18 Aug How to make the first offer
Most buyers aren’t strategic enough when making the first offer. John Potter shared some clever tactics for negotiating a great price with the team at Your Investment Property.
When putting an offer on a property, it is important to respect that the vendors are probably selling a home they love. Coming across as a hard-ass is not usually the right approach.
Vendors often sell their homes because their children have grown up and moved on and the house no longer suits their needs. It is reasonable to assume they would hope the buyer makes a lovely home in their property, just as they did.
Picture yourself in this scenario. You have decided to buy a property, and after looking through six houses you decide to negotiate on the last one you looked at. The vendors are asking $595,000, which seems reasonable value. You have only inspected it once, so you decide to go back for a second look.
The owners weren’t present at the first inspection, so you ask the agent if a second inspection can be arranged while the vendors are at home. This way, you can ask questions that only the owners can answer.
This request may surprise agents, but meeting the vendors face-to-face is a good idea and can only help you. Vendors sometimes unintentionally divulge critical information that gives you a huge advantage in negotiations. It also keeps the agent honest.
Your first question to the vendors after some small talk (remember, you are developing rapport) should be: “Where are you planning to move to once you have sold?” Here you’re being careful not to create the wrong impression. If you were buying a car it would be fair to ask why it was being sold, but with houses it is better to be less direct. You want them to like you.
Sometimes sellers unwittingly admit negatives about the property, such as increasing road noise, or what position they are in. I recall once inspecting a home for the second time and asking the vendors where they intended to move to. The wife blurted out that they would be on the street if they didn’t get a sale soon. An admission of this sort can be a huge setback for a vendor but a great opportunity for you to negotiate a lower price.
How much to offer?
By the time you’re back for the second inspection, you should be nearing the point where you make an offer.
Naturally, if you have finance in place and can settle quickly, this will be a huge advantage during negotiations. Remember, too, that an offer that is more than 10% under the listed price in a reasonably strong property market will likely create animosity from the vendor. So, for an asking price of $595,000, I would be inclined to initially offer $550,000, subject to finance (14 days), and settlement within 30 days.
Mention to the agent the reason for reducing the price by $45,000. For instance, does the home need some work done? Every house has something that needs changing.
Rarely will a vendor accept the first offer, unless it’s very close to the asking price. As a seller I never accept the first offer, even if it is above my first-offer expectations. Most vendors share this view.
Assume then that the vendor will take 24 hours to reply to your offer. During this time, a good tactic is to go back to the agent and tell him you have made an appointment to look at another home, through another agent, as a back-up in case the offer is rejected. This will usually get the agent straight on the phone to the vendor to put pressure on them to accept your offer or make a counter-offer.
Let’s say the counter-offer comes back at $575,000. You have the following choices: either agree to pay $575,000, stay with the $550,000 you initially offered, or counter-offer somewhere in the middle.
The vendor is then faced with either accepting your offer of, say, $560,000, or hanging out for $575,000. As the buyer, I would persist with the line, “I have an appointment with another agent to see a house tomorrow”.
The vendor may be quick to accept $560,000, which is more than 6%, or $35,000, less than his original asking price. A drop in the asking price of this range is a successful result, as it is much higher than would normally be achieved in a reasonable residential market.
If your counter-offer is not accepted, I suggest you walk away. If the property is still on the market a couple of weeks later, the agent will no doubt be back in touch and you will be in an even stronger negotiating position.
Advanced negotiation strategies
As deals become bigger and more complex, it becomes necessary to use more advanced negotiation strategies to get the result you want.
In the late 1980s I had an association with a large financier who made a line of credit available to me for the purchase of a significant landmark property on the Gold Coast. I identified a property and negotiated a conditional contract.
We received interest from a few large development groups but the most enthusiastic potential buyer was a prolific developer. This developer requested a meeting and a date was set. I had about a week to prepare and wanted to make sure the negotiation was successful.
The developer was 30 years my senior, with extensive experience in property development and negotiation. Since I was in my early thirties and green, this was an intimidating experience. Before the meeting, I made a list of the following 10 components of the deal, deciding I could concede the first eight:
- The amount of deposit
- Where the deposit would be held
- Who would get interest on the deposit
- How long the contract would remain conditional
- Who would pay council rates
- Who would insure the property
- The date the contract should become unconditional
- The extent of the purchaser’s ability to access the property
- The final settlement date
- The price
The day came and the prospective purchaser’s team arrived, as well as my team of three and the lawyers for both parties. Altogether, there were 14 around the board table.
