In this episode of 'Invest Like A Pro' we’re in Kelmscott, south east of Perth, where he found a bargain deal for his client. Seemingly the last property in the area for under $400,000, they snatched it up— after doing the necessary due diligence, which is different on the west coast than the east. He explains how it differs, what a reticulation system is, and the non-monetary difference between a $150 repair and a $30,000 one.

Timestamps:
00:49 | Ticking the Boxes
04:30 | Makeup for Houses
08:29 | Terminating and Termites
13:59 | Intrigued
15:54 | Demographics
17:01 | Don’t Judge
22:32 | Different Lifestyles
26:47 | Important Inspections

Resources and Links:

[00:13:08] It was off market, we locked in the contract at $380,000, [and it's] about 700 square metre, so a decent block of land. And it's a four bedroom, two bathroom house. When we ran the comparables, it came back at around about the $470,000 ish mark. So clearly quite a bit of fat in terms of being what we call a bargain or a good deal.

This is Property Investory where we talk to successful property investors to find out more about their stories, mindset and strategies.

 

I’m Tyrone Shum and in this episode of Invest Like A Pro we’re chatting with founder of House Finder, Simon Loo. He and his client secured a property in Kelmscott, Western Australia, where deals and due diligence are a little different to on the east coast. He shares how things differ, why trust needs to be earnt, and how the WA market supercharges their Saturday inspections.

Tyrone Shum:
Loo’s client is a first time buyer who was keen to jump into the Kelmscott market. Although they haven’t been working together for very long, he’s very familiar with their goal to build a portfolio large enough to achieve passive income.

Simon Loo:   

[00:00:49] With every client, we kind of talk to them initially and just say, 'Hey, what's your goal?' And we kind of try and paint the picture based on my own journey, and what some of my clients have been through as well. At the end of it, it's usually a lot of excitement. 'Hey, let's go get started, let's find these houses', that type of thing. 

  

[00:01:05] So [they're] a regular client in the sense that she's quite young. I think she's, like, 27 or 28, or something like that. So she's got a couple of years under her belt in terms of being in the workforce. She has a decent income, and she's just looking to build wealth at the end of the day to get enough passive [income]. Financial freedom, that's always the goal in life, to be free from finances.

  

[00:01:40] We've got a bit of a lead time with new signups. So maybe around about the sort of four week mark, as we work through current clients, I guess you can say. 

  

[00:01:52] So, anyway, this was literally the first property we sent them, and it ticks a lot of boxes. I'll run through some of the details shortly. But the first property we sent them, we kind of explained to them, like, 'This is why it's good value, off market based on the price that we're paying, the cash flow is really good'. 

  

[00:02:20] We didn't know the condition. So I'll explain a little bit about how we do our due diligence in WA, to ensure that there's no issues, and obviously, if there are issues, how we can overcome them. But being a first [time] buyer or first time investor, I think there's always some jitters. You're kind of always a little bit anxious about not only the buying process, but the conditions of the property and if the area's the right area, that type of thing. Obviously, it's our job to educate and mentor them through that process.

Tyrone Shum:   

[00:02:58] And a lot is based on trust as well, too, from your experience.

Simon Loo:   

[00:03:01] It is, it is. And I always tell everybody to not trust anyone, including me, but I do have a lot of clients that are just like, 'Hey, Simon, I trust you, just do whatever you need to do'. But I actually enjoy the clients that question everything. Because we've done this so many times, it's kind of like second nature now. 

  

[00:03:21] And also, I always say there's no such thing as a perfect property. There's always, like, a defect, there's always [something]. Hopefully, it's all just minimal cosmetic wear and tear stuff. But sometimes it can be a little bit worse. And it comes down to whether the deal itself justifies some of these problems, you know, what's the reality of these problems in terms of the cost to fix some of these issues. And, yeah, I think ultimately, that's what constitutes whether a deal is worthwhile going for or not.

  

[00:03:59] We come across a lot of properties where it might need a little bit of paint, some carpets might be a bit old, high traffic areas might experience like a few tears and rips and things like that. We find some properties have unkept yards. All these things in the grand scheme of things, a couple of hundred here, $1,000 there, like, we try and tell clients, 'That's not going to affect the performance of the property'.

