How to negotiate the purchase price when buying a house

April 9, 2021

With property sales going haywire in Australia through 2021 and prices soaring to record-breaking highs, it’s important to know where you stand on price and how much flexibility you have to negotiate. Knowing where you stand means you won’t overpay, which is especially important in a hot market where panic can set in.

Overpaying on a property is one of the most common mistakes you can make. Especially in a hot market.

People don’t really understand how property markets work, there is a feeling, and even portrayal that the market is running hot, so you need to keep up, which sets off panic buying and significant overspending.

The truth is, people control the market.

If someone out there is willing to add $50,000 to the asking price just to secure the sale, it creates a feeling in the community that those are the property prices. It’s just not so. This is what investors and business forecasters talk about when they say, the property bubble will burst.

What they are saying is that, eventually, all those people who volunteered to overpay on the asking price of a property, will someday find the property’s true worth, which may well be less than they paid for it.

It is crucial that you do the research to understand how much a property is worth so you make a solid investment for your future.

The research on price has to be done before you make your offer, so it’s something you will want to get started on as soon as you are interested so you can get your application submitted in a timely manner.

If you put in a bid, then research and find it’s too high, it really is too late to change it. You’ll be trapped in it at that price.

The research you do is essential. Take your time and harvest as much data as you can from relevant, local sources.

As well as the trap of offering a price that’s too high, it is possible, though not as common, to offer a price that’s just too low. The danger here is you’ll quickly be muscled out by more genuine offers, which means by the time you reset and come back with a higher offer, the property will most likely be sold.

Research is the key to understanding the property price so you can compare this to the asking price and make sure you are paying what the property is worth.

Here’s where to go to get the facts and figures you need to go in strong.

Compare with recent sales

For your comparisons to be effective, you’ll need to study apples and apples, not apples and oranges. That means finding homes in similar locations, that are of similar age and size with similar amenities. This way you can easily account for any differences and look for patterns.

Real estate agents will typically use local comparisons with similar properties recently sold to set their property prices, as well as looking for any stand-out features that may make the property more valuable than those around it.

Take a look at what has been sold and what the prices were. Many properties also now have an online record of previous sales so you can see when it was last on the market, how much is sold for and how many previous listings it had (as well as other similar properties).

Here are some fast rules so you can filter down your results and find the three comparisons that matter

- Sold in the last six months

- Sold within a one-kilometre radius of your potential property

- Is of similar size and build to the potential property

This gives you a solid understanding of the current local market, allowing you to make an offer confidently with support to back up your proposed figure.

When you make an offer, provide evidence that supports your claim. The price you offer has to come from somewhere and be based on logical facts if you want to be taken seriously.

Monitor the numbers

As well as getting information about current property sales, you also want to get a read on what type of market you are in.

A Sellers’ Market

This is when there is a high demand for properties in the area. The vendor will have a lot of offers and be able to pick who they want to deal with. In these cases, you’ll need to get a quality offer on the table as fast as possible.

In a seller's market, you’ll see crowds at Opens and lots of different people bidding at auctions. You’ll see homes selling quickly and auctions doing well.

A Buyers’ Market

In a buyers’ market, a vendor may struggle to move a property quickly. If they are desperate to sell, you may be able to offer a lower price, even as much as 10% lower than what you calculate the property is worth, and open up negotiations on price from there.

In a buyers’ market, you will see properties in the area sitting for sale longer, fewer people attending Opens and a number of auctions failing to clear the reserved sum.

Attend open for inspections, see how much interest a property is getting and monitor auction clearance rates to see what kind of market you are dealing with.

Meet the seller’s needs

The representing real estate agent is a great source of information on the property. Part of your research will be asking them lots of questions.

There are questions you are able to ask to help understand your vendor’s motives for selling. Knowing what the reason is for the sale will give you an understanding of how urgent the sale is.

One of the biggest points for leverage with home sales is the reason for sale. When you understand what the seller needs, you can satisfy this as part of your offer, which might be a 30-day settlement, or a 150-day settlement, a bigger deposit or making no changes to the sale agreement. In order for this to work, you’ll need to be flexible enough to meet their needs. If you can’t handle a 150 day settlement period yourself, it’s not something you’d want to put on the table as a bargaining chip.

The reasons for sale that can prompt urgency are

- Moving to a new home (already purchased)

- Deceased estate

- Divorce

- Debt

- Moving interstate

- House in need of repair

- Reasons for sale that work for a slow sale

- Moving but not yet found a new home

- Desire for profit

- Renovation for profit

- Property upgrade

- Moving in with a partner

- Sale of investment property

For example, someone who is wanting to sell so they can put the money into their newly purchased home will be looking for a quick sale and a short settlement period, compared to an investor who is making rental income from the property and is looking to increase his profit with a good sale. They will be willing to wait for the right buyer for the sale to be worthwhile.

When you know what their reasons are you can make an offer that helps them meet their needs, making it a win-win for the both of you.

The factors that are heavily influenced by the reason for the sale include

- Settlement terms

- Settlement period

- Deposits

- Price

As well as asking about the reason for the property sale, make sure you get other relevant information as well including how long the property has been listed and if there is any room for price negotiations.

