7 Real estate negotiation tactics - the actual price of a property
Experienced property developers understand that a successful development begins with a well-chosen site. Paying too much for a site means the developer will make less money.
The developer's knowledge of the property and its market value and good real estate negotiation tips for sellers on how to negotiate in real estate are essential for a successful solution. In a property deal, aggressive developers do not always get the best result; skilled and sophisticated negotiators seek a delicate balance between the real estate negotiation sides to create a mutually beneficial end.
A critical first step in any transaction is determining what motivates the seller. Are they selling because they're in financial trouble and need the money? Is it because they're retiring or because they're going through a divorce?
Because selling properties is sometimes held by multiple parties, the real estate developer must investigate all parties engaged in the transaction to determine who the ultimate decision-maker is or whether a group decision is required. Knowing as much about the seller as possible can aid in determining the most effective real estate negotiation tactic in real estate.
Property developers should complete their investigation on the property before entering into discussions with a seller and work to build flexible real estate negotiation tactics and solutions for dealing with the many responses that may come.
Developers should anticipate any objections from the seller and be prepared to respond with a well-thought-out solution. It is critical to prepare for both happy and unfavourable outcomes mentally. How a real estate developer reacts to a poor outcome can impact the likelihood of future discussions. Developers will improve their overall reputation by handling a less-than-favourable conclusion skilfully, calmly, and sensitively, which may lead to future business with either side.
#1. Organizing your offer
It would be best if you had a good understanding of the property for sale and the compelling elements behind the sale before structuring an offer.
Asking a series of questions is the best way to go about it. This is all part of the property's due diligence—the better your queries, the more information you'll have for organising a valid offer. During the initial real estate negotiation, ask the following questions.
Regarding the vendor
- What is the reason for the property's sale?
- When was the last time you looked at the house?
- Is the property owned by a corporation or by private individuals?
- How long have the current owners had the property?
- Who takes the final choice on whether or not to sell?
- When and where must the owners relocate if the property is occupied?
- Is it possible to get a higher price if you settle the property sooner?
- Is the owner willing to contribute to the development by including land in the deal?
Terms and conditions
- What is the asking price for this property?
- Is there any room for negotiation on the asking price?
- Is the seller willing to provide you with an option?
- When does the seller want to do the property settlement?
You may need to examine the following once you better grasp the property and, more significantly, the seller's motivations for putting the property on the market.
Negotiate your terms if the seller is firm on pricing.
Some merchants are firm about their prices and refuse to negotiate. They are just concerned with a specific price and have not investigated alternatives. This allows you, the customer, to purchase on your terms.
You might, for example, offer the asking amount but prolong the settlement period to allow you to finish your plans and feasibility studies without incurring interest on the property.
If the seller is adamant about the terms, you can negotiate your price.
On the other hand, some sellers seek an early settlement due to personal reasons. As a result, a cash offer below the asking price may be considered favourable. In this situation, decrease the asking price by the interest you'll pay on the feasibility studies, blueprints, and approvals.
Dispel the seller's expectations if the price is too high.
If you've done your homework and located a home you want to buy, but the price is too high, and the seller and their agent won't budge, carefully examine the house and look for all the flaws. You may decide that the sale is a waste of time and walk away, or you may wish to demonstrate to the seller or their agent that you are systematic and have identified issues in the property that need to be addressed.
You may persuade the seller or agent to lower the price in line with the market by pointing out the problems.
#2. Set yourself up for real estate negotiation
After you've gathered all pertinent information and, more significantly, comprehended the seller's motivations, consider your position and how to best position yourself for the best real estate negotiation.
Decide on the advantages you need
You will know the price you should be paying for the home if you have done your research well. Keep your price and terms the same. Be prepared to walk away if the seller refuses to take them. If the vendor realises you aren't bluffing, he may back down. Property development is challenging, and you'll be misleading yourself if you don't find a property that offers you the desired financial results. Look at my detailed blog, site acquisition process - little unknown makes a big difference. This information will help you finalise the best property for your development project.
Maintain a straightforward approach
It's best to keep your offer and real estate negotiation simple, so you don't end up confusing the seller or agency. It's also possible that the seller will back out of the contract, even if it benefits them in the long run. Keep it basic and employ language that is easy to comprehend.
