Striking the right property deal

By Nila Sweeney

Buying a property
Having secured the best possible deal on your mortgage, it's time to move on to your next big hurdle - buying your home. While you were in negotiations with your lender it was pretty much a one-on-one proposition. But in buying property, you will find yourself in competition with other home buyers and investors, each one looking for their dream deal. Not only are you now in a battle of wits with the vendor, you also need to look over your shoulder in case someone tries to sneak in and "hijack" your deal.

Knowing the market
Before you can negotiate the best price on your home, you need to accurately determine its value. Rather than gaze into a crystal ball, you are much better off if you can work out what similar homes are selling for in an area.

The worst way to value a property is to ask the real estate agent, whose commission is based on the selling price. A professional valuation is a better way but is likely to cost you a few hundred dollars. If you are looking at several properties, it can get expensive. Outside of the metropolitan areas, local councils are usually able to provide some sales information.

A great, and cheaper alternative, are Home Price Guides, available from Australian Property Monitors. These property price guides list sales details of individual residential properties including the full address, the type of property (house, unit etc.), descriptive information (where available), the real estate agent who sold the property (where available) and the sales date and the sale price (and/or auction result). Each standard guide lists monitored sales in the previous 12 months in the postcode of your choice. If the property you are purchasing is in the database, you can see how much the current owners paid for it, whether it has been put to auction since it was purchased, and in some cases what the highest bid at that (unsuccessful) auction was.

Knowing the estimated value of a property can help you determine immediately if a home is priced outside your range and most importantly, where to draw the line in your negotiations, the first step of which is making an offer.

An offer too good to refuse
If a property isn't going to auction, you are saved the stress of auction day. But then you are faced with the daunting question - what should you offer?

Don't lose sight of the fact that you are trying to get the home you want for the lowest possible price while at the same time the vendor is trying to get as much as they possibly can for it. While it is important to be cautious in approaching negotiations like this, don't be too inflexible. After all, you want this property. The last thing you want is someone beating your best bid by a few hundred dollars, knowing that the property is worth much more. This is the type of experience that causes horrible 'if only I had...' nightmares.

There is no set strategy for purchasing a home by private treaty (as opposed to auction). There is also no way of knowing if you are being told the whole truth by the vendor or their real estate agent. One common tactic to get you to increase your offer is when the real estate tells you there is a competing bid from "another interested party". There may be other interested parties, there may not. The vendor may be anxious to sell, they may not. Making a strong opening bid may be preferable to slowly creeping towards an acceptable figure, but then again, it may not.

If it sounds like this type of negotiation involves a lot of uncertainty, you're right. It's a game of bluff and the person with the best nerves wins. This is where your research comes into play. If you know the selling prices of similar properties in the area, you are better able to gauge the asking price. In a slowing market such as the present one, find out how long a property has been on the market and whether the asking price has been reduced.

While most people make an initial offer of about 5 per cent of the asking price, you need to know how realistic the asking price is. Offering 5 per cent less on an asking price 25 per cent over the property's actual value is smart business - for the vendor. Knowing, for example, that the vendor needs to make an urgent sale means you might be able to make a cheaper offer and get the property. It's all about pressure, and the more you know about the deal, the more effectively you will be able to negotiate.

While most buyers get a kick out of "squeezing" vendors, remember not to drag it out too long. If the property is a particularly attractive one, playing mind games with the vendor may allow someone else to sneak in and make a more attractive offer. So be thrifty and careful, not greedy and inflexible.

Going, going, gone!
In a buyers' market, relatively fewer properties are sold by auction. Buying at an auction means you can't negotiate the terms of the sale, you are immediately bound by the sale contract and you have to pay a non-refundable deposit on the day. It's very easy to get caught up in the excitement at an auction but be careful that you don't let your emotions sway your head. You can easily pay top dollar and go beyond your means to repay. Set a bidding limit and stick to it.

If the property you are after is going to auction, a good negotiation strategy employed by many home hunters is to contact the vendor prior to the auction date and make a firm offer. There are advantages and disadvantages to this approach. On the positive side, you may be lucky and strike a nervous seller, anxious to sell. Alternatively, your bid may convince the vendor that they are sitting on a gold mine, and set a higher reserve price when the auction is held.

Sale by private treaty/public auction or public tender
The way a residential property is sold in Sydney will depend on many factors.

Sale by private treaty is preferred where there is no particular special feature that will attract a premium price and there is no particular schedule for the vendor.

