept their lowest possible sale price? Should they wait now and see what happens on the market?
They had launched the property on the internet Thursday night & of course, enquiries come through asking for more info. But are those people serious buyers? Are they just tyre kickers? Would they even like the property? Are they finance ready to buy?
If they had gone ahead with their four-week campaign followed by an auction - they would have passed up our guaranteed offer. We had made it clear that we were not hanging around to buy it in four weeks at an inflated price.
The owner also lived in the property so having four weeks of open homes is something most owners do not enjoy. This is especially true when the owner has children, as was the case here.
We were ready to go
We had reviewed the 900 page sales contract, the 620 page strata report, the client's finance was in order and we were not wasting anyone's time.
They had no guarantee any new prospective buyers who came through during their campaign would be ready to go come auction day. It is the uncertainty.
How do you calculate the risk then?
The probability of not finding a single other buyer on this property, I would classify as unlikely. It had some unique elements compared to others in the area, a good strata record (which is hard to come by) and is well located. Plus, in the current market where stock is very low & in this suburb down 12% YOY, it is unlikely they would not find another single buyer.
The impact of not finding another buyer, however, is severe. It costs them 100% of our offer price.
The risk is therefore rated medium
So, would you take a medium risk at turning a guaranteed $1,000,000 into $1,100,000? Maybe it would turn into more than $100,000, but it could also turn into less.
We all have different risk appetites.
There is one thing I am confident about - you would all rather pay $1,000,000 than $1,100,000 for a property!
That is exactly how my clients felt!
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