I'm Jeremy Sheepard. >> And I'm Daniel. >> We use data to expose deceitful property experts and their marketing BS. >> This is the expert busting series. >> This is episode 18 of the expert busting series, buying under the median. Why it doesn't give you an edge.
>> Yeah. So, there's lots of industry professionals, maybe not lots, a handful of industry professionals I've heard say that investors should buy a property that is valued below the median for the suburb they've targeted to invest in. And the idea is that the median is supposed to drag up the value of the property that you've just purchased. Uh and the idea is you've you're comparing the cheaper property to more expensive properties or the median. The thing is those valuations of a property are not based at all on the median. The median just does not come into consideration.
Uh so the suburb median has nothing to do with the value uh of any property and it doesn't matter what the median for the suburb is. the property will be valued based on a comparison of that property to recently sold properties with similar features nearby. So the only thing that will drag the value of a property up is recent sales of similar properties in the same vicinity. >> Well, for all the listeners, what is the median, Jez, and how is it calculated? >> Yeah, so the median is just the middle figure from a range of sales results over a certain period of time. Quite often you'll see this on uh real estate.com.au, domain.com.au.
A lot of the free data you will see them list a median. That's usually a 12 month median. So all the sales over the last 12 months could have been 50 sales. Uh market could have moved in the last 3 months, 6 months, whatever. That 12 month median is the middle figure when you list all those sales results in order. So if they range from a million to 500,000, somewhere in the middle there.
It could be 600,000, could be 750, could be 800,000. Whatever the middle figure is, that's the median. >> What if you only had two sales over the last 12 months? So let's say you had a million dollar sale and a $300,000 sale. >> It's the combination of the two, the median would be 650,000. So it's the average of two.
So whenever there's an even number of sales, two, four, six, then it's the those middle two sales, the average is taken and that's the median. And ideally, you want to be seeing a higher volume of sales, right? Or there's just more reliability in the data if there are more sales. >> For the median to be more reliable, you need more sales. And that's why these free resources have a 12-month median because it includes more sales. But if the market's moved, then it could be out of date.
Yeah. So, it doesn't matter what you think the property is worth. What matters is the valuation or the sale price. and the bank will base their valuation on recent sales of similar properties nearby. >> Uh and similarly, when a buyer is trying to figure out how much they're going to offer to buy that property, they're doing the same thing. Uh when a selling agent or a buyer's agent is trying to estimate value, they do exactly the same thing.
They look for recent sales in the vicinity of a similar nature. uh a professional valuer hired by banks to value a property. They will estimate based on those three things and this is called a comparable market analysis. If the property didn't sell recently, well, it's not considered comparable. If it was miles away, it's not considered comparable. And if it's nothing like the property being valued, well, obviously it's not comparable either.
So every property is valued based on its merits on an individual casebyase basis. If a property is valued less than the median, then it's for a good reason. Uh the median doesn't drag anything up or down for that matter. So a property will be valued higher if it has maybe something special. Maybe it's on a bigger block, maybe it's in a quiet street, maybe it's double story, it's um uh recently renovated. So properties are valued higher for good reason, not simply because uh they're they're cheaper than the median.
They're dragged up by the median. So valuations valuations simply do not consider the median. Okay, buying below the median uh is not a good strategy for a few reasons. Uh there could be all sorts of reasons why a property is under the median. Uh could be on a tiny block of land. uh could be in a Greenfield estate on the fringe of suburbia, could be surrounded by loads of developable land.
Cheap does not mean good value for property. And a novice investor might think they found a good deal simply because the property has an asking price that's under the median. Uh but they may may end up paying too much. And that's because it's possible for a property under the median to be overvalued and for a property be over the median but to be undervalued. For example, uh property A on the left of this uh infographic, it's listed for sale at 550,000. But what if the land is valued at 350,000 and the dwelling on top of that land is valued at 300,000?
then the property is massively undervalued. However, the median for the suburb that's the just have a look at the middle of the graphic there is 500,000. So that's 50,000 less than the advertised price of property A. On the other hand, property B that's on the right side that's for sale at an asking price half that of the median. But what if the house needs to be demolished >> and the land value is only 250,000? Well, in that case, the property might be 50,000 overvalued.
