When you make your offer on a property there are a few things to keep in mind to give you the upper hand in the negotiation.
These are just as important in the current market as they were during the times of the property booms.
So, let's look at some tactics that should help you.
1. Substantiate Your Offer
Provide an explanation for your offer.
For example, your first offer might be based on the lowest recent comparable sale of a property in the area, less an amount of say $20,000.
You would then justify this discount based on defects in the property you’re buying or how the market has changed
If you get to the stage of making counteroffers, attempt to validate these counteroffers in the same way.
This will give you negotiating more credibility and force.
The reason that it’s important to have a rationale to support your offer is that this affects the seller’s expectations about what you’re prepared to pay and usually will soften their response when they make a counteroffer.
2. The Amount Of Your First Offer
It’s here that the importance of good preparation shows its real value.
Making an offer that is too “low ball” can sometimes insult a seller.
This could prompt them to refuse to deal with you after that.
The amount of your first offer is a balance therefore between the desire to secure the property at the best price possible, and presenting an offer that is credible, but without being offensive to the seller.
This is where it’s important to have some rational basis for the offer, as discussed earlier.
3. Beware Of Splitting The Difference
A sale price is often struck by splitting the difference between the seller’s lowest sale price and the buyer’s highest offer.
Beware of this strategy.
For example, if you make an offer to purchase a property for $700,000 and the seller wants $800,000, the first person to offer to split the difference will usually be the loser.
If you as a buyer offer to split the difference by increasing your offer to $750,000, the seller’s classic response will be to offer to split the difference between the offer of $750,000 and their price of $800,000.
In other words, you pay $775,000 and not $7500,000.
The better approach is to increase your offer by small increments.
For example, offer $725,000 with your next offer after that to be $740,000 and your offer after that to be $750,000.
Each offer should go up in decreasing amount as this suggests to the seller that you’re running out of steam and they had better accept your offer.
And I would not increase my offer until the vendor came back with a counteroffer first.
As part of this strategy, it’s also wise to delay making the next incremental offer, as this adds to the impression that you’re running out of momentum.
As a negotiating strategy, the only time that you would offer to split the difference first was when your first offer was so outrageously low that the figures are already stacked in your favour.
4. Authority
A clever negotiating strategy is to say you can't increase your offer without referring to another "authority."
Tips: This tactic can be used to extract further concessions which wouldn’t have been made because the other party thought they’d concluded a deal with the person who had the authority to make the decision.
Using this tactic gives you time to think about the offer and gives you a second shot at it.
I usually throw this tactic in towards the end of the negotiation process when other concessions have already been made.
Be careful not to say you need to ‘check with your husband or your wife’ as this sounds very ordinary and weakens your authority.
It’s much better to say that you need to check with your fellow director or your business partner or your broker.
5. Negotiate The Conditions
Agents operate on the principle that “yes is less.”
That means the fewer conditions and the fewer matters that are dealt with in your offer, the greater the chance they have of getting a yes from the seller, and an acceptance of your offer.
But you shouldn’t work on the same principle.
Note: From your perspective as a buyer, a simple offer to buy a property on a 10 per cent deposit, settlement in 45 days, cash unconditional, will work against you, as the only thing you can negotiate over is the price.
In this example, experienced negotiators might make their offer subject to finance, pest, and building inspections with say, a 120-day settlement and a much smaller deposit with as many inclusions as possible in the sale.
This will allow them the opportunity to negotiate away some of these matters, ultimately arriving at a settlement with a 10 per cent deposit, 45-day settlement, but at a reduced price.
6. Using Conditional Clauses
Many people add clauses to their offer, such as making it subject to a pest and building inspection and then attempt to use these clauses to drive the price down.
I remember being told of a purchaser who bought a property subject to a pest and building inspection and advised the seller that as the building inspection revealed a number of building defects that had to be rectified, they would proceed with the purchase but only if the price was reduced by $15,000.
Unfortunately, for the naive buyer, this seller was present when the building inspector conducted the inspection.
The inspector had advised the seller that the house was in pretty good shape for a house of this age, other than needing a bit of minor work.
The buyer’s attempt to drive the price down by using the pest and building clause was transparent and destroyed the goodwill between the parties.
Apparently, the buyer was “just having a go” and proceeded with the purchase anyway.
The seller repaid the buyer’s ruthlessness and lack of sincerity on the settlement date when the buyer asked for approval for their removalists to move the furniture in at 11 o’clock in the morning, some four hours before the agreed settlement time of 3 pm.
The seller refused, as they were entitled to, as settlement had not yet taken place and the buyer had to pick up the cost of the removalists standing time for four hours until they could get access to the house.
There is therefore a real danger in using these clauses to lever down the price.
However, there is one clause that you can genuinely use to do so.
Note: That is, make the contract subject to a valuation.
If the valuation does not come in at the purchase price then you can provide a copy of the valuation to the seller and genuinely ask for a reduction in the price.
“Subject to valuation” clauses are one of the few clauses you can use to genuinely lever down the price – a small negotiating point that can become very big where you’re looking to achieve a win/win situation from the negotiations because of a continuing relationship between the parties after the settlement.