Tyrone Shum:   

[00:04:30] That's right. I mean, they're very minor cosmetic type of things, which are great to be able to easily fix up and adds value to it once it's been done. But you're not spending hundreds of thousands of dollars to do a site, which is really, really important to understand.

Simon Loo:   

[00:04:44] Just really quickly, like, if for example, whatever property we buy has potentially let's say $50,000 below market value based on some real comparables, and let's say, worst case, you have to put down $5,000 of your own money to fix up a few things, that's not going to break the deal. The fact is, if those issues were a problem, that it probably wasn't going to be a good deal anyway, even if those problems didn't exist. 

  

[00:05:13] So this house was a little bit older. We did our due diligence on a couple of inspections, we found some issues with the property. But we managed to come to a pretty good solution nonetheless, which I think listeners— especially if you're buying in WA— really need to be very diligent with these inspections. Because it's not as easy to terminate contracts if you're not satisfied with, like, a building and pest for example, in WA. So doing a few level[s] of inspections is really important. So we'll have a chat about that as well. 

  

[00:05:55] But anyway, we sent this property to the client. She was actually quite keen on it immediately, like, I was a little bit surprised, because typically when we see older houses, this house doesn't have very many pictures online as well. It's been owned by an owner occupier family for four decades. So it hasn't had a huge history of selling, so you can't really find a lot of it online. 

 

[00:06:23] So, obviously, when we send through a property, we include as much info as we can, but we haven't done the inspection yet. So everything that we send through is things like cashflow analysis, comparable sales, data and suburb profiles, and most importantly, how much we've negotiated the property at.

Tyrone Shum:   

[00:06:43] So this is really just the numbers, the data, just to make sure that the deal stacks up. We don't want to get into the nitty gritty yet.

Simon Loo:   

[00:06:50] Correct. Data, the area, pros and cons, everything we know about it, about the area, about the property just based on some really sort of surface level research. 

  

[00:07:02] But usually, that's enough to ascertain whether a deal is good or not. I mean, for every listener out there, you know where you live, you know the value of whatever house you're living in, or unit or townhouse you're living in, has a value. And, like, because you're very familiar with where you live, if there's like a[n] almost identical property to the one that you're living in that pops up for sale, let's say tomorrow, and let's say wherever you're living is worth $1 million, right? And you're like, 'Hey, that unit or house next door that's identical to the one we're living in, we can potentially buy it for $800,000' or whatever, it is, you can immediately spot a good deal. And you haven't even seen it, you've haven't even been through it. 

  

[00:07:46] So I think investors like having that focus on the numbers. And the deal itself is actually what the most important thing is. And then after it's secured, then we go through and do the due diligence. 

  

[00:07:57] So the process in WA, for us anyway, is we get a lot of these off market. So we negotiate in the background, no one really knows about it. Then we secure them, we secure the price. And then we send it off to a client, the client looks at it, we talk to them about it, and if they're like, 'Yep, Simon, this looks like a great deal, super keen', we lock it in with a contract. 

 

[00:08:20] The contract, typically, we include three conditions. We can include a due diligence condition, we include, obviously, the finance condition, and the building and pest condition. 

Simon Loo:  

[00:08:29] Now, the caveat in WA is that when you do the building and pest, and let's say you find a bunch of issues, you can't terminate as a buyer, the contract, and walk away from the deal. You have to give the seller the opportunity to fix the problems, professionally, of course. 

  

[00:08:52] Even if it's a really major issue. Let's say, like, the roof's falling apart or whatever. If the seller decides not to fix it, then you have the right to terminate. And we're only talking about major structural issues, which is a huge grey area. Because even what they call settlement agents in WA, or what the eastern states called conveyancers, even they get a little bit confused with what's determined as majorly structural. 

  

[00:09:24] So, we've heard of instances where something is actually quite major, like, maybe a pergola area is falling apart and needs to be removed completely.

Tyrone Shum:   

[00:09:41] Or what about like, say, for example, there's termites in there, active termites that are eating away at the structure?

