With the Australian property market shifting from a buyers market to a sellers market, its time to brush up on your negotiating skills. Frank Valentic reveals effective tactics to get the best price.
There has been substantial capital growth in property prices across all Australian capital cities this year, with increases of more than 5% based on the latest data.
With market forces now favouring the seller, there is a greater demand for residential property than there is stock. Were already seeing stock levels declining by up to 30% when compared to the previous year. Combine this with the swarm of savvy investors who are cashed up and looking for good buying opportunities, and properties are selling for thousands above vendors reserves under heated emotional competition.
So how can you achieve an edge by securing the property youre after - and negotiate a good deal when you see it?
1. Understand the method of sale
A skilled negotiator can buy well at auction or through private sale if they separate emotion from the purchase decision. Buying at auction today is more competitive than in the past six months - as you will notice from multiple bidders and clearance rates that average 20-30% higher than last year.
But vendors can become more open to negotiation after going through a failed auction campaign and realising that the market doesnt value their property as much as they do.
The private sale negotiation can often be more cumbersome. The agent may say that other offers are coming through, but it is generally unclear whether you are bidding against real competition - or just against yourself.
2. Prepare to negotiate
Being able to identify a good deal all comes down to doing your homework. Do your due diligence and undertake a sales comparison of similar properties that have sold in the last three months in your chosen area. Also consider engaging a valuer who has access to detailed sales data and is experienced in valuing property based on its location, existing condition, accommodation, style and land size/content. Using a third party to negotiate can also prevent you from getting carried away with emotion and spending too much on the property. A professional buyers agent, solicitor, friend or family member can negotiate on your behalf and separate the emotion from the property deal.
You can also purchase property data from research firms such as RP Data, Residex or APM. These provide recent sales information to help you assess if
the property is a good deal, or just at market value.
Also organise a pre-purchase building report. If there are structural building issues and maintenance concerns, it may give you some leverage in getting the vendor to lower the price.
3. Assess the sellers situation
Not everything in life (and in real estate for that matter) is negotiable, but experienced negotiators can secure top-notch deals in any market. In the current rising property market, those who can negotiate can still pick up some good deals. Good negotiators will track down vendors that need to sell and are motivated to sell. I call them D (distress) vendors who are Desperate to sell due to Death, Divorce, Debt (or financial hardship), Deadline, Distance and Disaster motives. Skilled negotiators ask many why, what and how questions to find D vendors willing to negotiate. Discovering as much as you can about the vendors position provides real insight into whether the property is worth bargaining for.
Ask questions such as:
• Why is the vendor selling?
• Have they purchased another property?
• Which settlement terms are preferred?
• How long have they owned it?
• Is it an investment or owner occupied?
• Is it tenanted?
• Have you had any offers?
• How long has it been on the market?
• Is the vendor testing the market?
4. What to do at the negotiating table
Experienced negotiators know that establishing an offer is a fine balance: go too low and the vendor will get their back up, closing the door on your negotiating position. If you have done your research on comparable sales and asked the relevant background questions, you will be in a better position to make the ideal offer. In the current market, sellers are generally in the drivers seat. Auction clearance rates have averaged more than 80% in Melbourne over the past three months. With more buyers than properties, aim to pitch your first offer at a level of 10% below the estimated market value of the property. Test the water before diving in by pitching a lower offer, to see how desperate the vendor is. Always start lower so that you have room to negotiate upwards - and so that the vendor feels they are getting some sort of win, too.
Your first offer should not be your last, as you may be able to buy the property at an even lower purchase price. Negotiating is a bit like playing a game of cards. Dont play your best cards too early - leave something up your sleeve.
Savings of up to 10% below the propertys market value can provide you with instant equity that you can leverage to buy further investments or fund your own lifestyle requirements.
5. Prepare to close the deal
While you should always have an upper price limit in mind before commencing negotiations, you can close a deal by manoeuvring the terms of your offer. This includes trying to move on price, settlement terms, deposit and conditions.
Try to offer settlement terms and deposits that will be most suitable to the vendor as well as making offers as unconditional as you can to create a win-win situation.
To increase your chances of closing the deal:
• Organise finance approvals, building reports and contract approvals first
• Have another property as a potential back up so that you can use it as leverage in your negotiations
• Find out if there are other offers on the table and what terms they are on
• Leverage your offer by presenting lower comparable sales to the vendor that will support your case
• Always show that you mean business by presenting your offer in writing
on a contract with a 10% deposit cheque attached
6. What to do if the deal falls apart
If the deal has not been closed, sometimes doing nothing is the best strategy. Sitting back and waiting can cause the vendor to become nervous and more negotiable if they think that you have walked away.
Time can be a great negotiating tool so be patient and wait for the agent to chase you. But this depends on how important the property is to you. If it is an investment property, be prepared to walk away. Wait for the agent to chase you.
If it is an emotional home purchase and the property meets the majority of your criteria, waiting may not be the best strategy as you may miss out on your dream home. Consider also that time out can be beneficial when emotion
Let the agent know you are still interested and to come back to you before selling, as you are thinking about things.
If you really want to buy the property, tips to keep the deal together include:
• Find out what the vendors ideal settlement is
• Offer a larger cash deposit (10-20%)
• Make your offer unconditional and not subject to finance or building reports. But bear in mind that this is a risky move, as you could end up spending a lot of money if youve bought a lemon
• Try to offer a release of the vendors deposit ASAP
• Negotiate the price and always end your offer in uneven numbers, not on round numbers to demonstrate that you have pushed yourself to your limit (eg, $751,250 not $750,000)
7. How to negotiate counter offers
Try to find out how many other offers have been made in writing or verbally. Ask the agent how many contract requests, building reports and repeat inspections they have had in order to gauge the level of interest and competition. Finding out how many buyers have inspected the property
can also help you anticipate the
Negotiate counter offers by giving something more back to the vendor, improving your terms to offer the vendor a win-win situation. Improving the terms of your counter offers shows the vendor that you have played your part in the negotiation.
You can successfully handle counter offers by making your offer seem like it is your final walk-away offer. In the current strong market in most capital cities, you will most likely be up against offers from other buyers, so dont waste too much time. Try to make the first offer and set the negotiation up so that you have the last right of reply with the agent.
Keep in mind that not every deal is worth trying to save. Just as important as knowing how to negotiate is knowing when to walk away. This is because there will always be another property out there for you somewhere.
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