 Buying by Private Treaty
  • Always get a professional to read the purchase contract, which is usually a standard form in most states
  • Finance - Having a pre-approved home loan puts you in a strong bargaining position, as you are ready to buy when the price is low and before it is pushed higher
  • Being ready to buy the home you want minimises the chances of gazumping or similar tactics
  • Don't be tight. Get building and pest-control inspections done before making an offer to see if there are any "hidden problems". Alternately, make the offer subject to rectification of any problems found by the inspections
  • Remember, the payment of the deposit does not mean you have a binding contract. The contract becomes binding only after the seller and buyer have signed the contract

Sale by public auction is preferred in a buoyant market or in the following situations:

  • properties in the top fifty suburbs
  • there is more than one qualified buyer as the increased competition will lead to competitive bidding and hopefully an increased sale price
  • the property is unique and therefore hard to value
  • the vendor nominates a specified auction date.

Tip: If a vendor is considering selling by auction it is advisable to do extensive research as a skilled auctioneer can significantly enhance the sale price.

 Tips for purchasers at auction

  • If you are a new buyer, go to several auctions to get orientated before attending the auction you are interested in
  • Purchasers attending auctions must come prepared for a number of factors such as dummy bids (now outlawed in many states by legislation), pressure from sales people and pressure from the auctioneer
  • Don't get too emotional about the house. Remember, if you miss this one another will come along
  • Buying at an auction is all about strategy. Work out which way you want to approach the sale and go for it!
  • Be sure to set your spending limit before you go into the auction. Be prepared to reach it, but don't go over it
  • Residential property valuations cost between $200 and $500 but can be money well spent
  • Think about hiring a professional bidder or "purchasing agent" to act at the auction on your behalf. They generally work on either a flat fee or on commission as a percentage of the sale price.
  • If you are well informed and as cool as a cucumber in a high-pressure auction, then this may be the ideal way for you to purchase your property.
  • Don't forget there will be a reserve price, that is, a price nominated by the vendor at which the property will become available for sale during the auction. The price is kept secret from bidders until it is reached
  • In a buyers' market, such as the present, auctions may not be the best way to purchase a property at the lowest possible price.

Auction antics
Auctions can be a frantic event, so it's important to keep your wits about you. Most Australian states don't offer a cooling off period after auctions, so the bids you make all have the power to make you a home owner. Remember what your maximum bid is, and ensure that you don't exceed it.

There are a range of different tactics you can use to try and turn an auction in your favour, and in the end different strategies will work better for different people - it all depends on whether or not you have the courage to carry them out!

Low starting bid - when an auctioneer wants bidding to begin at a particular level, jump in with a much lower bid. When the auctioneer protests, dare other bidders to make a higher opening bid. Few ever do.

Slow down the bidding - when bids are rising in $10,000 lots, pop-in with a $1,000 increase. Again, the auctioneer protests and you ask the other bidders if they are prepared to pay an extra $10,000 to beat your $10,000. Bidding generally slows downs to $1,000 lots as the sale price nears.

Place the property on the market - once a property has reached the reserve amount previously agreed to by the vendor, it is 'on the market' and will be sold to the highest bidder. If this level is not reached, the property is 'passed in' and may or may not sell to the highest bidder. Repeatedly ask whether the property has been placed 'on the market', informing bidders at this point that their next bid may lead to purchasing the property, possibly scaring them from making further bids.

Master of ceremonies - instead of standing reverently in front of the auctioneer, walk to the front of proceedings and make your bids staring into the face of opposing bidders. Joke with the crowd, make faces and generally undermine the authority of the auctioneer.

Make a knockout bid - make a calculated and confident bid well above that made by competing bidders. The other bidders rationalise that you mean business and they often decide they aren't prepared to enter a bidding war for the property.

The differences between buying at auction and by private treaty:

Buying at Auction

Buying through Private Sale

  • There is no "cooling off" period
  • A "cooling off" period may apply (varies from state to state)
  • Full deposit must be paid immediately
  • Full deposit must be paid when exchanging contracts
  • You must undertake any inspections and searches before the auction without a guarantee that you will have the successful bid.
  • You area able to complete your inspections and searches at any time before the "cooling period' ends. If you find anything wrong, you can withdraw your offer.
  • You don't know the minimum amount (reserve price) the vendor will accept.
  • You know the price the vendor is asking.
  • You are in competition with other buyers and the price may be inflated if you get involved in a "bidding war"
  • A higher price may result if you are making counter offers in competition with another buyer.
  • Any offer (bid) you make at an auction is unconditional.
  • Conditions are negotiable.