Price is only one of the terms you should be interested in when you are buying investment property and if you can agree one or a combination of several of the following, in some circumstances, it might even make paying more than the asking price more than worthwhile.
Other terms to negotiate when buying investment property could include:
- Paying a smaller deposit or even no deposit at exchange of contracts. The cash-flow advantages may make buying the property so attractive that is worth compensating the vendor by way of a higher price especially if it is combined with a delayed completion. A purchaser could then take effect control of a property with whilst putting no money into the transaction until completion.
- Being flexible on time frame for completion. Picking up on the proceeding point, securing and controlling the property now might be more important to a buyer than negotiating every last penny off the sale price. Having a flexible time frame on completion might be more attractive than price per se. After all, this is pretty much how the concept of options works where the parties agree that the buyer has the right to buy the property at a pre-agreed priced at any time during the option period. In return for this flexibility, and on the assumption that prices will rise during the option period, the buyer might agree a price higher than the asking price.
- Allowing you to start refurbishment works between exchange of contracts and completion. Again, if this is combined with a deferred completion date, this can be a very attractive situation for a buyer. If, for example, they may know that they can renovate or redevelop a property and add a significant amount of value through that process with the result that the end value will substantially exceed the asking price and the cost of the works combined. They might be able to structure the deal agreeing a price which reflects the unimproved state of the property, and then agree that they will do the works prior to completion. They might then, at completion be able to raise finance against the completed value of the property. The advantages of doing this might more than outweigh paying the vendor a slightly higher price as an inducement to co-operate.
- Obtaining vendor finance. In extreme circumstances it might be worth paying more than the asking price (or current market value) if, in return, the vendor provides, say 100% finance. This would be the ultimate ‘no money down’ deal. A vendor might not be able or prepared to grant 100% finance but they might be able to offer some kind of loan which makes the deal attractive to the buyer, especially if it means not tying up the buyers cash. Although vendor loans have become somewhat synonymous with mortgage fraud there are ways of structuring them which are totally legal. They can be registered as second charges against the property and fully disclosed to all parties including any lender with a first charge.
- Asking the vendor to undertake repairs before completion at their own expense. Again, if the cost of the works is greater than the additional amount paid by the buyer, this has to be worthwhile, especially if the buyer is able to finance against the improved value either at completion or post completion by way of a remortgage or a further advance. This situation could arise where a vendor is trying to sell a property in slow market and where the buyers negotiating power is enhanced.
- Including carpets, curtains, fixtures, fittings, furniture etc. This is something many investors overlook but the cost of re-carpeting or of replacing curtains, or fixtures and fittings, can be high. It’s not always a given that a vendor will these. So, if, for example, you know it will cost, say, £5,000 to replace carpets curtains and other bits and pieces, it might be worth offering an extra £2,000, for example, to encourage the vendor to leave them.
Or anything else you can think of that may be helpful or useful to you.
Sometimes I will include other terms in along with the price, most often because I can then drop them during the negotiation. This can help take the other party’s focus off price, if that is important, and it can help to build or maintain empathy if it looks as if you are being reasonable and not being dogmatic.
A last point to consider on price is thinking about market trends and where prices are likely to go in the future.
If, in these rather uncertain times, you think prices are likely to fall then you will want to agree a price which factors in the potential for that fall. Many investors are doing this now by buying at a discount to current market value. If you think prices could fall 10% then you may want to factor in a 15% or 20% discount, not only cushioning against any fall but also ensuring that whatever happens you will equity in the property.
If you think prices might rise and strongly, either in the market as a whole or for this property or this type of property, then you may feel it acceptable to bid over the asking price to secure the property. Some readers may think it is absurd to think like this under current market conditions but some market sectors have proved extremely resilient and are performing strongly. For example, prices for property in the central London high-end market are now back above their 2007 peak levels.
If I were to summarise what I have been saying in one sentence it would be “You can’t decide what you want or need to pay for an investment property until you fully understand why you are doing the deal”. In my experience, when you look at the bigger picture, price becomes only one of several factors that drives a deal.