4 steps to effective negotiation
Property investors need to have strong negotiation skills — but it isn't all about talking price.
Whenever the topic of negotiating comes up, the first thing that comes to mind for many is the price. Buyers love the idea of getting a bargain or paying ‘under market value’, whilst the agent and vendor are focused on achieving the highest price possible. In many property transactions the price is the most important factor, with all other aspects of the deal being insignificant or irrelevant. But in some cases, it can be the difference between a successful negotiation and being left empty handed.
We recently purchased a property prior to auction for a client. At the inspection our buyer was told that the vendors were ‘definitely running to auction and there was no chance of buying beforehand’. Our client was disheartened as he felt the property had a very strong chance of selling over his budget under competition.
On further investigation we found out the vendor had purchased another property ‘off-the-plan’ which was due to settle early next year. We formulated an offer which allowed the vendor to line up both settlements, whilst also having an exclusive right to lease their property back on an ongoing basis if the new property’s completion date was delayed. To the agent’s surprise, this changed their mind about selling prior and our offer was accepted. Their peace of mind about not having to move twice or finding short-term accommodation was worth more to them than the likely chance of a higher price at auction.
Getting creative with terms
Buyers who are able to provide flexible settlement terms will have an edge over someone who must settle within a certain timeframe. Vendors who have already bought another property may need to settle on a specific date. Any buyer who can match their terms help them avoid bridging finance or other expensive moving costs. For vendors who haven’t purchased yet, a longer than average settlement could be appealing to give them time to find, purchase and settle on their new home. The vendor's request for settlement terms generally gives us some insight into their position, without having to ask the agent intrusive questions about why they’re selling. Conversely, we advise our clients to keep their settlement preference close to their chest in case they need to use it as a bargaining chip.
Another option which vendors or agents might not consider (or suggest) is the prospect of a short settlement with a lease-back option upon settlement. This means the vendor can have access to their funds earlier, without the risk of having to move before they’re ready. We suggest the lease be drawn up either as a short-term license agreement by a solicitor, or as a formal Residential Tenancy Agreement (with a lease agreement, bond and condition report to protect both the purchaser and vendor) with the terms arranged during the negotiation process.
Other scenarios could include a fixed settlement date with an option of ‘or earlier by mutual agreement’ or a longer settlement with the option for the vendor to lease the property prior to settlement and receive the rental funds. The offer can be as simple or complex as need be to make it as appealing as possible to the vendor.
Respecting the agent and the process
Every sales agency has different policies and procedures, and even agents within each company can differ with their approach. Understanding the process and following the agent's instructions are vital to knowing when the ideal time to make an offer is, and how the agent will present an offer to the vendor and deal with any competing buyers. Not respecting the agent's guidance or trying to ‘get one over’ the agent can completely damage a relationship and negotiating power. An agent will always have power to influence their vendor and whilst they legally must pass any offers on, whether they endorse or discourage the vendor to take an offer is a different story. Damaging a relationship with an agent may not only jeopardise a negotiation, but can also put a buyer in an awkward situation if they’re unsuccessful with their purchase, only to find that they need to deal with the same agent (or agency) for the next property they’re keen on.
Not insulting the vendor
Even in situations where a vendor must sell, buyers should be careful to not submit an offer which could be perceived as disrespectful, particularly when the vendor's family home is in question. Low-balling an offer too far can even run the risk of the vendor being so offended that they refuse (or are less inclined) to deal with that buyer in future negotiations, even if they agree to increase their price. Being derogatory about the features of a home in order to try and justify a low offer can have a similar effect. The emotional weight of selling a property can never be underestimated.
Being consistent
There are various approaches for buyers to justify an offer less than the asking price (or in the situation where a property has passed into them at auction). The negotiations may be on the basis of affordability – where the focus is on how much the buyer can afford, can borrow from the bank or their limited ability to source additional funds for the purchase. If an agent has had insight into the buyer’s budget (such as being aware of a previous offer or seeing them bid at another auction), then they will need to be able to defend their offer by drawing on the merits or shortcomings of recent comparable sales in the area, or their changed circumstances since the last offer/bid. Whatever the approach, care needs to be taken to stick to one story – for example, stating that an offer is the absolute maximum a buyer can afford whilst also suggesting the property isn’t worth any more can give mixed messages and imply that the buyer is bluffing about their budget.
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