The secret to negotiating the best value deal in the property market
There are two main ways to buy a residential investment property below market value. The first is to buy off-plan property. The best discounts are achieved if you:
- Buy early
- Buy lots
- Buy quickly
- Buy off-market (before property is offered to the public)
Most individual investors don’t have the ability to do all this, which is where Gladfish comes in. We obtain off-plan property in bulk early. We then pass the discounts we receive through to investors.
The second way to buy below market value is to negotiate on price. In this article, you’ll learn how to get a great deal when you invest in property.
Discounts you are likely to achieve through negotiation
Successful negotiation requires you to understand a concept and a rule of thumb. With these in your toolbox, you’ll be able to calculate how much discount you should be able to achieve by negotiation.
· The concept of ‘inherent value’
The concept of ‘inherent value’ is understood by few. Most people believe the value of a property to be in the bricks and mortar, but nothing could be further from the truth. If a property increases in price by 20% over a year, the likelihood is that the cost to build it would have done likewise.
Yet the cost of materials may only have risen by, say, 3%, and other sundries and employment expenses by the same. So, there is another reason the price to build will have increased by so much. That reason is the cost of land. In other words, the inherent value of the building is in the land, and not the building itself.
· The rule of thumb: ‘proportion of costs’
This follows on from the inherent value of a property. To build a property from scratch, the costs will be approximately split as follows:
- One third on land
- One third on building costs
- One third on marketing and profit for the builder
It is this final third that holds the key to the discount you might achieve. You may be able to negotiate a discount of between 0% and 33% off the valuation.
However, the exact proportion that you can work on for your discount will vary. For example, in overheated markets, if the land constitutes 40% of total cost, and building costs 35%, the maximum discountable proportion will be 25%.
This can also be translated into supply and demand. When demand is high, the developer will have more people to sell to and the discount you can negotiate will be smaller. On the other hand, when the market slows, you will be able to negotiate a larger discount.
You can make money whatever the market condition
Interestingly, as the market booms and your discount falls, you will generally make your profit through capital growth in the property. When prices are stagnant or dropping, you’ll make it through the discount and higher yields from rentals. Regardless of when you buy, you can profit from property investment.
The difference between new build versus previously lived-in asking prices
The concept and rule of thumb applies much more to new build property. The developer will attempt to hold an asking price much higher for longer, and simply negotiate a discount off this figure (even though the asking price may not represent the true current market valuation).
Previously lived-in property prices will normally be much less negotiable, as the asking prices are adjusted on a week-to-week basis as the agent tries to find a buyer.
The negotiations – first you negotiate the price, and then you negotiate the terms
I remember being taught negotiation techniques back in my early days of property investing. The thing that has always stuck in my mind is that you never talk terms until you’ve spoken price. Most people believe that once the price is decided, the negotiation ends; in truth, this is only the beginning. In fact, most people are so uncomfortable negotiating, that they simply want the process over and done with as soon as possible. And so, they stop at price – when the deal should only be half done.
Once you’ve decided and agreed on the price then you can immediately begin to build terms into the deal. This will catch many sellers off guard because they aren’t going to be expecting it. This is the very best time to negotiate.
Some sellers may get aggressive at this stage, so (as with all negotiations) you must be prepared to walk away. Remember – the best deal in property comes along every day. So be prepared to walk.
Examples of terms that can be negotiated include:
- Extended exchange or completion/settlement dates
- Access or use to the property prior to completion
- Assignment of contract prior to completion
- Discount if completion doesn’t happen at a certain time
- Guarantees on certain things that may happen after completion
- Retentions on the property in case things happen after completion
- Seller paying certain fees that would normally be the responsibility of the buyer
- Seller to provide searches that buyer would normally pay for
- Furniture and fittings to be left in the property forming part of the price
- Changes to be made to the property prior to completion taking place
- Renovation work being undertaken prior to completion
These are just some of the things that may be added after the price is negotiated, and every single one is financially beneficial to you, the buyer.
One final point: you can add these terms in at any time prior to the exchange, meaning that you may agree on the price and then a week later go back to the seller and say, “We have one request… We want X.” Often the seller is already emotionally committed, and it’s far easier to agree on this term than to put the property back on the market.
When you invest in residential investment property, make sure you buy at a discount to market value. Get in touch with Gladfish on +44 207 923 6100. We help investors achieve the best price, on the best property, in the best location.
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