The information below is very general. Much of it broadly applies to any property negotiation but you’ll see in parts there’s a focus on residential home purchases. It’s organised as follows:
Negotiation (Major factors)
1. Is the seller desperate to sell? Is the buyer in love with the property, in a hurry and tired of looking? Generally the party who wants the deal ends up compromising more in the negotiations
2. The agent seems like a really friendly, honest person. An important part of their job involves building relationships with other buyers to compete with you.
3. Effective agents create a context of urgency and competition with other buyers to get you attached to the property. Some agents go slow on your mid-week offer, making you wait for the weekend and competition from other buyers at an open home. The agent will let you know that there is interest from one or two other specific buyers to focus your attention. This builds a feeling of high demand and limited supply.
4. How can you separate yourself from the other buyers? Be a strong buyer. Recognise that the seller is generally very keen to sell their property. Potentially make your offer expire after, for example 48 hours (eg “This offer will expire at 5:00pm on Friday, 27 November 2020”). That creates a time pressure for the seller so they have to consider your offer separately from other buyers.
Real Estate Agents
5. Most real estate agents are good people doing difficult and under-appreciated work finding common ground between sellers and buyers who usually have very different objectives.
6. But let’s be clear, even the friendliest sales agents act for the seller and want to get a strong sale price. It keeps the seller happy and makes the agent’s sales figures look good.
7. Good agent are experts at obtaining small commitments, giving help and information and communicating often. They are professionally interested in you and they are also helping your competitors. Be thoughtful with your communications.
Communications / Instructions
8. Any information you give to the seller and their agent may benefit the seller. It’s as simple as that. Agents are also building rapport with other buyers to get them to compete with you.
9. Don’t share private and valuable negotiation information. Don’t give away valuable information like your financial position, how long you’ve been looking or how much you like the property. You’re being qualified so the agent and seller can get other buyers worried and extract the maximum amount of money from you based on your situation and how much you like the property.
Your Offer (contract formation)
10. Summary: Agreeing on the contract terms like price and dates is just like arranging a meeting. You say let’s meet on Tuesday at 3:00 [$630,000]? They say how about Thursday at 11:00am [$690,000]? Finally you agree on Thursday at 12:30pm [$660,000].
11. Detail: The fundamentals are:
(a) Get Clearman Lawyers involved early. It’s very cost-effective (often free for simple contracts) and helps you ‘build a strong foundation’.
(b) The buyer makes their offer first (generally). Here ‘offer’ means a full buyer signed contract in writing.
(c) But often the agent will ask you to complete a one or two page “Expression of Interest” form first. That’s ok. An Expression of Interest is just ‘who you are and what you want’. It helps them find out your required contract terms (eg Price, Finance and Building and Pest) and obtain your details to help their office fill in the contract. It’s also used to qualify you and get a commitment from you.
(d) If the seller doesn’t like some of your terms, they might make a counter-offer (eg cross out and increase the price or reduce the settlement period). Their counter-offer ‘cancels’ your offer. Then it’s up to you to decide whether you want to accept their brand new offer.
(e) The contract is dated the day the last party signs.
12. The major risks we see are:
(a) Buyers not knowing that the Building and Pest and Finance conditions are quite ‘narrow’ / specific. Those conditions may not help if there are adverse results from searches you may order including council approvals or Dial Before You Dig results. A Due Diligence condition would assist in those situations.
(b) Failure to check council approvals / Final Inspection Certificates or encroachments.
(c) Buyers not understanding that bank service levels are similar to any other large bureaucracy. Expect similar service to your internet service provider. telecommunications or energy company.
(d) Not leaving enough time for finance or settlement (at least 14 days for each).
(e) Bank requiring additional or different buyer (eg bank requires partner’s earning capacity to service the loan).
13. Generally the deposit amount is simply an arbitrary amount you negotiate with the seller / agent. It can be from about $100, $1,000, $5,000 up to about 10% of the purchase price. It’s a pure negotiation.
14. However, the selling agent wants to make sure that the deposit is equal to or greater than their commission. This is because if a buyer fails to settle (breach of contract), the agent is still entitled to the sales commission from the seller. When the deposit is low, the seller is putting their hand into their own pocket to pay the agent and they must then extract the rest of the commission monies (and other losses) from the buyer. Saying “a large deposit shows that your offer is serious” may be partially true but leaves out a critical part of the situation.
15. If the cooling off period hasn’t been waived, you can “cool off” from the contract (by writing within the cooling off period) without any reason. However, if you “cool off”, the seller can take 0.25% of the purchase price from any Deposit paid (ie $250.00 per $100,000.00). For example, that’s $1,000 for a $400,000 property.
16. In a situation where buyers feel they must sign a contract with minimal conditions but want to do urgent searches, they could make the initial deposit payable seven days from the Contract Date. Of course, sellers may not like that but it’s a reasonable strategy.
This page is not intended to provide legal advice and does not create a client-lawyer relationship. This post is provided for general information purposes and should not be relied upon as a substitute for legal advice. If you need help with legal advice for your particular situation, please contact our office (details below or on ‘Contact’ page) and we’ll be happy to assist you.