Make a suggestion, not a binding offer

One of the traps I mentioned was when your offer is high, you are committed to sticking with it, even if you are paying far more than you realised. There is a way around this, it’s called a Clayton’s Offer. This is an email you send to the agent saying how much you are willing to pay, but it’s not a binding offer and you won’t be held to it.

This is really helpful in a lot of ways. Firstly, it takes a lot of the emotion and charge out of it because really, you’re just asking, there are no negative consequences.

You can get a feel for how good that offer is by the response you get, so it’s a good way to read the market and know where the seller stands on price.

The other way this is really helpful is if you have a number of properties you are interested in. In a hot market, it’s usual to see property after property get snapped up before you get a chance to get a look in. Rather than make a huge offer just to be seen and be stuck with it, you can put a Clayton’s Offer in for multiple properties and see what works without any commitment to buy them all.

A Claytons Offer works because emails are not considered a legal way of buying or selling property. So anything you email through to an agent isn’t legally binding. The name Claytons is actually a bit cheeky. Claytons is a non-alcoholic drink brand, but it’s designed to look like alcohol. “It's the drink you have when you are not having a drink.” So this is the offer you make when you are not making an offer.

Get the contract thoroughly checked over

Your conveyancer will be able to read over the sale contract before you make an offer. They will look for anything amiss. It’s really important that this work is done early in the process. If they find something unusual, or not in your favour you can use this as a negotiating point to bring the price down if they want it to remain in.

Make the sale look easy on paper

When you are ready, put in an offer on paper. You can do this in writing or by filling in the contract.

There is plenty of space for you to add conditions, but you’ll be looking to keep these as few as possible. If you are handing in an essay of conditions and requirements, it’s not going to look like a simple and easy sale.

If you haven't completed a building report at this stage do make that a condition of sale, just be sure to state that the inspection will be completed in a certain time frame (say 24 hours) and have someone lined up all ready to go to the property the next day to get that completed.

Show the seller that your loan has been preapproved for the entire sum, so they can be sure you have the means to follow through on the payment.

In a similar way, be sure to get third party checks carried out on the property for pest and building inspections. If anything comes back that is wrong, you may be able to use that to negotiate a lower price if it wasn’t already mentioned by the estate agent before. Anything you decide on will need to be added to the contract so be sure to get it all in writing and legally binding. Your conveyancer can help with this process.

When you have completed all your research and you are serious about making an offer there are some things you can do to help your case.

1. Know the financial approval time frame.

Some lenders can take a long time to approve a loan, meaning that you are stuck with an offer in your hand and unable to move forward. Make sure you know the approval times so that you can get that contract underway and communicate clearly with the agent on what your expected delivery times are.

Be sure about how much you can spend

If you spend more than you can afford you will be facing some serious hardships. If the market is not in your favour and you have reached your limits, you’ll need to be flexible with where you live and how you live. Don’t rise to the bait of spending higher than you can afford.

2. Make sure you want the property

It might seem like a strange checkbox, but in a panic situation, people will often fall into buying a property just because they can afford it, then find that it doesn’t meet their needs. Reselling a house is expensive. Typically, to see a return on a property you’ll need to put some significant time between purchase and sale. If you sell too soon you risk a loss and you are still in the same situation of looking for that property in a hot market.

3. Be prepared to negotiate

Many people find it hard to take, but it’s typical that your offer won’t be immediately accepted. It seems harsh, you put in all that work, research and carefully fill in your offer, and you get knocked back. In most cases, the buyer might just be testing the water and taking advantage of that pressure-filled situation. Stay calm. Think about what you can afford and what the house is worth and submit again. A good way to leave some room for negotiations is to come down a fraction, but make sure it’s still well within 5% of the price you want to pay in a peak market.

If your offer stands, say so. Remember too that it’s not about the highest offer, it’s about the best fit, so make sure you’ve been flexible in meeting the vendors needs to make that offer more satisfying.

4. Get ready for a long ride

This is not the time to get impatient. Negotiations take time with a lot of back and forth, possibly even very slow responses. It feels like bad business, but actually, it’s all tactics in the cycle. Settle in for the long haul and be prepared to wait them out. Having said that though, always make sure you are prompt with your responses and counter offers to show you are serious.

If you need a distraction, keep house hunting, there’ll be plenty of ways you can make yourself busy and let the real estate agent do the middle work. The real estate agent will be looking for a quick sale, so keep communications open with them about what you can do to help the processes. Often it’s the seller who is dragging the chain so work with the agent to get to a win-win place.

Keeping the emotion out of your sale is the best thing you can do to stay in control and buy a property for its worth, not on hype and panic.

To help with this, get as much assistance as you can from your lender, real estate agent and conveyancer as they will be able to offer advice for your situation that is professional and unbiased.

Who is Peta Stewart?

Award-winning conveyancer. Entrepreneur. Business mentor. Women’s cycling advocate. These are just some of the ways Peta Stewart is introduced. What ties them together is a steely determination to help people achieve their life goals and have fun in the process.

In 2004, Peta became the first licensed conveyancer in the Albury Wodonga greater region. Five years later, she launched her own business and started shaking up the industry with a good dose of personality, integrity and humanity.

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