Simon Loo:   

[00:09:46] Termites, you know, I mean, there's so many varying degrees of termite activity. So what's deemed major and what isn't is really kind of debatable. It comes down to what the building and pest guy suggests, in all honesty, And because of the fact that it's not easy to terminate a contract on building and pest, we throw in this due diligence clause where we actually send out our own guy or girl to do a full inspection of the property visual interest. 

  

[00:10:22] It's kind of like a supercharged Saturday open inspection. Because most people, when they see a Saturday open home, they go through, they spend 10 minutes walking around the house and go, 'Looks alright', but they don't really get into the details. 

  

[00:10:34] So when we do these inspections, because most of our buyers are not from the area, they rely on us to give them all this feedback. And we take about 100 pictures of every visual defect that we can see with the property, from, like, a little ripped flyscreen in the kitchen to maybe, like, a small hole in the wall behind the doorknob, we see that quite frequently. From small things to big things.

  

[00:11:02] The purpose of this due diligence or visual inspection is so that we weed out the chances of any sort of major issues that at least we can see. Because property is not really like A Current Affair where you hear those stories where you're living in the house, or you bought a property, and something inside it is completely wrong. Like, the roof is falling apart, or there's lots of termite activity everywhere. Generally, with a very, very odd exception, if there is something structural or something majorly wrong with the house, typically when you go through it and do a very thorough visual inspection just with your eyes, you can usually see that there's an issue.

Tyrone Shum:   

[00:11:49] Usually, if you see a lot of cracks in it, and all those kinds of things and big cracks, then you'll pretty much obviously spot it just from experience.

Simon Loo:   

[00:11:57] So we do this visual inspection. And in WA, we structure this due diligence condition so that if we're not satisfied with whatever we see, we can actually just terminate the contract there and then. We don't need to progress to the building and pest or whatever it is. 

  

[00:12:52] So anyway, this house, we go through it, we lock it in. So just to give you some numbers. By the way, the property's in a suburb called Kelmscott, which is about 30 kilometres south [east] of Perth. It was off market, we locked in the contract at $380,000, [and it's] about 700 square metre, so a decent block of land. And it's a four bedroom, two bathroom house. 

 

[00:13:22] When we ran the comparables, it came back at around about the $470,000 ish mark. So clearly quite a bit of fat in terms of being what we call a bargain or a good deal. 

  

[00:13:39] 0.4% vacancy rate, so extremely low vacancy rate. The property's owner occupied, it actually hasn't even settled at the time of recording. By the time you listen to it, it probably has. But we anticipate the rent to be about $500 to $530 a week in this market. So really good cash flow.

Tyrone Shum:   

[00:13:57] That is very good. Yes.

Simon Loo:   

[00:13:59] Now, there was no pictures of it online. So we didn't know anything about the condition except what the agent tells us, which I never listened to anyway. 

 

[00:14:08] I mean, look, in fairness, this agent we've done quite a lot of deals with, but he's a pretty straight shooter. And he did warn us that there was going to be a few issues with [the] property cosmetically. Even though it was owner occupied, the people that live there were not looking after the place as well as she could have been. But it was a bargain. So we were interested, we were intrigued to see what it was. 

  

[00:14:36] So it was paramount that we secured it first and we did, locked it in with a contract. The client was quite keen on it based on the numbers and we started the due diligence process.

Coming up after the break, he educates us on the unique way sandgropers water their lawns…

[00:19:44] Because it's extremely dry weather in WA, so if you don't water the lawns regularly, they go brown.

How you can protect yourself in markets that seemingly prefer to protect the seller…

[00:24:46] But there are still ways that you can protect yourself. And in a crazy market like where Kelmscott is at the moment, there's a lot of properties being snapped up really quickly.

He tells a story that explains just why nothing surprises him anymore.

[00:13:23] I think one of the worst ones I've seen was like a family put a fire pit— not a fireplace, a fire pit— in the middle of the living room.

And that’s next. I’m Tyrone Shum and you’re listening to Property Investory.

Tyrone Shum:   

Kelmscott is a suburb in the city of Armadale, south east of Perth. Historically this city has been known as a working class area, where some of its suburbs have been painted with the lower socioeconomic stigma brush. However, much like what’s been happening in other capital cities, it’s starting to shake a lot of the negativity and is seeing a lot of new people moving in.

