The art of negotiation

[TheBacon]

Hello psychologists....

I've reached the point where I'm begining to put offers in on properties.

I have selected a few suburbs I am interested in which I think will achieve reasonable capital growth. I have developed my criteria for purchasing a property (price v yield etc.). All I have read tells me its purchase price which determines the suitability of an IP and its long-term propsect. All these factors lead me to the following question...

How do you get props at good prices?

Is it simply a factor of the amount of offers you put in? For example, you put in 20 offers, 15 are rejected outright, in 4 the vendors negotiate but eventually turn you down and 1 person sells?

Or do people on this forum not worry as much about picking up a bargain but study trends in capital growth and buy at market price with the expectation that props will go up by X% in Zyears?

Should I put in low offers on lots of overpriced properties or put in a few highish offers on a few more reasonable properties?

Is there a negative effect with putting in offers 10-20% below asking price? i.e. will agents get sick of you, will vendors simply not negotiate with the low-ball offer, etc...

Thanks for your responses.....

TheBacon.

 

[geoffw]

TheBacon,

Rolf de Roos suggested that you may have to inspect 100 properties to get the one you want.

He said something about how many offers, etc... but the main thing for me was that I have to be looking very hard, enough to give up a lot of weekends, to really find something.

Not "analysis paralysis", but making sure you really know the market properly before jumping in.

Once I had that commitment to look like that, I found something good.

 

[Mike]

Hi Bacon,

I'm not sure why you would be wanting to put offers on overpriced property even if they are low-ball offers? If the property is overpriced now it means no more extra growth except inflationary growth until the next cycle comes along. A better strategy may be to set yourself up for future growth by picking undervalued suburbs and buying properties which can be improved to maximise the yield.

To prevent an agent getting sick of your offers make sure you back up any offer with documented proof like sales comparables, residex reports, media reports etc. If you show the REA that you have done your homework they are less likely to think you are a tyre kicker and more likely to take your offer seriously, even if it is a low-ball offer. A low-ball offer should be taken seriously if you can substantiate that the property is overpriced.

Regards, Mike

 

[TheBacon]

Thanks GeoffW and Mike.

Mike- I think you are right with presenting yourself as well-informed to an agent, it cant hurt...

I think what I am asking is...
How do you pick up properties for less than current market value, is it a factor of lots of offers or lots [and LOTS] of research, home opens, drive by's etc., etc., etc?

Does one need to get to know agents and get on their list of people to inform when new props come on the market? What other methods are there?

Thanks

TheBacon

- Not by the hairs on my chinny chin chin!!! -

 

[Mike]

How do you pick up properties for less than current market value? - TheBacon

You need to negotiate from a position of strength. Best example is: the vendor desparately needs to sell and you are the only willing buyer.

Start by researching the area which is going to give you good capital growth over the long term. Ask the local council development officer which area is likely to benefit from population growth over the next 5, 10, 20 years. The council may have plans to rehabilitate certain areas to encourage employment and population growth. That area may be currently undervalued if it shows signs of long-term neglect.

Councils also have zoning maps so you can quickly determine where the employment zones are, industrial areas, residential areas, parkland, retail etc.

The main areas of interest to you will be residential near employment, public transport and major shopping precincts. Stay away from residential near chemical or heavy industry. Check the style of cafes - are they trendy? A sign of new demographics changing the area.

Now drive through the residential area looking for hot spots ie streets where modern housing has been newly constructed or renovation works are being carried out. In those same streets or nearby streets look for neglected or tired looking property. The roof condition, construction materials, paint condition, garden condition provide all the clues.

Now put a flyer into the letterboxes of these properties stating that you are are a serious buyer wishing to purchase their property. If they ring your phone number you are in a position where you have cut out the real estate agent's commission and dealing with a vendor who may not know the state of the market well. In addition, if the property is in need of a facelift it is likely that the vendor needs to sell but can't afford to do the makeover themselves so the chances are very good that you can purchase the property below market value.

Go the whole way and negotiate access to the property before settlement to complete the makeover to add value before the bank valuation is done. This will improve the Loan to Value on the deal.

Regards, Mike

 

[GeeVee]

The magazine Australian Property Investor bookshop has the book "Not One Dollar More" by Joseph Cummins. This book is all about negotiation strategies. Haven't finished it yet, but sounds like some very useful info.
Try this thread: http://www.somersoft.com/forums/showthread.php?s=&threadid=3928

 

[Sunstone]

Dear Bacon,

You've probably already read it but two helpful parts on negotiating tactics that I have posted earlier.

http://www.somersoft.com/forums/showthread.php?s=&threadid=6500

Cheers,

Sunstone.

 

[WillG]

Hi Bacon,

I find the best way to find undervalued properties is to find properties with overgrown gardens and cosmetic paint problems. It may cost a few hundred dollars to have the property revalued thousands of dollars higher.

I try to find properties that have been on the market more than a month. The vendor is usually open to a wider range of offers.

When making offers try not to use round figures. Choose $248,500 rather than $250k.