I shook the developer’s hand firmly and made strong eye contact with him. I then engaged him in small talk to break the ice. We sat at opposite ends of the long boardroom table, both with our teams around us. This was going to be an icy negotiation with plenty of ego involved.
The process commenced with his lawyer raising the first item on the agenda, which was the deposit. I saw no real need for the developer to offer a large deposit. However, considering the contract was conditional, as a show of good faith I felt it should be at least $100,000.
He disagreed strongly and said it should be only $10,000. After a short argument I reluctantly agreed. To me, the size of the deposit was irrelevant. We moved on to the second point: where the deposit should be held. Again, I conceded in his favour.
We went on and I conceded each point right through, until we reached number nine. Each point extracted an argument from me, but I was prepared to give up the small points to gain the big ones. The developer thought that this was his easiest negotiation ever. That is, until I said that I needed settlement in six months.
He agreed to this reasonably easily, because everyone at the table thought it was probably time for me to at least win one point. I stood up, walked to the other end of the table and invited him to join me in another room to discuss the final point: the price.
I knew that discussing the price in front of 12 people would be difficult, with so much ego sitting around the table. He followed me out of the room into another office.
I had contracted to buy the property only five months earlier for $15.3m and I was now asking $26m, as I had identified an opportunity that had been overlooked by other developers hunting for large assets. My challenge now was to convince this experienced developer to agree to my new price. “I need to get full price, $26m,” I said. “That’s too much for me,” he replied. “I can only go to $22m.”
That was a great start. We went back and forth and by the time we left the room 20 minutes later we had agreed to $25.75m. We proceeded and the deal was done. Six months later, the property settled without any issues and I pocketed a tidy profit of more than $10m.
The importance of the agent
Every property has its good and bad characteristics. There’s no such thing as the perfect piece of real estate, and I want to share an experience that demonstrates the role real estate agents play in overcoming
In 2005, as payment for another property, I received a beachfront house that I traded for $6m, even though I knew the property had been on the market for $5.5m for the previous six months.
At settlement I took ownership of my new piece of property. I terminated the existing selling agent, who had been unsuccessful in effecting a sale. I then let two or three months slip by, leaving the house locked up and vacant with no ‘for sale’ sign.
The house was in poor condition and not suitable for renovation. The only value was the land, so my next step was to enlist two new selling agents and discuss all the good points the property had to offer, namely its location just a short walk to shopping facilities and a range of restaurants.
There were also strong negatives associated with the property. A residential building across the street looked straight into the house, and a medium-rise building to the north threw a shadow across the house for four or five hours a day.
I discussed these negatives with the agents at great length. They were aware that a prudent purchaser would quickly identify them and be turned off the property entirely.
We researched the local council’s building code and were pleasantly surprised. We found that the setback requirements for a new dwelling on the land allowed us to build a full six metres closer to the beach than the existing property, allowing more sun across the front of the house and gaining a view to the north, the critical aspect. Furthermore, a new house could be designed in such a way as to provide more privacy.
This meant that our two major objections could be overcome if we were given the opportunity to present the case to a serious buyer.
With these issues addressed, I told the agents I wanted $7.5m. We embarked on a bold selling program and a buyer emerged. My agents proudly presented a contract to me at $7m, unconditional with settlement in 60 days. They were ecstatic.
To their amazement, I rejected the offer but countersigned the contract at $7.5m, aware that I carried the risk of the purchaser rejecting the counter-offer and looking elsewhere. I was confident, however, that there were no more beachfront lots on the market at that time – a critical factor in making that decision.
The buyer finally came back to us, countersigning at full price. He did exactly as the agents had suggested, and built a new home taking advantage of the block’s physical attributes, which had been pointed out to him.
Here is the moral of the story. While some buyers had walked through the derelict, aged house attempting to imagine a major renovation, this prudent buyer was able (with the help of the agents and some serious imagination) to ignore the state of the existing property and instead focus on the strong points of the land and its location. These were clearly the right real estate agents for the job. It was through my education of them in how to overcome buyers’ objections to the property’s negatives that we achieved such a great result.
Originally published as: http://www.yourinvestmentpropertymag.com.au/strategy/how-to-make-the-first-offer-182300.aspx