Try not to give the figure first
Don't mention the figure if the price of a hot property isn't posted or if you're negotiating an 'off market' property. Remember the old proverb, "Whoever mentions a number first loses." Mentioning any figures could jeopardise your case. Allow the seller to reveal what they're looking for. Ask questions to force the vendor to reveal all of their cards. You will be able to Strategize an offer that will profit you from this position.
Make the vendor aware of the advantages
Most vendors are solely concerned with price, ignoring the advantageous terms you may be offering. Ensure the seller or agent is aware of the issues you can solve for them or the benefits you can provide.
Consider things from different perspectives
Examine several situations before beginning discussions or deciding to make an offer, as not all real estate transactions are the same. Provide the vendor with a variety of options or terms to choose from. Your offer should persuade the seller that cash is not the only way to transact real estate. Demonstrate that there may be mutually beneficial alternatives.
#3. Prepare a feasibility report before making a purchase
You must write a pre-buy feasibility study after completing all of the essential research before making the ultimate decision to purchase a possible development site unconditionally. The entire process should take no more than a few minutes and should give you a general indication of whether the site is worth the money the vendor is asking for. Include the below exercise in the process:
- Complete the checklist for the property.
- Make a rough sketch of the projected development.
- Calculate the profit if the property is sold.
- If the development is held, calculate the future rental return.
Use one-minute feaso to know your numbers accurately and quickly.
Checklist for Real Estate Negotiation
The first rule is to avoid purchasing a home based on emotion or gut instinct. The easiest method to manage your emotions is to create a complete checklist and follow it religiously for each possible site you visit.
Unless the property meets all of the criteria on the checklist, drop it or use any unfavourable discoveries as leverage to negotiate the price down to the correct level for you.
The checklist will assist you in identifying any potential dangers related to your proposed development. There will be some issues that you will be unable to fix on your own, such as subsoil conditions; nevertheless, you can seek a real estate negotiation expert help to resolve any residual issues.
Although a property's zoning may indicate a specific density, this is not necessarily because each site has unique characteristics. For example, the council laws may stipulate that you can develop 11 housing units based on a specified site area. Slope, irregular shape, orientation, influence on neighbours, streetscape, stormwater drainage, vehicle access, overshadowing, privacy, and other factors may limit the development potential to only nine units.
As a result, it's critical to hire an architect to create a schematic or concept plan to see if this is the case. If this is the case, you should either walk away or negotiate a price that reflects the viability of nine units.
Taking a risk in a development endeavour is mainly motivated by the future benefit. If there is no profit from the development, either the site is too costly, or the design is inefficient.
If the land is too expensive, try to bargain for a lower price or better terms that fit your budget. If the design isn't cost-effective, have your architect or designer examine the too expensive elements and hunt for less expensive alternatives.
If you can't fix any of these problems, move on to another site. There are several formulas you can use to calculate your future return. You can take advantage of the property development feasibility suite.
Rental income potential
Whether you plan to keep your finished development as a longterm investment or sell it for a quick profit, you still need to do the numbers to see the prospective rental yield.
If you want to sell, keep in mind that the market could turn, and you could find yourself unable to sell your units and obliged to rent them out until the market turns again.
The decision to keep the property as an investment will, of course, be based on the amount of equity you plan to put into the project. It's an innovative business to ensure you're not in a situation where the loan is too heavily geared, as this can damage your cash flow.
In conclusion, these exercises are time-consuming, but they are well worth the effort. An impulsive site purchase could result in a costly and stressful situation if you don't know the area's values.
#4. Important considerations before making an offer
The following list will give you an idea of what a developer will have to negotiate to secure ownership of a potential development site for sale.
Not every property sale will include all of the items on this checklist.
The buyer's name
The name will be determined by the legal company under which you will develop the property.
Name of the seller
Instead of the owner's name, the property is registered under a business name.
The legal description of the subject property
All legal information, such as the lot number, street name, street number, suburb, and title particulars, such as the volume number, folio number, and plan number, is included. The property type should also be defined, such as freehold, strata title, green title, etc.
You would have a price in mind after your real estate negotiation.
Is the money required at the contract signing to indicate the buyer's seriousness.
The settlement date
It is the deadline for payment and title transfer.
Due diligence period
After obtaining all information requested from the landowner, this period, which is required to undertake due diligence for property evaluation and inspection, shall expire in a certain number of days.
