How to negotiate like a pro and tip the odds in your favour!
This blog follows on from my two previous blogs which provided a thorough overview of how to conduct due diligence on both the market and your identified property. If you’re now at the stage where you’re confident the property ticks all (or enough) of the boxes, then it’s time to make an offer!
The next stage of the process is just as important. How do you approach the negotiation process to ensure a swift close at the best possible price?
I touched on a few negotiation tactics in a recent blog. Here I’ll discuss the process and approaches in more detail. (Note: this blog relates to private sales only, not auctions).
Step 1: What is the maximum you are prepared to pay for the property?
It’s important when entering negotiations to know the maximum price YOU are prepared to pay for the property – regardless of the asking price and the level of buyer demand. As I’ve said before, this is an investment. It’s not your home. Its purpose is to make you money, so you need to know your price limit and stick to it.
Having done your market due diligence, you should already have a very good idea of the local market conditions and the level of demand for housing in the area. This, along with detailed information on the property itself, will help you determine what you believe its real value to be.
Markets around Australia have seen a pivotal shift in recent years. Currently, there is a growing belief among industry analysts that top performing areas such as Sydney, Perth and Darwin may be reaching (or have reached) their peaks. We could start to see these markets shift from sellers markets to buyers markets, which is great news for investors. Other cities and regional areas on the other hand will be entering new growth cycles.
Information you need to determine your maximum price:
· Number of houses on the market vs number of sales – hopefully you’ll have this information from your market due diligence. An increasing number of listings and a decreasing number of sales indicate lessening buyer demand which places you in a favourable position to place an offer under the asking price.
· Property data reports – Consider utilising RP Data’s property report service where for around $40 you’ll get an estimated value and full property sale and listing history (where available). It will show how long the property has been on the market and if the price has been reduced during this time. It will also include recent sales and suburb statistics to give a complete view of the local market.
· Independent valuation report – consider appointing an independent valuer to value the property.
Take all this data into account and set your maximum price. This will then help determine your first offer. This information is now your best negotiation weapon and you shouldn’t be afraid to use it during the negotiation process to support the offering you are making. Have complete confidence in what you believe the property’s value to be and back it up with the facts.
Step 2: Have you secured finance pre- approval?
Agents and vendors love buyers who come prepared and mean business. Obtaining pre- approval can take less than 48 hours and a vendor is much more likely to accept your offer if you have been pre-approved – it will ensure your offer gets to the top of the pile if you have competition.
Step 3: What do you know about the vendor?
Find out as much as you can about the seller. Ask the agent these questions so that you have the full picture before placing an offer.
Questions to ask the agent:
· Why are they selling?
· Is it an urgent sale? If it’s a distressed or urgent sell, this will place you in a particularly strong position ahead of entering negotiations.
· What are the seller’s ideal terms? Being sensitive to their preferred settlement terms could help you negotiate a better price and/or put you ahead of the competition. Price isn’t always the only motivator!
· What interest has there been in the property?
· Have offers been made? How many? On what terms?
· How many sale contracts, building reports and inspections have been requested/completed?
These last three questions will give you an idea of the level of buyer interest.
Step 4: Making your first offer?
Asking prices are generally set to accommodate negotiations; agents fully expect buyers to make their first offer below the asking price. Where possible, try to make the first offer so that you control the negotiation process and have the last right of response.
· In a sellers market, placing your first offer close to the asking price is fairly standard. Where demand is particularly high and time is of the essence, consider going in with your best offer straight off the bat and sticking to it.
· In a buyers market, some investors will start off as low as 20% below the asking price. Bear in mind that going in too low can cause the vendor to shut you out. Make sure you back your offer with your supporting data.
Whatever the market conditions, don’t let the agent know you are too interested. Advise them that you’re considering multiple property options and intend to make a quick decision. This shows the agent that you’re a serious buyer and they may miss out on the sale if they don’t move quickly to bring the deal together. Always show that you mean business by presenting your offer in writing with a 10% deposit cheque.
Step 5: How to close the deal?
The agent will relay your offer to the vendor and then let you know whether it has been accepted. You may need to revise your offer several times before you come to an agreement.
· In a sellers market, one tactic to close a deal quickly is to set the timeframe in your favour. This aims to put pressure on the vendor and remove the opportunity for further offers and more competition. Place a 24 hour expiry clause on the contract requiring the vendor to begin negotiations with you within that timeframe or run the risk of missing out.
· In a buyers market, if you’ve gone in low, make sure youleave room to move. If you know the seller’s ideal terms, use this to gain an advantage by offering better terms if other parties should come to the table.
Just remember, you won’t win the game every time. Rather than feel disappointed, feel empowered by the fact that you knew when to walk away, ready for the next ideal buy!
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