Try to give offers on a proforma 'offer' paper. The agent will take you more seriously and all of the clauses (such as subject to finances, building inspection etc ) will be there.

 

[Steven Fraser]

Underpriced properties?

What you are talking about is finding an uninformed owner to swindle.
Granted we all take plesure in getting a bargin but realy at the end of the day if a property costs you $1,000 more or even $10,000 more will it make a big differance in the long run? Smart Buying will always make any 'extra' money spent on the purchase seem tiny.

Just to clear a few things up......

I find the best way to find undervalued properties is to find properties with overgrown gardens and cosmetic paint problems.

If the gardens need work and the paint needs doing then the property may be fairly priced and not undervalued.

The only way a property can be undervalued is if someone else has a current offer of more. The definition of undervalued is less than another person will pay. So is an owner who's home has been on the market for more than a month open to offers less than they were 1 month ago? Perhaps but it still wouldn't mean that the price you paid was under value.

The Price a property sells for is it's Value.

To answer your question TheBacon Find a property, work out how much it is worth to you and offer that. If it is regected keep looking.

 

[Les]

G'day Steven,

The definition of undervalued is less than another person will pay.

So, if there are NO others willing to make an offer, does that mean NO others would pay that price? I think not!!

In different circunstances, others may well pay more for the same property - but, if they aren't there NOW, and you are, how is that "swindling" someone? When someone is wanting to sell a property, and there are no other buyers around, isn't it THEIR CHOICE to sell to you, even if it is less than they figured they wanted??? Are they selling at the wrong time of year? Are they anxious about selling (have to sell within two weeks) - rather than selling within the age-old adage "market price - the price agreed between a non-anxious seller and a buyer"

How is it the buyer's fault if the seller wants to be rid of the property at any cost???


Regards,

 

[Steven Fraser]

My apologies I should have been clearer. When replying to the post I was referring to the suggested ways to source new properties that are not on the market and to pay below market value

put a flyer into the letterboxes of these properties stating that you are a serious buyer wishing to purchase their property. If they ring your phone number you are in a position where you have cut out the real estate agent's commission and dealing with a vendor who may not know the state of the market well.

Whose money is the commission that you are 'saving' the owner. What you are suggesting is that the owner would have had to pay an agent anyway so let’s cut that figure from the deal. If the owner appointed a good real estate agent in the first place they would know exactly what the state of the market is. So the owner looses twice?

People who engage in this sort of scam shouldn't call themselves shrewd investors, rather thieves.

Circumstances play a huge part in real estate and you certainly can pick up a property for less than what the owner could have gotten if things were different.

However things aren't different and you spent the most that the market was prepared to pay at that time.

 

[Mike]

Hi Steve,

Some interesting viewpoints and definitions you have there. Could I trouble you for your definition of "adding value"? Correct me if I'm wrong but the concept of adding value can't exist with your definition of undervalue.

My understanding of adding value is that the property is beautified to enhance and widen its appeal thereby creating greater buyer interest and intensifying the competition among buyers to purchase the property. If that process brings a higher price than would have been obtained prior to the beautification, doesn't that constitute adding value in the same way that the price of a canvas is increased by painting a lovely oil landscape on it?

If the property was bought without the intention of on-selling or re-valuing then it would be bought at a price the market thought was right for a shabby property - it's market value. However, if the property was bought with the intention of doing it up to modern specs and then revalued higher then the original estimation was correct - that the property was undervalued.

Regards, Mike

 

[Steven Fraser]

Hi Mike,

What ever the buyers intentions are when they buy a property they buy it at market value, they set the market price as soon as they settle. It may not be what a valuer would say but it is what the market said.

If the property was bought without the intention of on-selling or re-valuing then it would be bought at a price the market thought was right for a shabby property - it's market value. However, if the property was bought with the intention of doing it up to modern specs and then revalued higher then the original estimation was correct - that the property was undervalued.

Your reasoning appears to be flawed to me. So it depends on the buyers intentions as to wether a property is undervalued?

If a property was initially bought by a 'Mom and Dad' and had intentions of staying forever, put on a deck for Christmas and then got a transfer, would it not be fair to say that the property may fetch a greater price than before? Did they pay less than the rest of the market was prepared to pay at the time? I don't think so.

A property is sold also on potential. Two blocks of the same sized land, side by side may sell for different prices just because one has the potential for city views. It doesn’t now, they are both the same but if the one block sells for less than the neighbour it doesn’t mean that it was bought under value.

Regardless of what property you buy and in what location you can always do things to it to improve its future selling price

Is the property with a beautified garden not a better property and therefore will attract a greater selling price? Just because the owner didn't beautify his garden doesn’t mean that you bought the property for less than it is worth. Just because the owner didn't rip down the house and build a mansion doesn’t mean that you bought the property for less than it is worth.

Regards,

 

[Mike]

Point taken, Steve. Would it be better, then, to say "adding potential" to describe the process of improving a property?

And perhaps exchange the term "undervalued" to describe a shabby property for something along the lines of, "this property has "improvement potential""?

Regards, Mike

 

[Steven Fraser]

I had a feeling our definition of terms was different.