When buying real estate, knowing what you want means at what price and on which terms you wish to buy the property. But more importantly, what is your “bottom line”?
For the purpose of this article I’ve assumed that you have carried out all your research on past growth, future growth potential, vacancy rates, how much money you’re able to borrow, etc., and you now know what you’re after. Write out your goals before you start and make sure you stick to them.
This preparation is essential and without it you undermine your own efforts. However, not only do you need to have done this preparation, you also need to know, before negotiating on a property, more information on the property itself, the sellers’ agent (if there is one) and the sellers themselves.
You need information
The best way to get this information is to ask a lot of questions. Remember to ask open ended questions and not closed questions. (Closed questions will prompt a simple yes or no answer whereas open ended questions will allow the other person to open up so that you can gain more information). Some fundamental questions to ask are:
Why are they asking this price for the property?
Their answer may show a flexibility about the price. That is, the seller really believes its too high because they say something such as: “I know it’s on the top end of the range, but we’ll listen to offers.” If the price hasn’t been based on recent sales or market value, this will strengthen your arguments when you offer a lower price.
If you have found a property that you like but it isn’t for sale and you decide to approach the owner about selling it, its best not to make an offer to buy it if the seller has not set a price. Being the first to make an offer disadvantages you from a negotiating point of view, as this discloses the starting point of your budget to buy the property. Strategically, its best to ask the seller to tell you what they want. This will generally result in them disclosing their budget and you’re therefore off to a better start in the negotiating process.
If a property isn’t for sale now but could be later, say to the owner: “Look, I know your property isn’t for sale but if you ever decide to sell, would you do me a favour, would you call me first?”
If they say yes (and why wouldn’t they, since the sale would be without agent’s commission?), you’ve just secured an unofficial right of first refusal. And you’ll be the first to know if it comes on to the market.
Who calculated the asking price of the property?
This question will reveal whether the asking price has been based on genuine comparison sales or has simply been artificially set too high by either an unrealistic seller or an incompetent real estate agent.
How long has the property been for sale?
To get reliable information on this fact, ask the real estate agent to give you a copy of their listing sheet. This will usually note the date that they obtained the listing.
Obviously if the property has been listed for sale for some months, the sellers will be softer on their price than they would be if it had just been listed in the last few weeks.
Why are the vendors selling?
From a vendor’s perspective the best answer is,” We’re selling for personal reasons, but be assured that we’re keen to sell”. This will avoid them being preyed on by unethical buyers simply seeking to source properties from desperate vendors who have to sell due to financial distress, divorce, death etc.
However, this question should always be asked, as the answer may reveal an opportunity to negotiate to buy the property which was not otherwise apparent.
What offers have they had on the property?
The answer to this question should tell you the price the property was originally listed at, and how much they have moved down in their price, or, if applicable, at what price the property was passed in at auction.
When does the occupant have to move out of the property?
Are there any real deadlines here that you can take advantage of in negotiations? It may also reveal the real reason for selling the property. A good way to lead into this subject is to ask the following questions: “Oh your not one of those many people who are moving to Queensland too?”
What’s your bottom line/ what price will you really take?
An unworldly or naïve seller or an incompetent real estate agent may reveal their bottom line to you. As a buyer, never reveal your bottom line or what your budget is, as an astute negotiator will take advantage of this and do their utmost to work you towards this figure. Sellers sometimes will not tell you their bottom line when asked this question. Try again by re-framing the question to: “What do you think it will sell for?” This will usually elicit the right response.
What’s included in the sale?
Many times, particularly with a tenanted property, you’ll be advised that “everything is included, apart from the tenant’s furniture”. From a buyer’s perspective, the more that is included, the more you can negotiate away in return for a reduction in the price. From a seller’s perspective, the less that is included the more they can later agree to leave as a concession to a buyer who is attempting to negotiate a lower price. And in this way the vendor might avoid having to lower the price.
How flexible is the seller with contract conditions?
This question relates to the contract conditions such as being subject to finance, pest and building inspections or the sale of another property. A seller displaying a flexible attitude allows you to frame an offer with more conditions than you would otherwise include. You can concede and negotiate away these conditions as part of the negotiating process in an attempt to drive down the price. Hard bargainers often also spend an inordinate amount of time arguing about some part of the transaction.
For example one of my clients always pushes hard for the sale to include all of the furniture or the need for a long settlement, and then gives in on that point in return for a concession on something that really was important to them. This is all part of the art of negotiation.
Is there anything else that is important for me to know?
You would be surprised at what things a seller may volunteer when you ask this question as it invites then to tell you anything that they believe will persuade you to buy the property.
The power of the real estate agent
Investors regularly underestimate the power of the real estate agent. The agent is the only person who deals with both the buyer and the seller. Never take for granted the influence they have in the transaction. In most cases the most powerful person in the transaction will not be the buyer or the seller, but the real estate agent.
As a buyer, never attempt to “back door” the real estate agent by approaching the seller directly as this will only get them strongly offside and encourage them to promote an offer made by another party rather than your offer.
Recently a friend of mine was keen to buy a double block of beachfront land to build on. Properties were in scarce supply. He was visiting the main agent in the area one Saturday afternoon. She had recently told him that the last available double block had been sold and she was awaiting signature of the contract by the buyer.
While he was in her office, that buyer called her to advise her to reduce the price on one of the blocks by the amount of her commission (and add a clause that the seller paid no commission on that block) as the commission made on the sale of the other block was more than adequate to compensate her for her efforts in making the sale because he had put a lot of work into the sale dealing with the sale directly.
