How to: Negotiate the property price you want
Savvy investors know that much of the money in property is made on the "way in" to the deal - that is, when you purchase. Buying for a discount also provides you a buffer in future should you be required to sell. Part of doing well is knowing how to negotiate carefully with the real estate agent or vendor so that you can secure yourself the best deal. While auctions can be a different environment, some of these negotiation skills will be useful.
Many experts will explain that it's largely about coming up with your "ending" figure, or the amount you are willing to pay, and then working from a "starting" figure to this point. For instance, if you are buying a property that you want to spend $700,000 on, and the vendor is asking $720,000, it might just be worth offering $680,000 and staggering upwards. Starting low will also ensure that the expectations of the vendor, particularly in a soft market, are brought down to the level where you want them to be.
The tricks to ensuring this will work are the following:
1) Know your market inside out
If you don't know what the property is worth, you run the risk of overpaying from the get go. If you don't know whether the market is hot and demand is going crazy for the type of home you are looking at, you also run the risk of irritating a vendor who will just go to the next buyer - who may be willing to pay more than you. Make sure you negotiate harder in softer markets where buyer interest is at a low, rather than playing hard ball in hot and fast moving areas where you'll be wanting to be just as quick with offers. Be realistic about the market. You may want to have a look at statistics such as vendor discounting and days on market to get an idea of what type of an area you are buying into. For suburb specific data, see our free data section.
2) Know how much you can afford
Don't be offering blind. Have finance pre-approval and a good idea about what you are able to borrow, as well as a clear understanding of your personal capacity to buy. Don't leave yourself in an uncomfortable spot while negotiating due to a lack of preparation. You can also use this to your advantage - by telling the real estate agent that finance will only allow you to borrow up to a certain amount, they are less likely to push you to prices you do not want to go to (remember that you do not have to tell them your true borrowing capacity).
3) Don't put all your cards on the table
If you're willing to go a little higher, but have a feeling the vendor is close to breaking point, then make sure you don't give any further suggestion to the real estate agent that you'd be willing to spend that extra $20,000 or so. You may also want to push the "This is as much as I can possibly spend" line, as well as falling back of the finance suggestion above. A good example of this was from the couple in our recent Day In The Life Of an auctioneer, where we see them play pretty hard to not increase their offer by saying "This is our final amount". Note how skilfully the agent coaxes them into revealing their hand, and how he presents the vendors thoughts in a positive way. Befriending silence and not rushing to fill it can be an important skill that you'll want to make the most of as well - do not be coaxed into letting yourself reveal important details.
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Look at about 3.17 onwards for when the negotiations begin.
4) Do not assume that price is everything to everyone
You might be able to knock down the price by offering different terms and conditions. Desperate vendors might be willing to take a lower amount provided they can have a longer or shorter settlement or similar. Find out what is important to the vendor - and find out as much about them as possible. Sometimes Googling or doing an RP Data search on the property can be revealing. However, remember that just because the property has been on the market for a long time, it doesn't necessarily mean that the vendor is desperate - sometimes the exact opposite can apply. Get to know your vendor's "cards" as best possible, including whether the property's price has already been discounted and how much they actually want for it. Observer Jo Chivers previously looked at negotiating the Terms of Purchase to secure yourself more access and a better deal. Don't forget that you can offer multiple offers at once with different terms and conditions attached to each - for instance, you may provide their asking price but with strict terms and conditions favourable to you, while offering less for the settlement period that they want.
5) Provide reasons for lower offers
If you think that you can offer less than a property is expected to sell for and get a positive response, you'd be wrong. Sometimes justification is a powerful thing. Use comparables that you think fit your case better than those presented by the agent (which are almost guaranteed to be comparables in the favour of the vendor) and remember to use your handy building and pest inspection - anything that needs to be fixed can arguably come off of the price you pay (for instance, wHeregroup's Todd Hunter has told Property Observer that he uses details such as gardening that needs to be done, taps that need to be fixed and similar to present his case for a discount or to get the property in a better condition when he does purchase).
6) Put time limits on your offers
This can make you seem serious about the offer, and also means they are encouraged to make a decision as soon as possible. 48 hours would be a good starting point. Also add a cheque to the offer - show them that they can easily have the property sold with the simple act of accepting. Similarly, time your offers carefully and use the response from the real estate agent as a guideline on how to act next. If the agent isn't chasing you for the next offer, then you may need to face the consideration that there are potentially other buyers willing to pay more. You might want to play this same approach and ensure you have other properties of interest to you.
7) Have the team behind you to act fast
If another offer falls through and they come to you with a time limit themselves, you'll want to have a solicitor and a team who can turnaround the paperwork as quickly as possible. Cultivate your investment network so you can act as quickly as possible. This will also enable you to put the first offer onto a lot of properties.
Remember that you need to assess the situation carefully - while some buyers like to throw a negative or disinterested light onto the property they want, it can cause real estate agents to assume you are not serious about your intention to buy. They may take the easy route with another buyer. Other advice that is up for debate is contacting the seller yourself, or asking to meet the seller. For confident, competent property buyers this may be a powerful step, however those who are uncertain may be leading themselves astray.
Neil Jenman also shared his top 10 ways to negotiate a better deal.
What techniques have you used to negotiate the price that you want? What has and hasn't worked in the past?
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This guide on negotiation for a commercial property by Chris Lang