Simon Loo:   

[00:15:54] And these aren't your traditional lower socio economic demographic, it's actually young families, owner occupiers, professional couples that are simply priced out of more 'premium', quote unquote, suburbs.

Tyrone Shum:   

[00:16:15] It's affordable, basically. I mean, $380,000 for a four bedroom house is extremely affordable. I mean, you can't get that anywhere on the east coast.

Simon Loo:   

[00:16:25] You actually can't get that in Kelmscott, either. But we got it. I had to throw that in there. If you want a four bed house in Kelmscott, you've got to pay $470,000.

Tyrone Shum:   

[00:16:42] Really under market value. That's awesome.

Simon Loo:   

[00:16:43] That's the goal. So look, we did the inspections. We locked it in, we did the visual inspection. And we found there was a couple of issues. So there were a couple of broken glass panels around the house.

Tyrone Shum:   

[00:17:01] It's very odd, though. I mean, I've never really heard [of] buying a house with broken glass panels. Why are they not fix it? That's what I don't understand.

Simon Loo:   

[00:17:09] Look, I've learnt a long time ago, especially as an investor, it's not going to do me any favours to kind of judge how people live or have that kind of emotional factor attached to it. I just look at it as very black and white. So however they managed to create broken glass panels in the house, I don't really care about, as long as I know that they exist, and how much it costs to fix it. 

  

[00:17:34] So there were a few broken glass panels. Really bizarre, the kitchen counter was formed or cut up by, like, a bunch of other different kitchen counters. So maybe at some point it was like a normal kitchen counter. And maybe over the years of living there, maybe, like, a section of it was damaged. Maybe with a burn or something or a fire maybe. 

  

[00:18:03] So instead of replacing the whole kitchen counter, what these guys have done is they just, like, cut that section out, and then chucked in a piece that could physically fit into that slot. But it was a completely different counter. Like, it was discoloured, it was the wrong material, different thickness. And it was like three or four of them. So who knows, maybe they used their kitchen counter for some really physically enduring activities.

Tyrone Shum:   

[00:18:35] Or they forgot that they burnt something and left the pot on there, or something like that. I've seen that many times. But strange.

Simon Loo:   

[00:18:42] At the end of the kitchen counter, they actually did a really bad job of cutting a hole out to accommodate the upright stove/oven. So they obviously didn't fit originally. So instead of buying a stone oven that actually fit into the normal hole, normal section, instead they just... really bad, just think like your first time sawing job that you've ever done in your life. You know, it was kind of like all zigzag.

  

[00:19:16] So it was just really, really terrible. And there were a couple of other things as well. There was a few holes in doors. The flooring wasn't really that great either. And also there was a... in WA a lot of houses have what they call a reticulation system, which is like a watering system for the lawns. Because it's extremely dry weather in WA, so if you don't water the lawns regularly, they go brown. And a reticulation system is basically like a self watering system. 

  

[00:19:55] And we find that they actually fail quite a lot. I don't think many people use them. It's kind of like back in the eastern states, like, recently, when you build a house, you have to include, like, one of those massive water tanks in the backyard. And it's to meet, like, water standards and energy requirements and all that stuff. And then no one really uses them. Like, we see so many houses that aren't even connected to the gutters, as they should be, because it's supposed to collect rainwater. So they're just like a massive thing that sits there. To be honest, most people just throw them out. It sounds bad, because it's supposed to save water.

  

[00:20:37] I mean, at the time [of] recording, our dams are overflowing. So...

Tyrone Shum:   

[00:20:41] Hence the reason why.

Simon Loo:   

[00:20:46] So anyway, this reticulation system was also broken. Now, whenever we come across these issues— and there's always cosmetic issues with any house, it just had varying degrees, but obviously, some of these items are quite abnormal, or perhaps quite severe. There's two things to do at that point. 

  

[00:21:06] The first thing is try and get some money off to compensate for these problems. And the goal is always to get more money off than it cost to actually fix it, give yourself a buffer, and maybe take it as [an] opportunity to try and negotiate a bigger discount. 

  

[00:21:22] But again, in WA... I mean, we really drilled these guys down on price, obviously, at $380,000, this seller was in a situation where they just needed to sell pretty urgently, and they didn't have much funds. 

