Negotiation is about leverage.
When purchasing a property, you have the most leverage when: It has been on the market for a long time, and/or No competition exists from other buyers
The first point of leverage (time on market) is easy to determine, and simple to understand. Every property will sell for the right price, and properties that languish on the market are either overpriced or poorly marketed. Vendors are more willing to compromise as time goes by.
When searching for development sites, sort suitable properties from ‘Oldest to Newest’. And, before running a feasibility, speak to the selling agent to understand how the campaign has progressed: Have there been any written offers, and if yes, on what terms? What are the vendor’s circumstances? Why no sale yet?
This leads to understanding the second leverage point (how much interest exists from other buyers). Follow these basic principles:
- If the agent isn’t forthcoming with info, and isn’t asking you questions, then assume they’re pretty relaxed, and there are probably other interested parties
- If the agent is asking you questions (What type of property are you looking for? What are your pros and cons for this property? Have you been looking for a while?), then assume they’re eager for an offer, and there’s probably little active interest
- If the agent volunteers a lot of info about the campaign, the vendor, and the property, then assume that he/she is anxious, and you’re quite possibly the only real interested party
The following is a case study in how to use leverage during negotiations…
I recently purchased a development site for a client where the property had been on the market for over 6 months. The campaign started in Oct’15 (a busy selling season, where lots of properties were available) with a BIR of $1.25m-$1.4m. Given this advertised range, most buyers would consider vendor expectations around $1.5m at auction. The property Passed In on a vendor bid.
It turned into Private Sale with a BIR of $1.20m – $1.32m. Over-pricing is the kiss of death for any Melbourne campaign, and the fact that no clear asking price was provided, meant that buyers would still expect a price north of $1.3m.
I quietly tracked the campaign, and in mid-April contacted the selling agent. He immediately told me about the slope of the block, the difficulties associated with managing 3 vendors, and the recent challenges that Chinese developers face in getting funds out of China.
“OK, my client doesn’t mess around. What is the absolute minimum the vendor would likely accept?“. He felt $1.1m was the barrier in his clients’ minds.
I quickly ran a feasibility, and the numbers looked good, with Total Return on Capital well in excess of 20%. My client was very interested indeed. Now came the fun part – negotiation!
I primed the selling agent with the problems – high construction costs due to the slope of land, single driveway design (body corporate), maximum dwelling sizes of 24 squares, etc. “I’m telling you all this so that you understand our offer of $1.05m with a 90 day settlement“. This was clearly not what he wanted to hear, but we both understood I had a lot of leverage to play with – the campaign was 6 months in, without any serious interest.
He came back within 5 minutes. The vendors hoped for $1.1m-$1.15m (then why was he advertising it at $1.2m-$1.32m?!). They may consider below $1.1m but not $50,000 below. He said “maybe $1.08m would get it done…”
My client was happy with $1.08m (heck, it was a great buy at $1.1m), but I persuaded him to let me negotiate further, because this is the perverse thing – vendors need negotiations to be tough in order to feel like the highest price is achieved. We went back with $1.07m, and a few conversations later, bought it for $1.075m.
Why did we get such a good deal?
It’s about LEVERAGE. After a botched 6 month campaign, the buyer was desperate, and the selling agent even more so. Just over 2 working days following my initial enquiry, we had signed contracts at $1.075m with a 90 day settlement. I love real estate!