How do you negotiate in a rising market?  A market that is already moving and sellers know they are in the box seat.  There is a chance that you might have to pay more than the asking price.  Is that a good idea?  How far do you go and how do you make sure you are doing the right thing?  Simon Pressley has had to do this and he has some advice on how and when to do it sensibly.
Transcript:
Kevin:  There are some markets around Australia, and they vary from time to time, but they’re always there. There’s always some market where when you’re negotiating, when you’re buying a property, you may end up having to pay more than the asking price. That’s definitely a rising market. Now, in this market, it is happening, and it is happening in various markets in different places around Australia. This is an experience that buyer’s agents have all the time when they’re negotiating.
Simon Pressley from Propertyology was talking to me recently – and he’s going to join me in just a moment – telling me about some experiences where this is happening all the time.
Good day, Simon. How are you doing?
Simon:  Good, Kevin. An interesting topic, negotiating.
Kevin:  It is. It’s one that’s difficult. I know you guys do it all the time, but people who buy and sell property only once or twice in their lifetime find it hard to understand why you would actually have to pay more than the asking price.
Simon:  Yes. And admittedly, it’s not that common, but it depends on the individual market that you’re transacting in and where that market is in its cycle at the time. In a general sense, Kevin, the typical property somewhere in Australia will be listed at price X, and the eventual sale price, give or take, might end up being 3% below the list price.
That’s typically what happens in a normal market, and I think for a majority of DIY buyers when they see a property listed for sale – let’s say the list price is $500,000 on Domain or RealEstate.com – before the negotiation winds up too much, that person who’s interested in it might expect it to land under $500,000, maybe $480,000 or $490,000, something like that.
I understand why people think that, but there are times… And we’re transacting in a market at the moment where we’re seeing a typical property listed at $400,000 and selling for $440,000 or one sold for $450,000. That’s a massive markup on what it was listed at.
Kevin:  Indeed. There’s no doubt that there is a skill to negotiating. What do you see as the qualities someone requires?
Simon:  Some of us have negotiating skills that we use in our daily role. I’m not talking property people: a lot of sales roles for example, a lot of business owners.
Kevin:  Bringing up kids.
Simon:  Great example, Kevin. And that is a skill, the ability to negotiate. But what makes a really skilled negotiator is when those skills are used for a particular purpose. So, someone who has skills in selling apples or oranges or widgets or whatever, what they don’t have is the property-specific skill of negotiating.
It’s having knowledge, that’s what our buyer’s agents find the most important quality to have – knowledge about that individual market, knowledge about that property, knowledge about the vendor’s circumstance. Just being armed with as much information as possible.
Knowing something like the vendor’s circumstances can be useful, because for there to be a transaction to actually materialize, both parties need to feel like they’ve had a win. For the buyers, the win is ultimately the price, but while the vendor, sure they probably want the highest price, but there might be some other circumstances in their personal life that can be used in that negotiation as well.
But there are other tactics as well. The pregnant pause, sometimes deadly silence after we’ve made an offer on a property, and whilst we’re itching and we really want to wind it up, sometimes the best tactic that our buyer’s agents might use is to deliberately ignore that agent and let them feel like we’re not interested. And then when we see their number come up on our phone two days later, we know before even answering that phone we have a really good chance there. Different tactics.
Kevin:  Talking about negotiating, Donald Trump, president of the United States, has always said that he’s one of the world’s best negotiators. Yet if you look at his negotiation style, it’s all about hardball, it’s all about bullying. Is that what it’s all about? Is negotiation all about hardball?
Simon:  Not at all. There are times when hardball is the way to play, but what we can see is the market movement, and that varies from location to location that we’re investing in, the agent we’re dealing with, and as I said earlier, the vendor’s circumstances.
Different agents will use different tactics, so as a skilled buyer’s agent, there’s no point in us just having the one tactic and trying to hardball everything.
The Ray Whites and LJ Hookers of the world for example, some of them advertise properties differently to others. Some might be what’s called a lowball lister: they’ll advertise a property that they expect to sell for $500,000 but they’ll list it for $470,000. So when a buyer sees that, they think they’re going to get a bargain, but really, they’re trying to get a Dutch auction.
Now, a DIY buyer won’t know that that agent uses that tactic, but a skilled buyer’s agent will know different agents use different tactics, and we need to adapt our negotiation style for the unique circumstances for that particular property.
Kevin:  How much does emotion influence negotiations?
Simon:  It influences emotions a lot, especially if you are negotiating for yourself, if you are the purchaser. Plenty of people will try to kid themselves and say “No, I won’t let my emotion get in the way.” Let me tell you, when you’re in the heat of the battle and all sorts of information is being thrown at you from the agent representing the seller, emotions will get in the way.