  

[00:21:35] So getting a massive discount was not possible for these guys. But instead, what we ended up negotiating is for the seller to fix everything professionally. So we're kind of at the tail end of the purchasing period now, as in it's about to settle. And the seller's actually gone through and replaced the kitchen counter professionally, everything looks normal now. All the glass panels were fixed, the holes in the doors and stuff, they were patched up and repainted. And I think there was one or two doors that was replaced entirely.

 

[00:22:15] The reticulation system was also fixed. That's actually quite a rare thing. Like, a lot of people don't bother fixing these systems, but it was fixed anyway. Anyway, the house was completely fine. Completely livable, tidy now, nothing needs to be done.

Tyrone Shum:   

[00:22:32] And this was owner occupied that was that was living here before, correct? Not a tenant?

Simon Loo:   

[00:22:36] Correct. There was an owner occupier.

Tyrone Shum:   

[00:22:37] Interesting. I would have anticipated, being owner occupied, you'd probably want to try and look after your place, because you live there and it's your own place.

Simon Loo:   

[00:22:49] Coming back to what I was saying before, like, different people have different lifestyles, different ways of living and stuff like that. And like I said, it's not about judging people [and] how they live. Obviously, the way that I live is not how other people live. And it's not right or wrong. I think obviously these guys just didn't care about, you know, for example, having a normal kitchen counter. They're more functional.

Tyrone Shum:   

[00:23:21] It's functional, cost saving. I can understand why, yeah, totally understand.

Simon Loo:   

[00:23:26] Maybe they did it deliberately, as like, an artsy kind of thing. Honestly, like, these houses, sometimes I see that's been lived in by owner occupiers, they renovate it— I mean, I'm sure we've seen a lot of these examples— they dress it up to their tastes. And it rarely appeals to anyone else. 

  

[00:23:56] And I think it's a good thing. You don't want everyone just having vanilla white walls everywhere and [the] same sort of setup, I think it's a character thing. So it's not necessarily bad.

  

[00:24:12] As an investor, you kind of want something a little bit more vanilla. More safe, more boring.

Tyrone Shum:   

[00:24:19] That's important. That's very interesting.

Simon Loo:   

[00:24:21] So the takeaway there just really quickly is there are ways to... even in WA, because one of the big concerns for a lot of people when they're buying in WA is that the buying process is more for the seller, whereas in [the] eastern states is more sort of pro buyer. 

  

[00:24:46] But there are still ways that you can protect yourself. And in a crazy market like where Kelmscott is at the moment, there's a lot of properties being snapped up really quickly. Sometimes you don't have the luxury to do all of these inspections and the due diligence and back and forth [with] the agent and the seller and doing a proper building and pest and so on before you lock it in. 

  

[00:25:17] Because a lot of times, by the time you do this due diligence, which can take a week or two, someone's already bought it. So you don't want to waste your money or your time constantly missing out. 

  

[00:25:28] And obviously, the seller needs to accept something like a due diligence condition. So sometimes it's the way that you negotiate with the agent as well. But like I said, there are things that you can do to safeguard yourself as well. 

  

[00:25:47] Because buying properties, you see some really, really weird, wacky things. And people in the industry are also known for not speaking the truth, or perhaps trying to hide certain things about the house. So if whenever you see some of that, you just need to make sure that you've got areas to exit, to walk away and not lose money. So that's the main thing.

Tyrone Shum:   

[00:26:19] That's the key thing. And I think you've really hit the nail on the head, because that's the key. And this is why I like your process, because at the beginning, if you just do the high level numbers, making sure that the deal stacks up, you can easily filter through [if] this is a good deal or not. If it isn't, then you don't want to waste your time getting someone on site, taking photos, and then find out that it's not going to work. 

  

[00:26:36] So it's a really good filtering process. Because there's hundreds and hundreds of properties out there available, it's just which one makes the most sense and is going to be profitable for us as an investor.

Simon Loo:   

[00:26:47] Just one other quick point to add as well. If you are buying interstate, and let's say you're not using a buyer's agent. These inspections are so important, these visual inspections. I think people often overlook them. Or they may just accept, like, a few pictures. 'Here's the kitchen, here's the bathroom, here's the bedrooms', and that's it.

