How to get £10k Knocked-Off by Knowing how to Negotiate a House Price
When you're investing in property, negotiating house price is an essential skill. But, this is a skill that's going to be useful, not just for property professionals but for homeowners and first-time buyers as well. Today, we look at negotiating the asking price and at how to deal with estate agents when buying houses.
In today's quick, property investment tip, we are going to be looking at negotiating house price and at how to deal with estate agents when buying.
Today's article isn't just for property investors but for homeowners and first-time buyers as well.
It's for anyone who wants to shave some money off the asking price.
How do Estate Agents Value a Property?
Back in 2007, I worked as an estate agent. It was how I got into working in property.
And the truth is, since I left that job, not much has changed with regard to how estate agents value property.
Their valuation is based on two things:
- The local housing market
- The expectations of the vendor
In other words, they look at market comparisons and they have a conversation with the homeowner who is looking to sell.
If the seller wants to put it on the market at a particular price, most estate agents will agree with them and look to market the property at that price.
The truth is, the way that estate agents make house valuations is not some exact science.
There is no secret formula.
Normally, a property will go to market at a price that is nothing more than a guesstimation of its real market worth.
What Estate Agents Don't Do
Estate agents tend to value a property based on what other houses in the area have sold for and on what their client, the homeowner, wishes to sell for.
What estate agents don't tend to do, is look at local market trends. They look at prices but not at supply and demand.
A Buoyant Market
When a market is very busy or buoyant, properties will sell quickly. And, with increased demand, house prices increase.
Now, the estate agent will always have a clear grasp of what the average house price is.
But, the estate agent, won't be clear on exactly how fast the market is changing.
Therefore, houses on sale in a buoyant market can often be slightly undervalued, because the estate agents doing the valuations are often not quite keeping pace with local market conditions.
A Slow Market
On the flip-side of the coin, there is the slow market.
Here, the problem for estate agent's is putting the property on the market for a price that is too high.
We might not be talking much. Maybe just a few thousand over what it should be (based on market trends, not just current prices).
But, if the market is slow, then just being slightly off with the price, can stop that property from selling.
In a buoyant market, this wouldn't matter. The market will catch up. But, in a slow market, this can stall a sale for months or longer.
Negotiating House Price
Understanding how estate agents do a property valuation is an important factor in negotiating the price and I hope I've given you a taste of the sort of things you need to know.
But moving on to exactly how to go about negotiating with the estate agent on the asking price, I suggest there is no better place to start than asking these three questions.
- Why is the vendor selling?
- How long has the property been on the market?
- Have there been any other offers?
1. Why Is The Vendor Selling?
Why is the house on the market? Ask this question and not every estate agent is going to tell you the answer.
But, by asking you can open the conversation up a little and the agent might give more information away than they intended.
And, you might find out what the reasons are.
Maybe the owner is selling because they are relocating because of work or family.
It might be a bank selling the property. It could be a repossession.
It could be a developer or a landlord looking to retire.
If you can find out exactly what the situation is then you will get a good insight into the reasons, the mentality, and the thought processes behind the property being on the market.
In turn, this will give you a good idea of how motivated the homeowner is. That is to say, you might get an idea about whether or a not the seller is under pressure to make the sale quickly.
Of course, as I say, you might not get as much information as you would like. But you will get more information if you ask than if you don't.
2. How Long Has The Property Been on the Market?
The second question you should always ask your estate is, how long has the property been on the market?
Now, if it's been on the market for say, six or nine months, it doesn't mean it's a bad property to buy or a bad deal.
It might just be that the property has been marketed badly.
For instance, the estate agent might be using misleading photographs in the marketing materials. So, if a property needs a lot of work doing and the photos don't show that then the estate agent is going to end up spending time showing people around who aren't going to be interested in buying.
But, if you can find out how long a property has been on the market you might get a good sense of whether you are dealing with a motivated seller which will be very useful when it comes to negotiating price.