A buyer’s agent has not only had a lot of training at keeping emotions in check, but because they’re representing the buyer and they aren’t the buyer, they have a much greater ability of not allowing emotions to get in the way and paying more than what they need to or saying something that might adversely upset the agent and crash that negotiation.
It does play a role. A lot of DIY buyers end up paying more than what they need to for a property.
Kevin:  Because of their lack of skill at negotiating or understanding what the ground rules are?
Simon:  A lack of skill, emotions getting in the way, not having the breadth of knowledge about that property or that market that someone who’s transacting in it everyday for a living will have. At the end of the day, as human beings none of us know what we don’t know. But when someone is doing something all day every day, they’re going to know a lot more than someone who does it occasionally.
Kevin:  I gather from the conversation you and I had, both in this interview and off air, that you’ve obviously paid over the list price on some occasions.
Simon:  Yes. And I know that this is teasing listeners – this isn’t my attention – but there’s a market, not a capital city location, a really strong regional market that we are really enjoying getting as many investors in as we can. I feel this market has just commenced its growth cycle, but a 20% pace is what it’s moving at.
Now, if you think about what our capital cities are doing at the moment, people won’t believe it. But it’s unfolding before our very eyes, and pretty much every property that meets our selection criteria in this particular location, if it’s listed at $400,000 or $420,000 or whatever, we’re missing out on 50% of the properties that we’d want to buy, and then when we go back and talk to that agent a week or two later and find out what it actually sold for, it’s selling for $20,000, $30,000, $40,000, sometimes $50,000 over the list price.
So, our skills as a negotiator representing a buyer in a market like that are different to the skills we’d use within a flat market. In a really rising market like this, we expect more often than not to pay above list price, but we still have to help our buyer work out what’s a good decision and when do we pull up stumps?
Kevin:  When you’re going in for a negotiation like that, do you have several prices that you prep your client with? In other words, you’ll say “The asking price on this is $450,000, but we may end up having to go to $470,000 or something to secure it.” In other words, so you’re prepared and they are prepared as well?
Simon:  Yes, that’s right. What we do is we arm our buyer with as much evidence as we can. We say “Here’s the property, this is what its list price is, here are some comparable properties, this is what they have sold for,” but then the hard thing when a market is moving so hot as this, you actually need to build in a little bit of “This is what it would have sold for last month, and this is what we’re happy paying now.”
No one wants to pay any more than they need to, Kevin, but the thing is when you’ve identified a market that’s at the very early stages of a growth cycle and the pace has picked up in a very short period of time, you want to get into that market as quickly as you can. So, if we get too conservative – “No, we won’t pay that” – and someone else eventually buys it for $10,000 more than us, and we continue and repeat that process for the next two months…
Kevin:  …You’re chasing your growing market.
Simon:  Absolutely. We would have been better off buying that first property and paying that $10,000 extra and getting in. So, it’s a fine balance.
Kevin:  A really good example of that would be Hobart. I know that’s one market that you’ve picked well ahead of anyone else, and there are still people saying “Get into Hobart, get into Hobart.” I don’t know whether you’re still buying there, but the time to buy there was two years ago when you were talking about it.
Simon:  Yes. We stopped buying there mid-2016. That doesn’t mean that buying there today would be a bad decision; it’s just that we got in when that market was flat, not like the market that I’m talking about now. So, our clients benefited from 100% of the growth cycle.
Buying there now, we don’t know when the cycle will end. I don’t think it’s going to end in the next 6 or 12 months, but we’re probably in the second half of the growth cycle.
Kevin:  That doesn’t really matter, does it? If you bought two years ago, you’re enjoying the growth now for as long as it goes. That’s the benefit of it.
Simon:  Absolutely. The time to get into a market, Kevin, is before the growth cycle really ramps up. No one can tell us how long a growth cycle is going to last for, but typically, from start to finish, it’s two years to… We saw Sydney and Melbourne last about four and a half years. That’s probably longer than what a growth cycle normally lasts.
But you don’t want to be buying two years into a growth cycle, I don’t think, and when we’re spoilt for choice in a country as big as Australia, there will be markets at any given time, I can promise you, where the growth cycle hasn’t started yet.
That’s our strategy: get in while it’s flat, or in this particular case, we started a couple of months ago when it was flat and it’s just starting to heat up now. It might have three years of good growth ahead of us, so we want to get as many people in as we can right at this early stage.
Kevin:  Good talking to you, mate. And if you want to find out a little bit more, just go to Propertyology.com.au. Simon Pressley has been my guest. Thanks, Simon, talk to you again soon.
Simon:  Thanks, Kevin.