So, buyers, agents who are on the ground, they're operating in the area every day, that's their full-time job. They're intimately aware of value for money, and they absorb a lot more details than any part-time investor can ever hope to. Selling agents, it's the same thing. Uh, of course they're not going to tell you. They're not on your side when you're a buyer. So, the problem is if you focus on buying under the median, you may think your work is done if you simply buy cheap, but instead you need to dig deeper and find out what that property is really worth.
Also, if you focus on buying under the median, you're going to ignore half of that market. By definition, the median is halfway along that list of sales. So, if you uh are obsessed with this buying under median, you're going to ignore half the market. So, you may miss a property that is uh really great value for money simply because it had a price tag uh above the median. And in hot markets where supply is limited, there's high demand, the advice to buy under the median could actually double the time that it takes you to find uh a property because it halves the number of properties of interest to you. Uh and in hot markets where demand exceeds supply by a cracking margin, >> uh it's really hard to get a foot in the door and every week matters.
So instead of it taking say a month to secure a property, it might take you two months. Now if property's climbing by 2% a month in these sort of hot markets and we're talking, let's say it's $500,000 property, then that advice has just cost you $10,000 because the delay an extra month 2% that's for 500,000. If it's a million dollar uh property market, then it's even more expensive advice. Uh and on top of that is the cost of hiring the fake expert uh with the bad strategy and who knows what other bad strategies they follow as well. >> I think it's just a ploy, right? Just to get the the clicks and >> yeah, it's like a clickbait thing.
It's a pretend experience. >> The the problem is I think that as an investor, you can read it as oh this person knows what they're doing. They're a professional. uh and then when they you know go to a professional organization or a BA firm and go I want to buy under the median like that's my answer I has to let's say the median's 500 I don't want to go above that you got to remember it's always priced in the assets and I know we're going to go through it um potentially >> shortly but it's like there are markets or maybe we can go through it now we can look at so if we have >> let's have a look at an example >> so that there can be a wide spread of >> uh results sales results so for example let's just pick um let's just go West Meadows for example in West Meadows in Victoria. West >> this is in Melbourne. Yeah.
>> Yeah. Victoria. We'll just go houses. We'll say let's just say the last 3 months. You go back a little bit further because if you don't have a lot of sales results, the values potentially may go back a little bit further. Um but sometimes banks will just get a proper bank vow.
They won't even get someone out there. And you can actually challenge them. You can say look there's some recent sales. So let's say you know your property is worth around 900. They give you a bank value of 850. You could go back saying well look there's some of these recent sales I've done that in the past and they revalue the property back at 900 for uh myself to be able to pull that equity out.
So I challenged them. I did my own quick check because it's all >> And you showed them the addresses of these properties. >> Yeah, I just showed them and said look do a quick search on um >> but you didn't send them the median did you? >> Didn't send them. That's all right. You don't Yeah, I don't really look at the med.
We'll look at the nobody does >> typical value, but let's have a look. So, we got the the maps and as we know, >> where is this in Melbourne? Can you just >> So, if we go back, I think it's near the airport. So, right near the >> the Melbourne airport, >> just east of the airport. >> We'll zoom in. So, like let's just say and look, we're not familiar.
So, we're just going off the >> um off the cuff here. But if we have a look, so we got $840,000 sale, $690. They're pretty much like what almost side by side, right? So, it could be due to the age of the asset, maybe there needs to be a lot of work done, maybe the block sizes, but they're pretty much right next door. Um, the other reason is you factor in bedroom count and also bathrooms. I think that has a pretty big play also when you're doing these comparables.
>> Do they sell at similar dates? Can you just show that again? >> Yeah. So, what we sold sixth of October. There you go. >> Two days apart.
>> Yeah. Let's >> over $100,000 difference >> on the same street. That was that was good to find straight away. example. >> It's a 690. Let's just jump in the property.