Other pieces of information that are useful to know are:
- Has the asking price changed at all? When and by how much?
- Has the description of the property changed (say, on Rightmove)? Why was it changed?
You need to build as big a picture as possible as to what the motivation of the seller might be and the process to building this picture should play a central role in your due diligence.
3. Have There Been Any Other Offers?
Thirdly, ask the agent if there have been any other offers on the property. Their answer will give you an idea as to where they are at.
In the past, when asked, we have had estate agents give us answers to the effect of:
"Yeah, they did have an offer. The offer was probably six months ago now and the vendor didn't accept it at the time. But they are likely to accept the same offer now"
To which our response has always been...
"Sounds good. What was the offer?"
Whatever you do, when you are preparing to negotiate on the price of a house, you have to keep the conversation going.
You have to understand what has been going on. And, knowing what offers have been on the table is essential to that understanding.
For instance, if the property has only recently come on the market and there have been a lot of offers already, then you know you have some fierce competition.
If, on the other hand, it's a property where offers have been rejected in the past, but there is nothing currently on the table...
Then, chances are, there are angles you can explore to try and bring that asking price down.
How to Deal with Estate Agents when Buying
The important thing to bear in mind, when you are dealing with estate agents, is that they are working for the seller.
So the secret with how to deal with estate agents when buying is to know your role in the negations and to know theirs.
They get a commission from the seller for selling the property and are expected to get the best possible deal for their client.
An estate agents job is to achieve the best possible sale price for a property.
So, it's important to know where they are coming from. If you always bear in mind how an agent is motivated then negotiating with them is going to be much easier.
Framing Your Offer
Earlier we looked at ways to understand the motivations of the seller. Once you understand the reasons the vendor has for selling you need to go about framing your offer and positioning yourself properly.
So, before you put in your offer you need to know what the price should be, based on local comparisons and you need to know how motivated the seller is.
Then, when you put your offer in, there are two things you need to do.
- Do demonstrate your research.
- Don't Use obvious numbers.
Demonstrate Your Research
When you put in an offer that's lower than the asking price, you always want to demonstrate your research.
So, say a house is on the market for £100,000. If you put in an offer of £90,000 with no explanation for why you are going in lower, then there is a good chance the estate agent will simply dismiss it.
If, however, you have a good reason for picking the amount you go in with, then your offer will be taken a lot more seriously.
"Look, I really like this house. We've got other properties that we're considering in the local area. No 1, Sycamore has sold recently. That only sold for 80,000. Number one, High Street, sold recently. That only sold for 85,000. So I can't offer too much on the property. So, I'll probably be offering around the £89,000, £90,000 mark."
Having reasons for your offer will put you in a much stronger negotiating position than just simply going in there with an offer of £90,000 for a house that is on the market for £100,000.
Don't Use Obvious Numbers
Another important thing to bear in mind is that you shouldn't be using obvious numbers for your offer because, again, they can be easy to dismiss.
So, let's again take the example of a house on the market for £100,000.
If you go in with an offer of £90,000 the estate agent may well assume that you are just trying an amount out to see what happens.
If the agent assumes this, then the chances are that they will respond by rejecting it to see what you come back with.
But, if you go in with an offer of £91,000 or £89,000 then the perception will be that there has been more thought that has gone into it. Numbers that seem to be more obscure are taken more seriously.
It's simple psychology and perhaps it seems too obvious. But, this technique works.
And this rule shouldn't just apply to your initial offer, either.
When you are increasing your offer you need to be doing so using none-rounded numbers.
Say, you go in with an initial offer of £85,000. Don't then raise it to £90,000. Go in with an offer of £87,000 or £87,000 or even £87,300.
You always want to be in a position where you can justify or explain your offer but don't be shy in making that number look a little bit more thought-through than perhaps it is.
Appearance matters a great deal in negotiations and non-rounded number look a lot more thought through than more obvious rounded ones.
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