One of my favourite ways to find development sites is buying off market from vendors. This type of negotiation usually takes place over a number of meetings, and as part of the process, a Heads of Agreement can be a useful tool.

So what exactly is a Heads of Agreement, and how can you use one to improve your chances of getting a vendor over the line in an off market negotiation?

Let's go back to some of the basics of negotiating directly with the vendors. The most important thing is to find out what the vendor needs. Notice that I said NEEDS not WANTS.

Because it doesn't take many offers to realise that vendors pretty much always want top dollar in the smallest time frame possible. That's why so many of them are talked into auctioning their property (but that's a whole other article!).

It's actually quite fun to start delving into why the vendor is selling, and uncovering their true motivation. There's lots of different techniques, but there's one commonly called "The Five Whys" that I find really effective.

Let's do some role playing.

You: "Why are you selling?"

Vendor: "We want to move."

You: "Why do you want to move?"

Vendor: "The garden's too big for us." (Hint: They're downsizers)

You: "What area are you thinking of moving to?"

Vendor: "We're hoping that we can buy something smaller around here."

You: "Why around here?"

Vendor: "All our friends are here, we belong to the local bowls club, and our kids are all close by. It's home."

I know, that's only 4 questions, and one of them was a "What", but I'm sure you get the idea. What I'm doing here is gradually digging deeper into the answers they're giving to find the true motivation and need behind their decision making.

For this couple, it's clear they love where they live, but they're getting older and finding the garden and maintenance too much. They want something smaller and easy to look after in the same area.

At this point, you can basically repeat that last paragraph back to them. "So if I understand you correctly, you love where you live...  etc."

This is a really important step, because what you're doing is making sure you have clarity about their motivations, and this is an opportunity for them to add or correct any of the details.

Then, assuming you've been listening carefully and have understood them, they should be nodding their heads in enthusiastic agreement.

Now you can turn it into a way to create a deal - in this case, potentially a Seller JV. "So if I could find a way for you to have a smaller, more manageable new property in this area, debt free, is that something that would interest you?"

Hopefully they will then be falling over themselves to agree. And that's when you suggest the possibility of doing a seller JV to achieve what they're after.

Obviously this is just one example, and depending on their needs, the conversation could go in countless different directions and be resolved in countless different ways.

And now we come to the Heads of Agreement. Once you've gone through the process above, you write down all the important points in a list, and show it to them.

So using the above example, the list might look like:

• John and Betty will form a partnership with Rob to develop their property
• John and Betty will bring the property at 123 La La Street to the deal as their contribution
• Rob will manage the whole development process from start to finish
• At the end, John and Betty will keep the rear unit debt free as their profit from the project

I could keep going, but hopefully this gives you an idea.

Then, once everyone agrees that the Heads of Agreement contains all the elements that were discussed, all the parties sign it. Simple, right?

Not Legally Binding

Now, one thing I have to say right now is that a Heads of Agreement is NOT legally binding in any way. This is a really important point to make if they're nervous about signing the document.

The Heads of Agreement exists to achieve two goals:

• Recap and simplify the conversation to ensure everyone is in agreement
• The points in the Heads of Agreement form the basis of a proper legal agreement between you

Now, you might read that last section and wonder what's the point of signing a Heads of Agreement if it's basically useless from a legal point of view, even if it's useful for bringing clarity to what's been agreed.

That's where psychology comes into it. Although writing it all down is useful, by signing it the vendors now become emotionally invested in the deal. It may seem weird that signing something somehow makes it feel more binding and legitimate, but it does.

So a Heads of Agreement is a great way to keep the vendors tied to the deal even after you leave. It also gives them something concrete to share with family members who will inevitably be very suspicious of you and your motivations, then proceed to confuse the vendors by asking curly questions. They can use the Heads of Agreement to show exactly what was agreed, rather than fumbling for explanations.

The final step of the process, once the contracts are drawn up, is to sit down with the vendors and explain to them which clauses in the contract match the points listed in the Heads of Agreement.

This is really important, particularly if they're going to get their own legal advice as part of the process. Always aim to meet them in person for this process. Emailing them the contract without any extra support or explanation makes them vulnerable to awkward questions and concern from their lawyer or family members.

If the vendors understand the contract and why certain things are in it (based on points listed in the Heads of Agreement) they'll do a much better job of navigating those rocky waters.

Just to make sure you're clear on this point. Don't email a contract without any explanation. Take the time to sit down with the vendors and make sure they're really, really clear about what you're proposing. If you don't, you can almost guarantee that someone is going to ask them a question they don't understand, they'll get spooked, and your deal just got flushed down the toilet.

Hopefully now you can see both what a Heads of Agreement is, and how to use it effectively in your off market discussions with vendors. Happy negotiating!