Tuesday, 17 April 2012

Investing in real estate: Before you negotiate

This is the sixth part of my investing in real estate series and with what you should do before you start to negotiate the purchase.

Now that you have determined the house (or if you're lucky enough - houses) that fall within your investment criteria and the price you are willing to pay for them you are left to negotiate the price - however this is a lot of information you need before you begin this process.

In an ideal world this would be the backdrop to the negotiations

  • You would not have revealed anything about your valuation or how much you want to spend

  • You would know the price that the seller wants as well as their lowest price

  • You would know how urgently the seller needs to sell

It is actually a lot easier than you think to get a lot of this information (especially if you are willing to spend the time and effort).

Never ever reveal how much you are willing to spend or how much you can spend

Never forget that real estate agents work for the vendor - not you. Their aim is to maximise the sale price (and thus their commission) and this is the one piece of golden information that you should never give up. They will tend to suss it out in different ways by asking seemingly innocent questions such as:

  • What price ranges of properties are you looking at?

  • How much do you like this property?

  • Where do you work / what do you work as (they will back solve to how much they think you can spend)?

Getting the information you need is easier than you think!

Although real estate agents are working for the vendor they are as susceptible as anyone to letting things slip. In fact as many are just trying to make a sale at any price they will often tell you things they know you shouldn't just so you put a bid in.

Questions you should ask include:

  • Why are the vendors selling? You are looking for a desperate seller so you can get a cheaper price - good real estate agents will avoid answering this question but many will answer it straight off the bat

  • Are the seller's expectations regarding the price are reasonable? Never ever ask for what the seller is looking for - see my next post on negotiating the price. This question will let you know how frustrated the real estate agent is with the seller and how much he is likely to tell you about them. It may also tell you that they are desperate (if you didn't get an answer to the above question)

  • Get any other information about the sellers that you can. Most of it will be useful but just occasionally you will find out a piece of information that will be gold (such as they have already bought their next house and need this one to settle)

Do not ask these questions as a list as it will put a real estate agent on notice that you are fishing for information they shouldn't give out. Work it into your conversation.

A lot of real estate websites will reveal some of the information you need as well. An annoying trend in real estate advertisement is the price reads $POA (price on application) which means you have to contact the real estate agent. There are ways of getting around this and seeing what the sellers ideal selling price would be (no seller puts what they actually expect). On www.realestate.com.au if you right click and select "view source" and then search for the word "price" it will come up with a price band that the website uses to rank their search results. Other websites are like this as well so it is always worth giving it a go.

Beware false information

Real estate agents will give you false information all the time! Take every piece of information with a grain of salt and see if it fits with the whole story. The information most likely to be false includes:

  • Price the vendor is willing to sell for: Agents regularly under quote what the vendor actually wants to get people interested.

  • Interest from other bidders: Agents almost always pretend there is another bidder. This is especially true when the negotiation process has started. Often there is the temptation to bid against this phantom bidder - in fact all you're bidding against is yourself

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