  

[00:27:11] You really need someone that's on your side. Whether you pay them or not, it doesn't matter, [as long as they're] somewhat unbiased, somewhat unrelated to the property, someone that is not going to benefit [from] you proceeding with a deal. 

  

[00:27:27] So number one, obviously don't rely on agents to do it, the selling agent. If you have a friend or a family member or someone out there, great, maybe you can get them through. And when you do these inspections, really focus on defects. You know about the good stuff already typically, right? A bedroom is a bedroom, a kitchen's a kitchen, a bathroom's a bathroom. 

  

[00:27:49] So taking general pictures is... you can do it, but it's more about the specifics like the cracked tile, or maybe, like, a ceiling stain. Focus on that. Go, 'Why is there a stain on the ceiling? Is it a roof tile? Is a roof leak? Is it a bigger problem that's causing that?' 

 

[00:28:07] Focus on anything tight, open all the cupboards, make sure there's no... obviously with a lot of the cupboards and kitchens and bathrooms, when you get water damage through them, some of them expand, this MDF stuff is some of the cheaper materials that they use. 

  

[00:28:26] So it's so crucial because in property, a small thing can be a big thing. So an innocent looking sealing stain could be something as simple as a cracked roof tile, which costs about $150 to replace and fix. Or it could be like a huge [problem like] you need to replace your entire roof. A $20,000 [to] $30,000 job. I've replaced a few roofs in my time.

  

[00:28:55] So something small and, I guess, innocent, can become a big problem. And it's so crucial. Like, that's why we do the 100 pictures. That's why we really focus. 

  

[00:29:05] And it's jarring sometimes. It's always funny when we send these pictures to clients. The first reaction is often, 'This house is a dud'. But when you put it into the perspective that if the seller is willing to fix everything to a professional standard with invoices and proper tradespeople, or I guess telling them that they're not the fancy marketing photos that you normally see on Domain if you were to look at a house, like these are what all houses generally look like, if you dig deep enough. I think they appreciate the fact that the thoroughness was there at least.

Tyrone Shum:   

[00:29:45] It's like finding the diamond in the rough. Obviously, it's going to be very rough when you first purchase it, which is where our opportunity lies. And as soon as we can come in to actually add value to it or do repairs, whatever it is, it becomes rentable. There's where your add value is. 

  

[00:29:59] And that's why I like what you say, take the actual photos after you've actually done the numbers. If the numbers stack up, great, that's when you go in and do the photos. Because obviously, it'll shock people sometimes if they've never seen these kinds of things before. But you and I have been in this industry for a while now, we expect it. 

Simon Loo:   

[00:30:19] Nothing really surprises me anymore. I think one of the worst ones I've seen was like a family put a fire pit— not a fireplace, a fire pit— in the middle of the living room.

  

[00:30:35] I remember the situation very clearly. They were a family that came from overseas from a... it was like a war torn country. I think it was in their culture in their houses to have, like, a fire pit in the living room. Obviously, they just did the same thing to a house in Australia. So it's funny, there was carpet, and then there's, like, just a dugout pit, and then the ceiling was all black, obviously.

  

[00:31:06] So something like that, I see from time to time.

Tyrone Shum:   

[00:31:11] I'm surprised how they managed to get away with that, because that's not legal. It's very dangerous if something happens and the whole fire catches the house. So how did they manage to get that in without the agent even seeing?

Simon Loo:   

[00:31:24] Well, the short answer is they just grabbed the shovel and started digging without telling anybody. And then maybe at the routine inspection, the agent was like, 'Why is there a fire pit in the middle of the house?' 

  

[00:31:36] So just make sure you do your due diligence, guys. Like, I can't stress that enough. Don't rely on anyone, don't trust anyone. Just make sure for yourself. Even if it's just for you to sleep at night better without those concerns.

Thank you to buyer’s agent Simon Loo, our guest on this special episode of Invest Like A Pro presented by House Finder. 

Also, for being a loyal listener of the podcast, I’ve asked Simon to offer a free 1-hour strategy session normally valued at $500 to help you put together an actionable property plan.

To get your free strategy session, simply visit housefinder.com.au and fill out the contact form, or call Simon directly on 0415 626 342 and quote “Property Investory”.