December 06 ~ Final negotiationsBy support
G’day again, last newsletter for 2006!
As promised this month I am going to finish my series on getting from zero to your first deal.
If you don’t know what I am on about then you need to read the rest of the series HERE. July through November.
Now negotiating is not an exact science. I can’t give you a 1, 2, 3 to get twenty grand off every deal. Life is not that simple. What I hope to give you here is a bunch of tools to assist you in dealing with issues that come up through due diligence to get you the best result possible.
For the purposes of this newsletter let’s say that during your due diligence you discover 3 things.
Firstly there is no final code compliance certificate for the property.
Secondly there is $7000 worth of plumbing remedial work required
Lastly to make the deal work for you, you need the contract price to be minimum $15,000 lower than current because the valuation is less than you expected.
So how do we deal with this??
First thing to consider is when do you go back to the vendors. You are dealing with someone who is usually emotionally attached to their property and is becoming emotionally attached to the sale proceeds. So you have to decide when to communicate with them. If you go back with an attempt to reduce the price too early the vendors may get annoyed with you. Equally going back at the last minute is potentially very manipulative, unless you genuinely found out at the last minute, but also can cause enormous stress to the vendor. Some people would say this is a good thing when you’re buying but it doesn’t fit in with the way i want to treat people.
As I said this isn’t a science, you will have to make a judgment call on timing with every deal. In the above example I would go back early with the code compliance issue as that is non confrontational and one of those ‘fair enough” type issues.
And in practical terms I would be offering the vendors the option of supplying code compliance and we adjust settlement date to suit. OR we ask for a discount and we will deal with code compliance ourselves. Depending on how this process went I would then decide when to bring the next issue up.
Now this is critical. There are 3 paths to a vendor once you have a property under contract and picking the correct one can make or break a deal.
A: PURCHASER TO VENDOR.
I always try and have some interaction with a vendor, even if there is an agent involved. People like dealing with real people rather than bits of paper. So with the code compliance issue I would probably deal directly with the vendor and ring them saying that when I visited council there was no final sign off.
If they have been in the property a long time, or built it, there may be a story surrounding the issue. They usually happily tell you what they know, and if they didn’t know, they are very apologetic. It is then easy to explain that legally the house needs one and would they like to sort it out with council themselves or shall we reduce the settlement amount by $XXX, and we will sort it. My experience is that by throwing in a couple of “dealing with council” stories they nearly always take the reduced settlement.
B: SOLICITOR TO SOLICITOR.
Some things are best dealt with via written communication between solicitors. In our example I would get my solicitor to advise the vendors of the plumbing issue, even though I dealt with the code compliance myself. This stops either of us getting emotional and leaves the door open for me to contact them another way if the response is less than favourable. I have had vendors contact me all upset with THEIR solicitor because they had received a letter from me about needing the price lowered. Did you read that properly? I am asking for a discount, they are annoyed with THEIR solicitor. This means I can explain the situation and get their agreement more often than not. You see if a vendor likes you then you want to protect that relationship. Leave the hard stuff to the solicitors so you can keep talking.
C: AGENT TO VENDOR.
Now we all know that a very high percentage of agents are unfortunately very poorly trained and can’t be trusted, BUT you will find agents who will work with you. As a serious investor you will end up with one or two who you continually work with. So when you are dealing with a known agent ask them what they think is the best way to convey info to the vendors. They often know the vendors and the vendor’s circumstances much better than you do and they usually know teh best path forward.
I have on many occasions been stopped by my agent from contacting a vendor directly because he knew he would get a better result. So with our example I would normally get the agent to convey the need for a further discount to the vendor and give the agent all the info I could to help him convince the buyer. Good agents are masters at conditioning vendors and buyers so let them do it.
So a typical scenario with my favourite agents would be for them to go to the vendors and explain that we have spent considerable amounts of money investigating the property. We like the property but there were some unexpected issues. We would love to proceed but we can only make the deal work at 15K less than our current agreement. The purchaser feels terrible about this etc. but is offering as much as they possibly can and still proceed.
If I can, and I think it will help, I will instruct the agent to offer faster settlement or something similar to try and offset the cash.
CRITICAL POINT WITH AGENTS
Always keep agents informed of what you are doing. You can instruct them to NOT divulge info to the vendors if that is what you want, but tell them what you are doing if you are trying to negotiate deals down. The reason is that very very often if a sale is potentially going west the agents will DISCOUNT THEIR FEES to get the deal back on track. They can’t offer that if they don’t know you need it!!
