Understanding the Rules of Property Negotiation
Now that you have used your property checklist and done your extensive research, the next step is to negotiate to buy the property.
Real estate is a game, so either learn the rules or engage an expert who understands them, such as a buyers agent. Additionally, the rules of the game differ from state to state due to varying legislation, so don’t make the mistake of thinking that each states ‘rules’ are the same.
There are rules that selling agents (players on the selling team) need to abide by, there are rules buyers and buyers agents need to abide by (players on the buying team), and there is an ‘umpire’ in every state, such as Consumer Affairs Victoria or Dept of Fair Trading (NSW).
These umpires as supposed to police the industry and enforce regulations, yet given how rife the deceptive practice of underquoting is in both Victoria and NSW, we know they are failing dismally.
A selling agent must:
- Give an accurate appraisal of the market price of the property, and
- Update the advertised price if it changes during the sales campaign.
A seller’s reserve, or asking, price is the lowest price a seller is prepared to accept for their property, called the reserve price for an auction and the asking price for a private sale.
If a seller advises an agent of their asking or reserve price during the marketing campaign, then the agent cannot advertise the property below that price.
An agent’s estimated selling price is the price the agent estimates a property is likely to attract, based on their experience and knowledge of the market.
Underquoting is when an agent misleads a prospective buyer about the likely selling price of a property for sale. Examples of underquoting are when a property is advertised or quoted to a prospective buyer at a price that is less than:
- The seller’s asking price or auction reserve price
- The agent’s estimate of the selling price
- A genuine offer or expression of interest by a prospective buyer that the vendor has refused
New underquoting laws apply to the sale of Victorian residential property from May 1st 2017. The underquoting reforms are designed to stop real estate agents understating property prices.
New underquoting laws apply to the sale of NSW residential property from January 1 2016. The underquoting reforms are designed to stop real estate agents understating property prices.
Legislation banning real estate agents from providing price guides has been passed by the Queensland parliament. In short, prices are no longer allowed to be advertised at all for properties being auctioned. It is up to the consumer to effectively guess what the price is likely to be. Go figure!
Doing your homework before you buy will help you to understand the market and be a better judge of property sale prices.
- Research the market value of comparable (similar) property in your preferred areas by searching the internet, attending auctions, speaking with a variety of estate agents and monitoring auction results.
- Use the agent’s estimated selling price as a guide only. The agent represents the seller but must be fair and honest with buyers.
- Ask the agent to justify their advertised price by providing recent comparable sales evidence. They should have knowledge of the market in the area to support their estimate.
- The seller is unlikely to set their auction reserve price until the day of the auction (and isn’t obliged to do so any earlier). The reserve price decided on the day might be above the advertised price.
- Do not allow emotion to cloud your judgment and be realistic about the likely selling price.
Negotiating an Offer
When buying property, you will purchase either by private sale (treaty), at auction or post auction. However, the success or failure of establishing your portfolio is more than simply purchasing a property, and often comes down to your ability or inability to successfully negotiate a result in your favour.
Start your property negotiation only if you have done your due diligence, have a strong understanding of the market value of the property, have assessed your cash flow and have a fixed budget when negotiating or bidding at auction.
- Make sure you have the contract reviewed BEFORE you place an offer on the property, and
- Include a clause for building and pest inspections or attend to these BEFORE the auction
Remember, in all situations described below you will be up against seasoned professionals and highly experienced negotiators,
Buying by private sale (private treaty)
This is when a property is placed on the market and advertised for sale with a price declared in the form of a single price, price range or frustratingly, not at all!
Buyers deal directly with the real estate agent and make offers to and negotiate via the agent.
Remember, everything is negotiable. Whether it is the length of the settlement period, the size of the deposit, time required to allow for research and inspections such as building and pest, early access to the property for renovations, etc. However, while everything is negotiable, both parties in the transaction need to agree to the terms.
Hopefully you will reach an agreement that satisfies you both. Remain civil throughout the process and be realistic about pricing
Note – In some states a ‘cooling off’ period applies after an offer has been accepted and executed, but as these vary from state to state, or don’t actually exist at all, you will need to research the state that you are buying in.
Buying at (public) auction
This is where the property is placed on the market for sale by public auction on a particular date and time. Generally a price range is declared, however, sometimes no price is declared at all!
Be aware that selling agents and auctioneers use very advanced tactics and methods, to create hype and are dependent upon buyers who are overly emotional to drive property prices up. As auctions are designed to remove negotiating power from the buyers and to drive buyers into an emotional frenzy, take some of your power back by having other viable properties on the back burner.
Map out your bidding strategy before attending the auction and remember to keep your cash flow figures and budget in mind and stick to it. Keep your maximum price close to your chest and don’t let a selling agent stand next to you during the auction and goad you for more money – they don’t work for you!
Also have a plan in place if the property passes in to you at auction. If this happens you have obtained the right to negotiate directly with the agent to purchase the property and this is your opportunity to negotiate the best deal you can to buy it.
If you are invited into the property to negotiate, DON’T go inside. Stay outside so you can keep an eye on the other agents and to see if there are other prospective buyers hanging around that they may be talking with. This alleviates the pressure of being inside, being told there are other buyers outside (even when there aren’t) and making a negotiation mistake.
Should you secure the property, congratulations! The contract will be executed by all parties and you leave the auction with your own copy of the executed contract. Just as when buying by private sale, the next step is to provide a copy of the contract to all of your respective experts to ensure the process of settlement gets underway. This is especially important so any terms/conditions that were included (such as finance approval) can be met according to deadlines and of course, you need to ensure you pay the deposit as agreed.
Go forth and prosper!
Some of the article content is extracted from the book Property Prosperity – 7 Steps to Buying Like an Expert by Miriam Sandkuhler © 2013, with the author’s permission