So you’ve found a property that you think looks pretty good but you need the time to do your research to see whether the deal stacks up. At the same time, you’re concerned that someone else may see it and buy it while you’re doing your research. You may begin feeling anxious… you’ve spent a couple of weeks finding this great deal and you don’t want to lose it. What should you do?
Your thoughts go from ‘what the hell, I’ll buy it’ to ‘I’ll follow the process and make sure it’s a good deal and if it gets snapped up by someone else while I’m doing my research, then such is life’. Whether you like it or not, Murphy’s Law seems to always kick in with situations like this. The property could have been on the market for months without any interest and the moment you become interested, several other buyers appear from nowhere.
Here’s what you do. The idea is to get the property off the market while you do your due diligence and the way to do this is to firm up your asking price and make an offer. If the offer is accepted and a purchase contract is sent to you for signing, you should ask your solicitor to review the contract and instruct him/her to add contract clauses that make the contract conditional on you undertaking the necessary due diligence, including obtaining the necessary finance and undertaking building and pest inspections on the property. Once this has been done and you and your solicitor are happy with the contract, sign it and send it back to the agent for signing by the vendor. Once the vendor has signed the contract, you have a legal binding contract. The agent will show it on his property board as being “under contract”. The property will remain unlisted until the period of time for each conditional contract clause has expired, or you have notified the agent in writing that you’re not proceeding with the purchase because one of the conditional clauses hasn’t been satisfied. If you don’t notify the agent that you’re pulling out of the contract by the expiry date of the conditional contract clauses, the contract then becomes unconditional and you can’t withdraw without losing part or all of your deposit.
The purpose of the conditional contract is to buy you time and not put you under pressure to make an instant decision.
The question often asked of us is, should I buy at auction or by private treaty?
‘Private treaty’ is the term used to purchase by direct negotiation with the vendor. The answer we provide to our clients is try to always purchase by private treaty, even if the property is listed for auction. Sometimes the vendor will take a negotiated offer prior to auction day. The reason we recommend private treaty is that auctions can be full of emotional buyers who have fallen in love with the property, and who lose their sensibility and bid far higher than the property is worth on auction day. Buying by private treaty, on the other hand, allows you to think with a clear head and not be under pressure to make a bid. The best results and deals that we have made have been by private treaty.
There are many negotiating strategies for purchasing property and the right strategy will depend on the particular property and the circumstances surrounding its sale. One such strategy is the purchase price strategy. When negotiating the purchase price of a property, we always make our first offer at least 20 per cent below market value. Note that we said “market value” and not the “vendor’s asking price”. The two can be significantly different. The reason we ask for a 20 per cent discount is that most agents will have inflated the price of the property by at least 10 per cent in order to attract the vendor to list the property with them and we always try to get at least a 10 per cent discount on the market value of each property that we purchase.
Therefore in purchasing a property you need to do a couple of things: firstly take the property off the market by using clauses that protect you as the buyer. Your solicitor can help you with these. We suggest you at least make the contract subject to finance, pest and building inspections, and your solicitor’s approval of the contract. Using your own clauses in a contract buys you time to do your homework and make sure the property purchase is right for you. Our preference is to purchase via private treaty, however it’s still worthwhile attending auctions, especially if the property has been passed in… the vendors are usually emotional after an auction, which may lead to them meeting your terms.
Until next time, happy investing.
Investor and Author of 47 Biggest Mistakes Made By Propety Investors and How to Avoid Them.