3. SHOW & TELL??
When you raise any issue the vendor, or more typically the vendor’s solicitor, will often ask for proof of what you are saying. Now this is good and bad. Good because it means they are taking you seriously and bad because you have paid for this info, they haven’t, and there may be things you don’t want them to know. For example I am in a deal as you read this where my due diligence has uncovered the fact that the vendor is under selling the property big time. There may be material in the same report that I could use to negotiate with but I can’t show him one without the other.
So my general rule is to not give vendors information I have paid for. With a building inspection for example I will simply say there were numerous issues that needed resolving. I might show them the report but wouldn’t give them a copy. If you do then often they will come back saying that their Uncle Bob has read it and he can fix everything up for $500. Your problem then is that you either have to accept $500 or let Bob fix it and not know if it has been done properly.
Now with our example I might commission a specific report covering exactly the plumbing issues and the correction required. However I would also attach a covering letter stating that I have access to my own plumbers and would insist on getting the work done myself, as I had witnessed too many dodgy plumbing jobs in the past etc.
So remember you have paid for this information, it is yours. Don’t give it away unless you feel compelled to.
4. This is a business remember??
Sometimes you just need the price reduced because you signed the deal up at too high a price. In our example we should have gone in 15K lighter than we did. So remember this is a business. You are buying stock; you need it at the right price to stay in business. So in these situations I am just totally upfront about it and usually get the agent to talk to the vendor and explain that I just can’t get the numbers to work at the contract price. As an investor I need the deal to be at $XXXX to go unconditional. I’m doing one of those at the moment because I just need the deal to be better than it is.
Now as I said earlier there is no secret formula in this scenario, but by being honest and asking the question, you give the vendors an opportunity to say yes. No askee, no getee.
It ain’t over till the fat lady sings. (I’ve always loved that line J)
Now are you listening??
The final purchase price is going to be struck 5 minutes before you settle. If everything has gone according to plan since unconditional date you will simply settle. However there are one or two things to remember before you pick up the keys.
1. Inspect the property.
Now most of us don’t do this. On settlement day get the property inspected. ANYTHING THAT HAS CHANGED OR IS NOT AS IT SHOULD BE IS A NEGOTIATION POINT. UNDERSTAND??
If the garage is full of rubbish, get the price down. If windows are broken or grounds are now unkempt, get the price down. A recent deal I was aware of had 2 garages full of wood and crap. The purchaser’s solicitor contacted the vendor’s solicitor saying this wasn’t on. The vendors OFFERED $5000 discount when the purchaser was hoping for $500!!
Yes read it again. Vendor OFFERED 10 times what purchaser expected.
If it is an out of town purchase pay a property manager to do the inspection for you. It would be unusual to NOT find something to negotiate about on settlement day. Now just for the record I don’t do this very often myself because I believe to just use it as a tactic can become manipulative. I am just teaching you so you know. Whenever there is something genuine OK??
2. Title Search.
Many of us don’t realize that in every S&P agreement is a clause about clear title to the property. Your solicitor has basically 15 days to check title on the property AFTER unconditional or you can cancel the contract. My experience with my solicitor is that it is not hard to find a problem with a title and in fact often there are some minor but genuine issues. So in these cases don’t walk away unless the issues are serious. You now have another opportunity to negotiate the price. And this can be the best time to get a good result because you have already paid the deposit and the vendors have already, in their minds, spent all the proceeds. So they are strongly tied in emotionally to you buying the property.
So are you getting it yet?? Every issue is an opportunity to negotiate. There isn’t a whole lot more I can teach you about this in a newsletter. You need to develop these skills through actually doing some deals and learning what works and what doesn’t work for you.
The over riding things to remember are:
- Tell no lies
- Take every issue as an opportunity to renegotiate
- Negotiate not maniplulate
- The price is not final till 5 minutes before settlement.
I hope this series has helped equip you to be a better investor and reduce your fear levels. Take this information and start applying it. It works for me!!
DON’T MISS THIS!!
If you feel ready for the big leagues don’t miss my workshop in February on advanced Trading strategies.
It will be of huge benefit to you and is also a fundraiser to rebuild a church and home in Fiji. More info HERE.
DON’T MISS THIS!!
And lastly for 2006 I still have a few shares left in Coral Lagoon in Fiji. More info HERE. Don’t be put off by the current politics. This is normal for Fiji and doesn’t affect Coral lagoon in any way. They already have their consents through and the land is freeehold so business as usual.
Thank you for your support in 2006 and I look forward to bringing you more good reads next year.