This week is all about securing discounted property deals. If we are going to be professional property investors, then we need to know how to secure great property deals at the right price. It’s not as easy as getting Phil Spencer to put in an offer under the asking price as we shall discuss. Join me as I share 10 ways to secure a great deal…some of which don’t even involve getting a discount from the asking price!
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Today’s must do’s
Always adopt a professional approach to how you make offers on your property deals. Review the top list and make it personal to the way you go about making offers to secure your next great property deal.
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Transcription of the show
Hello and welcome to another episode of The Property Voice podcast. My name is Richard Brown and it’s a pleasure to have you join me on the show again today.
This week is all about securing discounted property deals. If we are going to be professional property investors, then we need to know how to secure great deals at the right price. It’s not as easy as getting Phil Spencer to put in an offer under the asking price as we shall discuss.
So, without further ado, let’s get straight into the show.
Today’s sound bite episode was inspired from an article on my curated property investment news feed service: http://sco.lt/8rpQSf, which you can find links to in the show notes. But in case you can’t access these for some reason, then just tap scoop.it into your web browser and when in there do a search for ‘residential property investment’…my page should be one of the top search results you find as a gold level contributor.
The article outlines how asking prices are being discounted in certain parts of the country. It doesn't tell you much really...between 20% to 43% of properties have had a price reduction of between 5% and 8% from their original listed asking price...wow, big deal right!
If I did read it correctly, it represents by how much some property asking prices have been reduced since their original listing, rather than how much below asking price (either original or final) offers are typically accepted at. Never mind.
However, historically speaking, accepted offers tend to average around the 5% off the asking price mark. But, it varies depending on location and stage in the property cycle and of course, which asking price in the case of price reductions. However, 5% below asking price is still a useful reference point nonetheless.
So, if we add up the discount from the original listing price of say 5% to 8% as outlined in the article to the additional discount an offer is typically accepted at of 5%, then it would appear that the total average discount from a property’s initial listing price is approximately 10% to 13% right now.
Of course, this is not an exact mathematical equation or rule that we can always rely upon. It will vary across the country and the nature of the local and national market at the time. Still, it’s a useful guide I think when looking at properties on the open market…we should ideally not be paying more than 10% below a property’s original asking price from when it was first listed. After all, smart property investors should really be getting better deals than the average Joe or Jane. In a hot market, this would be too optimistic potentially, but t acts as a guide for now at least. Or, in other words, we should be trying to secure property deals with at least a 10% discount from the original asking price…that would be a reasonable assumption to start off with that will improve our overall portfolio performance when translated into ROI and future capital growth.
The article did however get me thinking. How can we actually secure the best price for our property investment purchases? I came up with a top ten list for you this week. One or two of the results may be quite surprising though, so let’s run through them now.
If you want a discount on a property try one of the following ideas:
- Adopt the approach of a professional investor. Ideally offer cash and send proof of funds with the offer. If you can’t do this and instead need to use either bridging finance or a buy-to-let mortgage, accompany your offer with an agreement in principle from the lender if you possibly can. In either scenario, list your solicitor details as it shows you are ready to proceed. This helps to position you as a serious buyer that will move quickly and reliably to completion, it also makes the agent’s job a little easier, so they will appreciate that.
Remember that around a third of all property transactions fall through, so this helps to frame you in a positive light for agents and sellers when compared to people that don’t have their finances in order or are part of a chain that could collapse. Then, act quickly and professionally and do what you say you will do when you say you will to put yourself in the prime buying position. This is especially useful if you plan to return to the same agent again to buy more property later.
- Do your research on recent, directly comparable sales values (not asking prices). What this means in practice is:
Compare like-with-like, so a similar types of property, for example, don’t compare a 2-bed terrace with a 2-bed flat and such like.
Look for recently sold properties, ideally within the last 6 months
Make sure the comparable sale prices or comps you find are in a similar condition to the property you are buying. S0, the same level of finish and condition, with or without similar enhancements like an extension or conservatory and so on.
Look close by. You should be looking at properties initially on the same street and then within a ¼ mile radius for the best comps. Look at properties on a map rather than on a list to see if there are any natural barriers to achieving the same valuation, like other side of the railway tracks, a river and so on.
Then, adjust the prices if necessary. For example, older comps may need to be adjusted for recent price trends locally. If you can’t find similar types of property or to a similar standard, then flex the comps values to account for this too lifting or reducing accordingly but be conservative here.
This can turn what starts out as a relatively objective approach into a more of a subjective one, especially where there is a shortage of good comps available, so it will take some practice!
