Negotiating for success when buying and selling property
Despite strong demand, it’s not uncommon for a portion of properties to pass in at auction. Reasons might include poor interest in a property, unrealistic price expectations, and the timing of the auction relative to other key events. Irrespective of the reason, it doesn’t necessarily spell disaster.
In Melbourne, which is arguably the country’s most popular place for auctions, the share of properties passed in at auction is typically around 15 to 20% of total auction volumes each weekend. While a proportion of these properties sell soon after, some do not and are instead listed for private sale.
Whether you’re a buyer or a seller, it can be daunting to negotiate after a property has passed in.
Fortunately, if you’re the buyer to whom it’s passed in, you’re in the ideal seat to negotiate. Likewise, if you’re a seller, it means you have an interested buyer and may be close to signing a contract of sale. But, at this point, neither the seller nor the buyer has the benefit of transparency – so how much should the buyer pay and how much should the seller accept?
The simple answer is pay what the property is worth. In other words, the fair market value for the property, which is defined as the agreed price between two willing and informed parties engaging in an arm’s length transaction.
But, here’s where it gets tricky. Many psychological mechanisms come into play when buying and selling property, which can impact the ability to remain rational and negotiate strategically.
The endowment effect is one such mechanism commonly seen among sellers. It holds that sellers ascribe greater value to things they own, simply because they own them. Obviously this is problematic when attempting to negotiate a fair price with a seller.
Similarly, buyers too are subject to the psychological pressures of negotiating. By negotiating too hard the seller may walk away, while going easy may mean overpaying. This uncertainty, fuelled by emotion, can impact decision-making in strange ways resulting in negotiation breakdowns.
The simplest way to avoid these traps is research. Whether a buyer or a seller, understanding the market value of a particular property is the first step to negotiating a sale.
Consider a range of recent sales (those transacted in the last three months) of comparable properties located in immediate proximities to gauge price expectations. Armed with this information ahead of the auction or private negotiation, buyers and sellers can hold reasoned and evidenced-based justifications behind their decisions. And, don’t cherry pick sales based on the cheapest or most expensive ones – this undermines the process by creating a context of distrust. Instead, a range of sales provides room to negotiate an outcome that suits both you and the other party.
Written by Greville Pabst, Executive Chairman, WBP Property Group.
Follow Greville Pabst on Twitter @grevillep