She was understandably very upset by his conduct and my friend took advantage of the opportunity by offering to buy the double block for the price the seller had agreed to, but without any reductions (because she was being paid commission on both blocks). That offer was submitted to the seller and accepted. Shortly after, a single adjoining block was sold for more than $1 million over the price paid for each of the other blocks.
The moral of the story is never to underestimate the power of the agent, and never try to be cute in this way with the agent’s commission. To put it mildly, it acts as a disincentive for them to act in your interests.
From a practical point of view, it’s also important to ascertain whether the agent you’re dealing with is the listing agent or the selling agent. The listing agent procures the listing of the property for sale from the seller and is the party that has the relationship with the seller. Ideally it’s best to be dealing with the listing agent, as it’s more likely that your offer will be presented when made to the seller and not delayed or buried because of political or economic forces that may be present within a real estate office. The seller also listens to the listing agent.
Time as weapon
This will be a powerful factor in many negotiations, and often more important than the price. First the seller may have a deadline which you may become aware of through the many questions you ask. They may be prepared to trade off a reduced price for a quick settlement. Time may also be important as the real estate agent’s sole agency may soon expire and they may therefore promote your quick sale for their own personal reasons.
Of course the more you string out the negotiations, the more you find out about the property and the seller. This information can be used to your advantage too. Similarly, if a property really does suit your needs and the price is right, then you might decide not to waste any time and just buy it, rather than negotiate to buy it. Timely and quick action will seize the day.
Recently one of my clients had a keen interest in a property which was put to auction but passed in despite many apparent bidders on the day. The highest bidder at the auction was $1.8 million. I wondered how real the offer was when my client received a call from the agent asking whether they were interested in buying it now at $1.5 million. Offers of $1.5 million and more were made were made to the seller prior to the auction but rejected outright. Now was the time to strike and my client signed an offer to buy the property for $1.3 million cash unconditional, with a quick settlement.
The agent presented this offer to the vendor knowing that if it had been presented prior to the auction it would have been rejected out of hand. Timing can be everything.
Dealing with the seller directly
As mentioned in last month’s article, one of my oldest clients attempts to deal with the seller directly in every negotiation. If there’s an agent involved, he assures them that commission will be paid, however he simply wishes to deal with the seller direct as no one has greater incentive than he has in the transaction. He assures them that he is more than capable of looking after his own interests and I have regularly seen him do so. Agents won’t like it, but if you have competent negotiating skills and confidence in your own ability, then this could be one way to go.
Always put your offer in writing
Under the Agent’s code of practise they must submit all offers to the seller. Therefore ensure that all of your offers are in writing so that they do not disappear between the time you make them and when they’re presented to the seller.
Once a seller has accepted your written offer in writing, then it is no longer possible for you to be gazumped. The property is now yours.
Never reveal your bottom line
It makes a lot of sense to keep your bottom line to yourself and not reveal it unless absolutely necessary to either the seller or the agent. There are a lot of similarities sometimes in playing a game of poker and negotiating to buy a property, so why reveal your best hand to a seller when it’s possible that they may sell to you for a lesser price?
When you get to the stage of having to reveal your maximum price then stick to that price. You lose all credibility when you state that $350,000 is your maximum price, and the seller countersigns at $370,000 and you then offer to buy it at $360,000. A seller will just hold out for the $370,000 because they know that when you told them $350,000 was your limit, this wasn’t true.
To convince the seller that your offer is genuine and final, it’s best to make the last concession and increase in the offer as substantial as you can and to present it personally to the seller if at all possible. You should also impose a strict time limit on its acceptance to give maximum force possible to it.
When not to play games
There are some circumstances when the property is right, the price is right and the other terms match your goals, so why play any games? Until your offer is made, and then accepted by the seller, the property is still on the market and you run the risk of losing it to someone else.
For example, my family operates a storage shed facility at Beenleigh, between Brisbane and the Gold Coast. We’ve recently been looking for a site to construct another storage shed facility and late last month we were approached by someone who had a site they were proposing to develop 12km from our site. It was in a good location and the seller had spent the last year obtaining all town planning, development and subdivision approvals. Construction of the site could commence in eight weeks. The usual lead time from commencement of construction is usually about a year.
The seller’s representative visited us on Thursday. We inspected the site that day and said to the seller that we didn’t want to negotiate to buy the site; we just wanted to buy it. That day, based on the most recent sale in the area, we agreed on what was a real market price. The contract provided a short period for due diligence to check the seller’s representations, followed by a quick settlement. The synergies of building and operating this site with our existing site made the site just right for my family so we simply decided to buy it. Delays caused by playing the game of negotiation could have seen this opportunity vaporise.
Be prepared to walk away
The power will be with you if you’re prepared to walk away from the transaction. For example, a client of mine was looking to buy a property that was on the market for $2.5 million. It went to auction and was passed in without reaching the reserve. My client then made an offer to buy the property for $1.2 million and was advised by the agent that if they would go to $1.25 million they could buy it.
They increased their offer to that figure and the seller responded by saying that they would sell it for that price provided that a lot of items that were offered for inclusion in the sale (such as home theatre) were retained by the seller. My client simply walked away. The seller then advised that they would now sell it for that figure including those items. My client’s response was that if they wanted to sell for that price, not only would the house include all of the items offered with the house, but would also include the benefit of a golf club membership (worth $20,000). The seller agreed. Such was the power of being prepared to walk away.
This article was first published in Australian Property Investor Magazine and is copyright and reproduced with their permission.
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