Top tip: if you want some help to validate your valuation based on comps, then pay for a Hometrack or Mouseprice desktop valuation to support your decision. These are not going to give you a perfect valuation…there is rarely such a thing anyway…but at just £20 they are a very useful ‘second opinion’ to support your own research and analysis. Of course, only pay for such a service if you are serious about proceeding too, so do your own analysis and then potentially use such a service to support you on the odd few you wish to proceed with, particularly when there are not so many good comps that fit exactly your property type, age and condition.
- Find and then fix problems. What sort of problems could give rise to a potential discount? Here are just a few.
Slow sellers. Check if the property has been on the market for a long time, when compared to the average selling time locally. You can see the average selling times on home.co.uk and then cross-check against the property listing date to see if the target property is failing to meet the local average selling time. Watch out though, as there are sometimes some tricks of the trade to keep an eye out for, such as a new listing with an alternative agent, but that can also be another cue for a discount in itself.
Structural issues can give rise to a discount, so look for reports of issues in the property listings; terms such as structural movement, insurance claims, non-standard construction and such like. But remember that fixing these problems also comes at a cost and in some cases can also still result in a lower resale value when compared to the next door property.
Look for technical / legal issues such as a short unexpired lease term (85 years or less should give rise to a discount), un-adopted roads, non-compliant conversion works e.g. the term ‘additional usable loft space, instead of loft room). Once again, consider the cost of fixing the issue and how much of a difference it is likely to make to it’s resale value…accounting for your ‘developer margin or profit’ in doing so.
Other challenges to some buyers that could give rise to a discount opportunity could include sitting tenants, no new build warranty for a property less than 10 years old, no planning permission on certain works and so on.
Yet other challenges that could put some people off are plain messy or what are termed smelly houses, unattractive features like electric pylons, close to rubbish dumps and so on. Some of these can be fixed to bring the value back up, but some cannot be fixed and so we will have to live with the issue ourselves going forward, so take that into consideration too.
- Factor in the local market temperature, hot, cold or lukewarm. There is a big difference between Cambridge and County Durham right now and this is reflective in discount potential. Cambridge has been selling at above asking price, whilst in County Durham there are big discounts to be had in many areas as the article I mentioned earlier outlines.
A cold market means longer average selling times and better discount opportunity, but it might not be the best place to invest in either! Make sure that your pricing strategy reflects your investment strategy as well. If you are buying to sell, then you too would then become a seller in that very same market and could be forced to accept a discounted offer price. If, however, you plan on retaining the property for a couple of decades as a long-term buy and hold, then there needs to be far more emphasis on the rental market characteristics, knowing that in some local markets you will need a bigger net yield or ROI to offset a sluggish and perhaps not so important capital growth potential.
- Justify any reduced offer as far as possible. I used to really love to watch Kirsty and Phil on their TV shows but I often had a bit of a laugh when it came to putting in offers. It always seemed strange to me that this part was seen more as a game than a professional buying approach…could they win the game and secure the property on behalf of their best friends for the day? It led to a completely arbitrary let’s offer ‘this’ and be prepared to go up to ‘that’ type of approach based on nothing more than basic bidding. In many cases, it landed at ‘that’ rather than ‘this’ anyway, which if my memory serves me was often not that much below the asking price in the first place.
Professional property investors don’t operate this way, well not entirely this way at least. Yes, there is an element of psychological game playing that often needs to take place…the seller often needs to snatch back something in order to feel as though they have ‘won’ something. However, the professional investor will set out their arguments for a low offer, which will be supported by relevant information such as by local sales values, costs of essential works and so on. They will also put it in writing as well. They may then offer a price below what they think they would like to pay to allow the merry dance of turning ‘this’ into ‘that’ as well. Some will also add an extra 10% to their discount figure, just because. I have heard it said that if you are not embarrassed by your own offer that it isn’t low enough. That’s certainly one strategy and technique you could adopt, but be prepared for a few no’s if you do go down this line.
- Get your own survey done, even if paying cash. Then, use any negative results to renegotiate the price later on. I am not advocating an unethical approach of gazundering at the last minute with a vulnerable seller…I don’t agree with that. What I am proposing is enlisting a professional to identify any issues with the property along with an estimated cost of putting them right and then using this to renegotiate a price if we had not already taken it into account in our original bid. This will allow us a second bite at the cherry but at a time when the seller is likely to be more committed and so more receptive to a discount, even if they don’t like what they are hearing. However, it won’t always work and can sometime bring out the caveman or chimp in the seller, who might feel as though they have been hoodwinked and strung along, only to be set up for a price-chipping exercise later on. So, be prepared for that. You may lose a purchase or two at this stage if you try to chip too far and for a now justifiable or a previously known issue, so use it strategically to avoid incurring costs in an abortive transaction too.