7. The Big Deposit Myth
All too often people try to make their offer as enticing as possible by attaching a large deposit cheque for 10 per cent of the purchase price.
The flaw in this strategy is that most people negotiate to buy a property subject to various conditions (pest and building report, sale of another property, finance, etc.).
The power of attaching a big deposit is lost or watered down substantially by these conditional clauses.
- Also read:How much of your income should you spend on a mortgage?
- Also read:Pre-settlement inspection guide: what to inspect, why and when
- Also read:The offer and acceptance process when buying a property
- Also read:Caveats – The Red Flags of Real Estate
- Also read:How much you need for a house deposit in each Aussie city
You might as well put down a token deposit (for example $1,000) till the conditions are all satisfied and then pay the balance deposit up to 10 per cent.
8. Be Careful What You Say
Be careful about the comments you make in relation to the amount of your offer.
The following statements can work against you:
This is my highest offer!
This is the most that I can pay, take it or leave it!
If the seller doesn’t accept this offer, you can’t then credibly go back and make a higher offer.
The seller will get suspicious because you have just told them that you couldn’t go any higher.
Statements like this undermine any trust that you may have with the agent and the vendor and are counter-productive to the negotiating process.
Avoid them unless they are absolutely true.
9. The Ghost Theory
Potter says,
“I always use the ghost theory. I always tell the agent the I’m looking at another property through another agent and of course, given the confidentiality of dealing with agents I cannot mention the agent or the property."
“I’m always confident that the agent then passes this onto their client, the vendor, and creates the impression that I’m not too keen a buyer. This levels the playing field.”
10. Wait For A Response
Patience is a virtue in negotiation.
Once you’ve made an offer it’s important to wait for the seller’s response.
If they won’t respond to your offer, then walk away.
Tips: Don’t be tempted to make a further offer without hearing from the vendor.
To make another offer is to send a strong message to the seller that you’re keen and they will probably take advantage of you.
11. Get Something In Return
Likewise, don’t make a concession in the negotiations without getting a concession in return.
12. Take Your Time
Never say,
“Let’s cut to the chase”
Remember you must play the game so that the other party feels that they’ve gotten a good deal.
Statements like this send a clear message that you’re over-willing and over-keen and you could end up at the bottom of the food chain, consumed by the more experienced and sometimes predatory negotiator.
13. Negotiating For A-Team
If you’re negotiating to buy a property on behalf of a group of investors or on behalf of a joint venture, remember the “divide and conquer” rule.
That is, don’t let the seller divide and conquer you.
Tips: Make sure all negotiations are through one person only and appoint one person as the spokesperson for the group.
In reverse, if you have the opportunity and talk to each of them about the property and ask questions of each of them.
You have your best chance of getting to the truth by doing so and you’ll gather more information about the property to help you with the negotiation.
14. Don’t Attack The Property Or Seller
Never get personal with the negotiations.
For example, you wouldn’t describe the property as a “dog box”, a “demolition job” or a “haven for drug dealers and prostitutes”.
None of these comments are likely to achieve a reduction in the price.
You’re better served if you advise the seller that the property clearly has potential, but it’s obviously in need of work to bring it up to its best condition (which will cost say $40,000) and your offer is adjusted accordingly.
A local investor was recently looking at a property that I owned, which was in a great location, but not up to standard with the other mansions around it.
Instead of telling me that my house was a “bulldozer job” he cleverly told me that I was the owner of a great property in a great area, but it was under-developed and we needed to start again.
I left the negotiations feeling good about myself and the property rather than being resentful of him and, as often is the case, determined to sell it to anyone else.
Potter says, “I never bully and always try to be an empathetic listener.
I also never look too urgent to do a deal.
I try and promote myself as an empathetic listener who is ready to do a deal, but not desperate to do so.
“I like to be empathetic because buyers are easy to deal with if they feel that they have been heard and listened to. Let them talk as much as they want. And just listen (without responding), as often when they start talking they simply run themselves out and talk their own arguments out.”
Another typical comment that doesn’t do anything to promote the negotiation process is: “Don’t be offended by this offer, it’s not personal”.
To which the other party will always respond “Yes, it is”.
15. Creating Doubt
If you’re confronted with a seller or an agent who is also a hard bargainer then the best approach to their stance is to create doubt.
That is, do your best to create doubt about the value they’ve placed on the property.
For example, use comparative sales data, or reports from independent experts such as Residex, Matusik, and BIS Shrapnel about trends within their area and State.
15. Ethics
All hard-bargaining negotiation has to be tempered so that you feel comfortable.
For lawyers and agents involved in the process, there are ethical and professional guidelines that prevent them from lying, making misrepresentations, or being involved in misleading or deceptive conduct.
The bar is not set as high with investors, however, there have been many cases involving real estate sales where the parties themselves have been found guilty of misleading and deceptive conduct in breach of the Trade Practices Act, or held to have committed unconscionable conduct in taking unfair advantage of the other party in the transaction.
There is no excuse for ruthless and unethical behaviour by anyone.
Tips: Remember, it’s usually only about money, and money isn’t everything.
That’s true, but also remember it’s right up there with oxygen – that is, try living without it.
ALSO READ: Making an offer on a property – What price should you offer?
