Unfortunately, for some property investors the experience of buying an investment property can be a bit like a jockey’s experience of running the Grand National. They carefully negotiate the hurdles of finding a property, doing their due diligence and analysis and obtaining a ‘decision in principle’ on the finance, only to fall at the last fence by failing to agree satisfactory terms for a purchase. In other words, they make a hash of the negotiation and the chance to do a fantastic deal goes pear-shaped.
If this sounds uncomfortably familiar, worry not. You’re in good company. A lot of people get the negotiation stage wrong, especially when it comes to trying to agree the right price.
Negotiation to a lot of new investors is merely making an offer a little below the asking price – and when that is rejected, offering a little bit more. But I hope we can do a little bit better than that!
The good news is that it doesn’t have to be this way. In fact if you think about it, constructing your negotiation around the asking price is mad anyway, especially if you’ve taken the time to do your own research into the financials and know what you need to achieve to reach your goals.
Negotiating a good deal is really a three-stage process of gathering information, building trust and solving problems. And so this week, we’re going to take a look at how to gather all the information needed to set a starting price.
In actual fact, much of the information needed for this stage will have been collected whilst carrying out your due diligence. However, before you make any offer, there are certain other key facts that you need to know about the property too.
For example, as we discussed last week, are there any associated risks with you owning the property in terms of location? What about the condition of the property itself – if anything, what needs doing to it such as repairs or modernisation and what would be the associated costs?
Before putting in an offer, you also need to consider if the property is mortgageable, how you will finance it, and what terms you are likely to be offered by a lender. This will help make a realistic appraisal of how much you want to offer.
It goes without saying that you’ll also need to consider what the property is actually worth – and whether the price is reasonable – as well as the potential rental value and likely void periods. Armed with this information, you can then analyse whether this property at this price will provide a suitable return.
This may seem like I’m stating the obvious, but you’d be surprised at how many investors go into the negotiation process without gathering all the necessary information first.
In fairness, sometimes it’s not their fault. It is something of a quirk of the property system in England (I think the system is different in Scotland) that often we make an offer and then send in a surveyor to tell us what condition the property really is in. This doesn’t make a lot of sense though, because surely the offer should reflect the condition!
The trouble is that once an offer has been accepted and the surveyor appointed, the vendor is often not amenable to renegotiating the price. This is why, as you already know, I encourage investors to “inspect” a property rather than merely view it. By this I don’t necessarily mean conducting your own survey (or even relying on what you pick up on your “inspection”), but you can gather enough basic information about the condition and the likely cost of putting it right. This will certainly save a lot of grief in the negotiating stage and hopefully save you a small fortune in the end too.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, Author & Property Investor
PS. By the way, I’ve rewritten and updated my best selling ebook, The Successful Property Investor’s Strategy Workshop, which is an account of how I put together my multi-property portfolio, starting from scratch and with no money of my own, and how you can do the same. For more details please go to www.ThePropertyTeacher.co.uk/PSStrat