- Look at the value and don’t be too obsessed with the price. I like this one, as it could mean no discount or even paying a premium for a property in some situations…and that could be OK too! Consider what a property is worth to you as an investor and base your offer around this. This might mean a big discount, low / no discount, or sometimes paying the listing price or above!
As unlikely as it sounds, property could actually be listed below market value in the first place. This could happen when someone has ‘priced to sell’ or if the owner or agent has made a mistake in their value appraisal.
Equally, it's what you plan to do with the property that determines its value to you. For example, if you plan to convert a property into an HMO and you know that you are likely to obtain a commercial or investment value on the property after you have completed the work. An investment value of an HMO is often calculated at something like 6 to 10 times the gross annual rent on the property, depending on the location and the extent of the conversion away from being a regular single property. This might not bear any resemblance to the sale value achieved for the next-door property, which would be known as the ‘bricks and mortar valuation’ instead. Look at both the investment value and the bricks and mortar value when determining your offer price. This does not mean you have to pass on all of this value creation to the seller, but what it does mean is that you might be able to afford to pay more than the average buyer would for that property, as it is simply worth more to you. The opposite may also apply though, so watch out for that…
- Offer terms rather than price increases. Sometimes a seller is motivated by more than the sales price. Some examples might be a fast exchange & completion, say within 28 days. Cash buyers means less time, less hassle and less third-party interference in the deal, so that is appealing to sellers…and agents! No chain can mean greater assurance that the sale will actually proceed. Paying a non-refundable deposit unless the seller withdraws means you are committed and have genuine ‘skin in the game’ in case you pull out. Some people might need a bit of relocation support in case they are selling for financial challenges say. For some sellers, the offer to use search insurance in lieu of actual searches can also help, especially if you both know what the search is likely to flag up and have priced it into your offer anyway, so it works best if you happen to know an area and are proficient at identifying problems in properties, such as structural issues.
- Try to meet the vendor if you can. Aim to build rapport and look for both motivation and leverage to lean on later. Also try and look for the win-win and you are more likely to have your offer accepted if it is framed in such a way that meets the seller’s motivations and needs but also leaves them feeling good about themselves.
- Go fishing in different waters. I quite like this one as well…not all properties are sold on Rightmove you know! For example, auctions are usually for problem properties but sometimes you find a very decent average property without a problem...many developers are not interested in these, so bid and buy a bargain on a baulk standard ready to rent or sell property that needs no work doing on it. DIY sales agents, low-cost listing-only services and classified ads are another place to go looking, as everyone else is fishing on Rightmove as I mentioned. Some agents can only work with two of the three major portals now, so that’s two out of Rightmove, Zoopla and OnTheMarket. If a property is listed with OnTheMarket, then it will be on either Rightmove or Zoopla but not on both. Equally, there are quite a few DIY property listing sites there are out there and don’t forget Gumtree for direct to vendor advertising by property sellers either. What this means is less competition and less competition reduces the chances of a bidding war developing and improved odds for a discounted offer being accepted.
That’s it then, my top ten suggestions of how to ensure you secure a great and often discounted property deal. Don’t overlook the fact that this list of ten ideas are just some of the approaches that can be adopted to help achieve discounted property purchases. They don’t always work and they can also be used on us by other savvy buyers from time-to-time as well. I had this recently with a flip project, where an investor gave me a list of works they wanted to undertake to help justify a lower offer they were making. In that case, the work they were suggesting was completely optional, personal to them and therefore not necessary, so I was able to knock it out of their bid and help bring their offer back up again.
Equally, don’t forget that we are descendants of cave men and women and that sometimes means that we can all be prone to the odd bit of a fight or flight response at times too. That’s why it’s a good idea to try and take your time before responding, do some objective research and consider the other person’s caveman or chimp-like response being quite possible as well.
The bottom line is that as professional property investors, we can adopt more professional techniques into our daily activities that helps to set us apart from the amateurs and regular house buyers and that leads to better investment results in the long-term too 😊
Ok, so that’s me for this week, I hope that’s been helpful but if YOU have some great techniques that you use to help achieve better property purchasing results, I would love to hear them too. Remember that you can email me firstname.lastname@example.org if you want to talk about anything from today’s show or more generally in property investing, the show notes will be over at the website www.thepropertyvoice.net
But for now, all I want to say is thank you very much for listening once again this week and until next time on The Property Voice Podcast…it’s ciao-ciao.