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!
Conduct due diligence like a property expert in 4 easy steps
I’ve blogged regularly on the importance of research and due diligence when investing in property.
Risk is one of the biggest obstacles to investment for many property investors. Everyone has different comfort levels – some of us are prepared to take greater risks for greater returns, others are happy with lower returns if it means lower risk.
Risk assessment is a critical element of the purchasing process, but how many of us really undertake comprehensive due diligence?
It’s common for investors to get caught up in hype or act hastily out of fear of missing out. As a result, they skip over or rush through their market research and property assessment.
For others, a full understanding of the risks, getting comfortable with them, knowing the worst case scenario and how they would deal with it is the only way they can overcome their fear and take the plunge.
Risk evaluation can seem a very daunting thing. I have provided comprehensive lists of research areas in past blogs. This time, I thought I would suggest a more simplified due diligence process to help make it more manageable. I have split this into two parts. This blog covers the first part – market due diligence. The second part will cover property due diligence and will be the subject of my next blog.
Right, you have your deposit, you know your borrowing capacity and you have your investment strategy in place. You’ve done some initial groundwork and, depending on whether you’re seeking cash flow or capital growth, you think you’ve identified some potential markets. Now it’s time for the nitty gritty.
The four questions to ask yourself when doing your market due diligence:
1. What will drive market growth?
For our investments to deliver us strong yields and/or capital growth, we need demand for accommodation in our chosen area to outstrip supply. This requires us to identify some solid drivers of sustainable population growth. Local and state governments often publish economic reports on towns, cities and suburbs which provide population and housing projections and predict shortfalls. This information is useful but make sure you look at what factors they are using to reach these predictions, when the reports were published and if they match up with your own research outcomes.
Look for as many of the following growth drivers as possible. These factors can all have a positive effect on population growth and will greatly improve the growth prospects of an investment:
· Proximity to good existing or planned infrastructure and appealing lifestyle amenities such as public transport, shopping and entertainment precincts, good schools, parks, rivers and beaches
· Urban development and revitalisation projects
· Industrial development – the more projects the better. Exercise caution with single-project towns – if the project should run into trouble the property market will suffer swiftly and drastically.
Where can I find this information? Information on infrastructure and urban development planning can be found on the local council’s website and the state government’s department of planning website.
2. Where is the market at in its cycle?
It’s no secret that the best time to buy in an area is ahead of the growth cycle. Buying in at the peak means you’ve missed the boat. Suburbs, towns and cities will all go through cycles – it’s not difficult to evaluate if the market is a buyers market (what you want) or a sellers market. You just need to know where and how to access this information.
Where can I find this information? Source historical sales information (for a small fee) from the relevant state’s statutory authority on land information. For example, Landgate if the property is in WA, Land and Property Information if it’s in NSW, Land Victoria etc.
For historical listings data, you should be able to request this from your state’s Real Estate Institute. Run a comparison of the number of properties for sale and the number of properties sold over the last six months, 12 months, two years and five years. This will give you a comprehensive picture of the market’s cycles and what stage of the cycle the market is currently in. An increasing number of listings and a decreasing number of sales indicate the market is in a downcycle creating a buyers market.
3. What residential development is planned?
Any increasing demand for property in your identified area will be greatly softened if you haven’t accounted for increasing supply. Find out what residential development is underway or planned for the area.
Where can I find this information? Information on land releases, development areas, planning applications and building applications can be found on the local council’s website.
4. What type of housing will be most in demand?
To determine the type of rental accommodation that will be most in demand you need to know what type of people make up the local renting market.
Where can I find this information? Council websites and the Australian Bureau of Statistics (though be aware this information can be out of date) can usually provide you with information pertaining to the area’s demographics, type of housing and the proportion of the population that is renting. But to ascertain the demographics of the renting population, you’ll need to speak to several local agents. They will be able to provide you with a profile of typical renters in the area which will enable you to identify the type of housing most likely to be in demand, whether it be houses, units or apartments and whether there is a preference for new or older style accommodation.
5. What is the worst case market scenario?
Understanding and planning for the worst is an essential step for stress-free investing. A solid back-up plan that you can easily initiate if the going gets tough will give you complete peace of mind. The worse case scenario with any property investment is negative growth and a vacant property.
How do I plan for it? Property in general is a fairly low risk and stable investment. Having done thorough due diligence to this point, you should be in a position to make a well-informed decision. But successful and experienced investors know that you still need a plan B. You need to know your financial limits.
For example, if you plan to negatively gear a property, at point would you no longer be able to afford the interest payments if rates were to rise or the rent dropped? Reducing the risk of not being able to afford your monthly payments is one reason why positively geared property has risen in popularity in recent years. But regardless of gearing, how long would you be able to maintain the interest payments with no rental income if the property was vacant? A rule of thumb is to give yourself a buffer in case of emergency by having the equivalent of four weeks rent in a savings account.
Taking the time to work through these key points will arm you with the knowledge and understanding required to make an informed decision on where and when to buy. Investors who do their due diligence stand a much better chance or getting their investment purchases right the first time and creating a successful portfolio sooner.
NEXT WEEK – Due diligence made easy – your step by step guide: Part 2 – The Property