Oscar Wilde once famously said’ a cynic is a man who knows the price of everything but the value of nothing’. Clearly in property it’s important to distinguish between the two.
It’s sometimes said about property that the value is the price some one will be prepared to pay. That might be a little simplistic and actually blurs the difference between price and value. I am sure that many of us will be able to think of instances where the price paid by us, or someone we know, for a property, or a commodity or whatever did not reflect the true value.
In Post I’d like to think about price, and how much we should pay or, indeed, sell for. I’ve said before that two fundamental mistakes made by property investors is to pay too much or to sell too cheaply.
The first thing to remember is that the only price you are interested in paying is the price that works for you.
You will know how much you want to pay for a specific property investment by having researched the market, estimated costs, thought about your target return and so on. In other words, you’ll know why you want to buy a particular property and mostly that will be for financial reasons. You’ll do you homework on the figures and you’ll know that there will be a maximum price at which this property works for you.
Alternatively, if you are buying at a property auction, there will be maximum bid which you can bid up to, and then stop, even if others continue bidding. If you pay more, it will not work or, using property talk, it won’t ‘wash its face’. You will know what that price or bid point is and you will be aiming to pay less than that maximum.
So, the price you offer should in no shape or form be influenced by the asking price. At auction, the amount you bid should not be influenced by the ‘guide price’ or, if it’s known, the reserve.
In the remainder of this article I will refer to ‘asking price’ but in many respects the principles and comments equally apply to auction guides.
I am sometimes asked questions like, “isn’t it standard practice to offer 5% less than the asking price?” I take the view that I do not know how any asking price has been arrived at. So in that sense I have little regard or respect for the asking price. The asking price might have been arrived at in any of the following ways:
- It might have been carefully and thoughtfully considered by an estate agent who has taken into account their knowledge of sales prices achieved in the area, and it might be reasonable and realistic.
- Or it might be an inflated figure provided by the estate agent in order to secure the vendor’s sale instruction.
- Or it might be an unrealistically high asking price set at the insistence of the vendor, and the estate agent has had no alternative but to comply for the time being. Perhaps they are working on the basis that once the vendor has tried this asking price for a while and has not sold the property, they can then talk some sense into them and get them to reduce the price to a more realistic level.
- Or it could be an unrealistically low price set by a vendor who has decided to sell privately but who is out of touch with achieved prices in the market.
- The price could be realistic for the property in its current use but it may not adequately reflect the possibility of increasing value through a change of use, or by redevelopment.
The point I’m making is don’t assume the asking price is right. Until an investor has done their research they will not know how realistic the asking price is and so, when opening negotiations, they should rely on their own opinion of value when deciding on the amount of their opening offer.
It’s also true that, unless the asking price is qualified in terms like “reduced for a quick sale” or “offers in the region of” it will not, in itself, give any clue as to the willingness of the vendor to negotiate.
In an auction context the catalogue may show a ‘disclosed reserve’ or even state that there is no reserve. However, until you pick up the phone and to the auctioneer and make an offer prior or, if it did not sell on the day, after the auction, you won’t know whether the vendor will be flexible or not.
The most obvious way to test this is to make a low offer.
I’m sometimes asked by new investors “isn’t it rude to make a low offer?” I don’t think it is, although sometimes estate agents act like you are being rude. I’m not sure why they do unless it’s just the irritation from knowing they have to pass the offer on to their client and they think there’s no chance of it being accepted. In other words, they just don’t like having their time wasted. I don’t have a lot of sympathy with that, I see that as all being part of the job.
The reality is that if the vendor doesn’t like your offer, they only have to say no. It’s nothing personal. But from your point of view, if you don’t ask, you definitely won’t get. And, if you offer too high to start with it’s usually impossible to reduce your offer in a credible manner later in the negotiation without causing real upset.
Then there’s a question I’m often asked about buying below market value from a distressed seller “Isn’t it taking advantage to make a low offer?” Again, the vendor is under no compulsion to sell and they are perfectly entitled to take their own advice on the value. So I don’t think you need to even see it in those terms.
I’ve also been asked whether there are any circumstances where one should consider paying a higher price than the asking price. The answer is yes, although there could be numerous different reasons for doing so.
So, for example, we are all aware of ‘gazumping’ where some one offers a higher price that that currently on offer, in order to secure a property from under the nose of another buyer. This is something we see in a strong market where properties are selling quickly, prices are increasing, and sellers can play buyers off against each other.
Another time a buyer could be justified in paying more than the asking price is if they are effectively in the position of being a ‘special purchaser’. This is where, because of their own circumstances, which are not recognised by the seller, they may be able to release value or extra value from this property, or another property, which another purchaser cannot. So a developer may pay more for the market value (or asking price) of a piece of land if it is required as part of a larger development site they are putting together.
Sometimes, when you do your research you just know that the price is too low. This can happen and rather risk losing the property by negotiating too hard you might decide on a pre-emptive strike and to offer more than asking price to get the property taken off the market. An example of this could be where the vendor has been badly advised by an agent who doesn’t understand the market, or where something of value has been missed by the vendor or their agent such as the ability to get planning consent for redevelopment, or a change of use.
A classic example of this could where large family homes in a particular area sell at a certain price but the vendor is confident, or knows, that they can obtain consent to split it into a House in Multiple Occupation. As an HMO the property will be worth significantly more than a house in single occupation as a family home. This type of situation can occur simply because the vendor has overlooked the possibility, or where local authority polices have changed, unknown to the vendor, but known to the buyer.
Then there are situations where the purchasers own circumstances mean that they can afford to pay more. An example of this could be where they have access to favourable finance terms which mean they can afford to outbid and average buyer who has access to finance at normal market rates.
Another example is one we have probably all seen or heard about where a builder can afford to out-bid most buyers of a property requiring some attention because they can get the works done more cheaply than most buyers. It might be that the builder is buying the property with the intention of getting his workers in to do the work during quiet times. He might think that if he has to pay them anyway, he may as well get them to renovate his property. In effect he is getting the work done for next to nothing, and so he can afford to pay more than someone who would have to pay a builder to get the works done.