John Edwards of property forecaster Residex says that if you pay just $5000 too much for a property, borrow the monies from the bank and pay them back over the usual 25-year term, you will have paid back the bank an additional $50,000. But what if you pay $20,000 or $30,000 too much? If you think about it this will leave you with that lingering and sinking feeling in your stomach that will put you off playing the property game.
It is therefore no exaggeration to say that negotiating is the most important skill of all for a property investor. I personally like Robert Kiyosaki’s philosophy that “if you can’t negotiate then you will never get rich and you will never get laid”. Think about it – it doesn’t get much worse than this – no money and no sex.
So let me follow on with this theme and see if I can make you a better negotiator.
I was commissioned on behalf of a company to negotiate and sell a “hot” commercial building on its behalf. The other directors of the property thought it could achieve a sale price very close to $4 million.
I engaged a successful commercial real estate agent and agreed to pay him a going rate of commission of 2 per cent of the sale price. He said to me that he thought that he could achieve a sale price as high as $4.2 million and asked me if I’d be happy with that price. He therefore suggested a different commission structure (as per Table 1) that would really give him some incentive to achieve such a high sale price.
He calculated that this structure meant he got paid approximately an extra $20,000 for every extra $100,000 in the sale price.
I said that sounded fine by me as long as the incentive worked both ways and not just at the top end (and in his favour only). Thus, I suggested the structure set out in Table 2 as one that was fairer for my client company.
My suggestion stopped the agent in his tracks. I don’t think anyone had ever put such a commission structure to him.
As Shakespeare said in Hamlet, he had been “hoisted by his own petard”, meaning injured by the device that one intends to use to injure someone else. But how could he not agree, as it was essentially fair to both him and the company and not just a one-way street as was his suggested commission structure. What is good for the goose is good for the gander.
Table 3 sets out the outcomes of the different commission structures on a sale of, say, $4.2 million ($300,000 more than the owner was expecting).
It is worthwhile carefully studying the above figures so that you truly understand how the incentive with the agent works. With my structure of commission the agent is given a great incentive to achieve a sale price of $4.2 million and in fact the commission payable is almost double the commission payable on a sale price of $3.9 million.
The property eventually sold on the night of the auction for a price of $3.85 million. Commission was therefore payable at 1.5 per cent ($57,000). Under the agent’s original proposal, commission would have been 2 per cent ($78,000), thus resulting in a saving to the seller of more than $20,000.
Offers before auction
A regular dilemma facing the many thousands of Australians that auction properties each year is this: What to do if an offer that comes close to the price the seller wants is made in the week or so before the auction.
The agent asks you whether you want the buyers to submit the offer in writingso you can try to work them up to the price you’re after.
The danger and the dilemma for the seller is that in doing this it could be that the buyers don’t come to the price you want, the offer is rejected and then they don’t attend the auction because they feel it’s a waste of time. Another negative of this approach is that in the process of negotiating through written contracts before the auction you end up disclosing to the agent your bottom line, that is the reserve price that you would have put on the property at the auction. (It is almost a golden rule that you never disclose your reserve price to the agent until just before the auction commences).
I received a call recently from a client seeking guidance on exactly this situation. His potential buyer was the only person who had made an offer on the property with only a week to go till the auction. From my discussions with him and the agent, although there were other interested parties that would be at the auction, this buyer was likely to be the one that would pay the highest price for the property. On balance I suggested that it was best to reject the verbal offer and get the buyer to the auction. Through the auction process he would be more likely to pay the price that the seller was asking.
In my experience the only exception to this strategy would be if there were other potential buyers at around the price that was being offered and who would also be there at the auction. Therefore, if you lost this buyer through the pre-auction negotiation process there would still likely be others who would attend the auction.
As for disclosing your reserve price to an agent before the auction the only exception to this rule would be if you were dealing with an exceptional agent. How do you know that you are dealing with an exceptional agent? An exceptional agent would be someone who works exclusively in your area, is easily the dominant agent in that area and who has achieved that status because they regularly achieve record prices for properties on behalf of sellers. You might disclose your reserve price to such an agent in the knowledge that they’ll use that information for your benefit, rather than against you.
A novice investor called me to sign off on a pest and building report. He was delighted with the outcome of the report and was pleased to tell me that the inspector’s backed up the physical check with a thermal imaging scan of the property.
This meant that for an extra $120 the inspector carried out a thermal scan (X-ray) of the property.
The scan showed up areas that may have been water-damaged but covered over cosmetically by new carpet or a coat of paint. These areas will still have residual dampness which will show up as blue in colour on a scan but will be undetectable to the naked eye. Similarly termite areas show up on these extremely sensitive scans as red because of the energy generated from the activity from the termites.
“How good is that?” was his comment to me. “Why would you spend hundreds of thousands of dollars on a property and not pay the extra $120 for this scan?” I agree.
This article was first published in Australian Property Investor Magazine and is copyright and reproduced with their permission
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