>> It needs a bit of work. >> Condition. Okay. >> So, it could be condition dated, but it's all right. >> Look, there could be structural problems. Okay, there you go.
>> There could be structural problems. So, it's on 556. Abnormal block size, too. >> Yeah, the shape of the blocks a bit. Small frontage. >> Um, looks like it's on a culde-sac, though.
And then if we just jump into this other one, >> a lot cleaner, renovated. So, there you go. Right. Side by side. And I'm guessing >> very similar block size. So 537 versus a 56.
>> Yeah, similar. >> Okay. But I think the purpose of this is like you can go into that same suburb. You've got a 975 sale. >> You've got one near um looks like it's maybe a could be potentially >> double story or is that a townhouse? >> Looks like a townhouse.
So town houses in the data can filter through to houses. Correct. Yeah, this one would be classed as a unit for the area because it's only got two bedrooms. >> Two bedroom. Is there plans to somehow eventually get town houses? >> Uh the problem is there's such a small sample size.
Whatever data you read from it, oh this is houses, this is town houses, this is terraces, this is villas, this is it's just going to be rubbish. >> You've got a $1 million. So it looks like it's on a bigger block. So again, we're just contact agent $850 1.3. So you can see we've got a suburb here with a range, >> a big range, right? So for me, we do have a Renault flip score where if you are looking at potentially doing a renovation, that gives you a widespread of typical sales, right?
So you can maybe gives you the opportunity to find markets that have a potential to do a rena flip, right? So you can buy down those you can buy those rundown properties and fix them up potentially. >> Yeah. If there's a uh really narrow range, like only between 800 and 850, how you going to do a Renault? You've got nothing to compare it with that's more expensive. But if you've got a broad range >> of like 600,000 to 1.2 mil, then there's more chance.
So that's that's what the spread is. >> You've got 600 sales. So there's a >> make it cheaper over to the east. >> To the east, you got 700. >> This is the same suburb. >> Same suburb.
Let's just bring up like let's say uh let's bring up this one over here. What's this? 706. >> That's >> Yeah. >> Tannos or duplex. >> Let's see.
We could just filter out by block size. Let's just go 500 minimum. Right. Okay. So, that cuts out a little bit. 610 690.
>> It's quite straight. >> Quite straight. >> It's [clears throat] still very cheap. >> Cheap. Let's have a look at this one over here. >> Bigger block.
>> Bigger block size. >> Decent condition. >> Decent condition. So, like again, there's so many variables to it. could have um maybe the further that you're going might have that bit of that stigma. You may be closer.
I don't know, Pascoal Road might be a little bit noisier. >> Dallas, >> you might hear you got >> Does Dallas have a stigma? >> Uh more of the I think the public housing around there. So again, that might filter through to that site. Again, we don't know until you spend a lot of time doing your own due diligence, but you've got all these factors that um that you have to dive into a little bit deeper. So, you've got that suburb part, but then you've also got to overlay that with what's that property worth when you're actually going in because you can easily overpay.
But in a hot market, like you said, 2%. >> Yeah. It's going to cost you >> in a $500,000 typical value market, you know, it's growing by $10,000 and that happens 105,000 20,000 a month in growth. So, don't get so caught up on >> on the property. Um, but yeah, I thought I'd just flag that. >> That was a good one.
you found two two very similar properties um well they weren't so similar were they but they were they sold uh on the same date they're in the same street they they're in different condition so that was a good example >> and it's normal though to see a big range of different sale prices right in the data >> like within the suburb >> oh yeah >> it's not super consistent >> can you just back up one more slide I just had a couple more points about this one >> um so What if the median is inaccurate? Um, so this happens like we were just saying in thinly traded markets with only a handful of sales u during say a month for example. Uh you could by chance only have a bunch of sales of cheaper properties one month, the next month they're on the other side of the tracks or they just happen to be more expensive. There's nothing that's been coerced by agents. It's just coincidence. And so the median can jump up and down from month to month.