- The expenses paid by the buyer or seller are known as settlement costs. Each party is responsible for its expenses.
- Stamp duty—the tax due when a deed is transferred from one owner to another, based on the sales price and a predetermined rate by law.
- mortgage registration fee—the cost for the registration of mortgage
- registration costs—the cost of recording mortgage and deed documents at the deeds office
- survey cost—the cost ensure that the legal description is correct
- Attorney's fees— both the buyer and the seller are generally responsible for payment.
If you are unable to settle on time, you have the option to extend the settlement date. It could entail:
Notice to the seller- The period necessary by the contract for notification that you will exercise the extension option.
The additional money- When the settlement period is extended, an additional amount of deposit money is required. It can be either additional proceeds paid or included in the sales price.
Shared settlement costs
These are charges associated with the property that will be shared between the seller and the buyer on the day of settlement. They include:
- Any revenue from the land shared as of the settlement date is referred to as revenue.
- operating expenses-the operating expenses due as of the date of settlement
- real estate taxes-the real estate taxes due as of the date of settlement
These are the representations and warranties that the vendor may be required to provide, such as
- authority to sell—that the seller is the only person authorised to sign the sales contract
- conveyance—that the property is not being sold in violation of any regulatory rules
- utilities-that the required utilities are available to the property
- liabilities-that all liabilities that encumber the property are disclosed
- court proceedings-that there are no present or prospective legal actions
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#5. Tenders for your property
Tendering is primarily utilised for larger real estate development projects and when the state or local government wants to promote a region or zone to developers for economic reasons.
Private landowners may also tender their property to achieve the best potential result for their land in terms of pricing, design, or just a better price.
Depending on the type and scale of the proposed project, the scope and process for each tender will differ. You must understand the process and what is involved if you decide to participate in a public (government) or private tender. The popular tender systems are 'formal' and 'informal.'
Formal real estate tenders
A list of parties is invited to participate in formal tenders, often known as 'invited' or 'selected' tenders, and is presented with papers describing the scope of the tender and an offer to contract.
These parties are granted a set amount of time to complete full due diligence on the property. Tenderers must submit a signed offer to contract by the deadline. After receiving the tenders, the seller can accept the best tender or negotiate with the other tenderers.
Informal real estate tenders
Property is offered publicly in the marketplace through informal tenders, and interested parties can obtain a copy of the tender documentation.
By the closing date, these parties will submit their offer, which will include their capabilities, a settlement date, and a deposit check. A preferred party will be chosen from the list of submitted tenders and given two weeks to complete the sale contract.
Calls for proposals
Government agencies generally issue proposal calls or expressions of interest when selling or leasing public land but seeking the best real estate development for the community.
At times, a fee and a set of criteria are established. Before the governing body finalises the winning proposal, the proposals are usually displayed for public remark or objections.
How do you get a tender?
You must recognise that if you participate in a tender, you will be competing with other tenderers. As a result, it's critical to ensure that you have the correct mentality and the capacity to compete effectively. Take into account the following:
- Make your tender proposal stand out by emphasising anything unique about it that other bidders might not be able to provide. This will provide you with a competitive advantage.
- Make a professional presentation document. Remember that the adjudication panel will be looking at multiple proposals, not just yours. As a result, a paper that has been professionally prepared will always stand out among other submissions.
- Follow the tender's rules and scope while keeping your proposal short and straightforward to read.
#6. Securing the rights to development
A developer negotiates a deal with a landowner to develop the landowner's property under a development rights agreement. The developer is in charge of providing expertise and constructing the structures.
The landowner receives land value plus interest when the building or buildings are sold. These chances are not typically available to inexperienced developers since landowners are more likely to be sceptical of inexperienced developers and prefer to work with an experienced developer with a proven track record.
Both parties should examine the following considerations when formalising a development rights agreement to avoid misunderstandings during the agreement's term.
Benefits of the development rights agreement
The following are some of the benefits to the developer:
- The developer does have to spend a lot of money or borrow money to buy the site, which lowers the overall real estate development cost.
- The developer's funds are not at risk.
- Imposts like settlement fees and stamp duty can be reduced, lowering real estate development expenses and increasing profit.
- There is no hurry to build right away, allowing for adequate planning. But there is the pressure of the landholding cost with borrowed cash.