So if you're looking uh at the median and you're and it happened to be a cheap month where there's a whole bunch of properties that sold during that cheap month, you may then go looking go shopping for a property that's under the median. You can't find one. So there's another month that's wasted until you get a a new median. So first of all, there's there's issues with missing out on half the market. Secondly, there's issues with uh the median. Uh, in fact, what if it's the other month where there's just a whole bunch of expensive properties that have sold?
>> You then go and buy a property that is that was under the median for that month, but then next month it's it's over the median. So, you've you've sort of shot yourself in the foot if this strategy worked. So, yeah, if you if you look at a reliable median over 12 months, you've got another issue. So, I mentioned earlier that um those free data sources like real estate.com.au, domain.com.au, they show a median, but it's a 12 month median. So, if the market's moving and you're looking at a 12-month median, you're trying to buy under the median. There's not going to be anything that's that cheap.
It's already out of date by at least 6 months >> because of the lag in the data. >> Yeah. Because the lag in the data for for sales results for starters and the fact that it's a 12 month median, not an up-to-date median. Is there a way they can smooth it out a little bit? Like we use typical value. That's the way that we smooth it out.
>> Well, their idea of smoothing is taking over over 12 months. So the there's only two dimensions that you can use to to get a larger sample size. You can either back up with more history or you can spread out with uh a wider geography. >> Yeah. Because I would think you'd have a bit more of a waiting, right? So maybe more recent sales would have a bit more bearing on maybe I call it typical value but the medium but they're because they're looking at the last 12 months it's tricky.
>> We do some fancy things with our typical value to try and bring it more up to date but the free data sources it's just a 12- month median and that's yeah that's going to give you loads of problems. >> All right so uh here's a hypothetical uh thought process to show just how silly this advice really is. Uh so imagine if the median did drag up the value of cheaper properties >> then for the exact same reason the median must also drag down the value of expensive properties. So imagine a suburb with a tremendous diversity in houses. Uh one property might be on a small block on a busy road next to a petrol station. Another might be on a large block in a culde-sac next to a nice park.
uh eventually if this advice to buy under median is correct then both properties should end up with the same value because of this dragging phenomenon. Right now I didn't bother going and having a look at the database to see if that's the case. Uh I don't think I really need to perform that sort of research for everyone to know hey it just simply doesn't happen. So you can see just how silly this advice is. How it just doesn't make any sense. You only have to think about it for a couple of minutes.
But if a novice investor was listening to this sort of advice, they could be fooled into believing, oh, this is an expert. I should engage their services. I'm going to be much better off than doing this myself. Uh, probably not. Probably an eeny meeny miny mo approach might be better. Uh, so there's a lot of marketing dressed up as education, a lot of fake experts getting in the face of novice investors, uh, taking advantage of them.
Uh, and this is just one of those. So, um, yeah, just just keep an eye on marketing, uh, that's, uh, really just dressed up as education. It's not whether you buy above or below median has nothing to do with your property's performance, either in the short term or the long term. What matters is finding a market where demand exceeds supply. U, there's only one piece of value that investors can glean from this sort of advice. This this advice to buy under the median.
The only benefit you get from it is that it clearly identifies a fake expert. So if you've heard this advice, uh you just flag them as a fake expert. And if you know an obvious investor who might be trapped by this sort of nonsense, uh do send them a link to this video. Um let them know that this doesn't work in practice. It's just rubbish. >> And I think it's more misleading, right?
It's misleading. >> Totally misleading. Yeah. It's just it's just a a fake expert trying to pump themselves up as a real expert. Um they've dreamt up this this part piece of advice. And I must to be fair, a lot of experts do not uh give this advice.
I just heard it from a couple and thought, "Yeah, it's time for an episode." >> And I think the the purpose of this series is for all of us [music] to grow, right? Like we're still learning. We want to get better. And that's a whole idea. And I think share it with other professionals so they're also aware that before they put a post on like this or buy under the median [music] that they don't mislead people. I think that's the whole purpose of this.
We all want to grow together. So uh good episode Jeremy. So next up in episode expert busting episode 19 desirable [music] areas why they often deliver the worst capital growth. Thanks for watching.