- Developers who pre-sell the development are not paying for the land.
The following are some of the benefits to the landowner:
- The landowner does not have to wait for a possible buyer to get land and building financing.
- The landowner earns a more significant interest rate on equity than selling and putting the money in the bank.
- If the landowner chooses to develop themselves, they won't have to face any real estate development risks because they'll be working with an experienced person.
- If the developer defaults, the landowner retains ownership of the property.
The property's worth
It would be best to settle for the actual market value, and a sworn appraisal by a property appraiser will assist in this regard. If the project involves the construction of residential units, the land cost per unit should be calculated and agreed upon.
If the land is worth $2 million and there are 25 residential units available, the land value per unit should be $55,000. The developer should negotiate a better price while also doing a thorough feasibility assessment to assure a healthy profit margin relative to the development risk.
The duration of the contract
The time it takes to complete the real estate development will be determined by the project's size, scope, and market conditions. Unknown factors may cause the project to be delayed, so the developer should strive for a lengthier time frame. There should be sufficient time to complete feasibility studies, planning, real estate development finance, building, construction, marketing, and unit sales.
The rate of interest
Negotiate an interest rate with the landowner lower than usual bank rates for a one-time payment. More importantly, establish the interest rate start date after all approvals and requirements have been completed or, better yet, after the first withdrawal from the construction development loan has begun.
Allow for a six-month review in case rates drop significantly, but keep the rate cap at a reasonable level.
The funding for development
The money for property development is used to pay for building the units and site infrastructures such as internal roads, sewerage, water, electricity, gas, telephone, and other costs necessary to get the development to a saleable state.
This money can be provided by the landowner or a third-party financial institution. The property will be mortgaged if external funds are used, and the developer will be the loan's guarantor.
Any debt payable to the landowner for the property will be a subordinated obligation, ranking below the senior development loan in this situation. In some cases, the landowner will borrow the property development funds but charge the developer a higher interest rate.
#7. Obtaining an option
A property option to buy a property development site is simply a contract to purchase a property at a set price for a set length of time. An option can benefit both the seller and the developer depending on the market and the property's circumstances.
While options aren't ideal in every circumstance, property developers should be aware of the basics of the transaction because it allows them to conduct a feasibility study for their project without having to pay too much for the land.
An option is a unilateral contract in legal terms since it binds just one party, the seller, who agrees to sell the optioned property at a specific price. The seller receives the option money typically right away in exchange for this obligation. The seller, however, keeps used of the property and receives any revenue generated until the option is exercised.
Benefits for the developer
Securing an option has various advantages for the developer:
- The developer can purchase the property without fear of being sold to someone else.
- During the option time, the developer is not required to manage the property, including rates, taxes, insurance, and other associated costs.
- The developer is solely accountable for the option money and is not responsible for repaying a hefty mortgage and its accompanying interest.
- The developer has enough time to conduct a thorough feasibility study, secure financing, invite partners, or sell the site to another developer at a better price.
- The developer who does not exercise the option loses only the option money and is not liable for damages as a conventional offer to purchase deal.
- The developer gains time to search for the best funding option.
The developer pays the cost of the option, which is usually a tiny fraction of the total purchase price, in exchange for these benefits. The seller maintains the option fee typically if the buyer's option expires. As a result, the seller receives reimbursement for the property's removal from the market during the option period.
Recommended Reading - Property Options: An Ace Up To Developer's Sleeve
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The property development profit is made when the development site is purchased. Overpaying for a property or deciding on purchase too soon can make the enterprise unviable.
Researching the market in which the prospective property is located and its actual market value will assist you in determining the maximum price you should pay. More crucially, a pre-feasibility study should be conducted to guarantee that the project is viable.
You'll be in a better position to discuss the terms of the offer once you've determined this price and devised a strategy that takes advantage of a few different ways to buy the home.
Why is real estate negotiating so important?
It is necessary to develop a plan to obtain the best possible price for the selling or the lowest possible price for the buyer. It must be in line with the buyer's expectations while also considering the price the seller is ready to accept.
When should you stop negotiating for a property?
A bank will not give your buyer the total amount of money for their mortgage if your property does not appraise for the approved offer price. That implies you'll need to match the offered price, or the buyer will have to cover the difference in cash.