It's often been said that if you want to sell something, make it easy to buy. Or words to that effect. And in marketing circles, WIIFM - What's In It For Me? is the question you need to answer if you want people to buy from you.
If we then flip that concept on its head, what about when you want to buy a property? Particularly when the market is hot? The obvious conclusion is that you need to make your offer easy to accept, because the vendor understands what benefit they'll get from accepting.
So how do you do that?
From the vendor's point of view, we all know the offer they want to receive. It's above what they're asking, it's all cash and there's no special conditions like building and pest, due diligence or finance. And preferably all within a week or two.
Now let's take a step back from fairy tale land into reality. Although the vendor might WANT all of those things, they don't necessarily NEED all of them.
Your job as a clever property developer is to work out what really matters to the vendor and make sure your offer delivers that. That way, they can look at the offer, see how it works for them and unless they're very greedy or stubborn, say yes.
I want to make one thing very clear here. When you make an offer on a property, there are two core elements - price and terms.
One of the biggest mistakes I see property developers make is to make it all about price. Which then leads to that really frustrating back and forth where the vendor comes down a little, you go up a little, on and on, until you hopefully hit a price in the middle that you agree on.
As a developer, though, the terms are often more important than price. Delayed settlement for 12 months versus getting $10k off the price? I'll take the 12 months any day. Terms can make or break a deal.
Outside of those two core elements is another very important factor that you have little control over, which is the current state of the market in the area. The market has three main states it can fall into - hot, flat and jumping off a cliff.
I'm sure you've already guessed that different market conditions mean you need a different approach when it comes to terms. So let's break that down.
Finance
I think if you took a poll of all vendors, 100% prefer a cash offer. It makes sense - no hanging by a thread waiting to find out if the buyer's finance has been approved. Cash is king.
In a hot market, offers with no finance clause start to dominate. It's one way a buyer can basically gazump everybody else interested in the property. So if that's the market you're in, you want to be as certain as you can that your finance is secure. If you can't do cash, at the very least have preapproved finance so you can avoid using a finance clause.
As a side note on that, preapproval is great but if the valuation falls short you could be in trouble. If it's possible, get a valuation done before you make your offer. Admittedly than can be tough in a hot market when properties often sell fast, but it's worth doing if you can.
In a flat or down market, when you're potentially the only buyer, adding a finance clause is much easier.
Building & Pest Inspections
If you're going to demolish the house to make way for your property development, this potentially isn't a big issue. It's quite a standard clause, so in a down market it shouldn't be an issue.
Even in a hot market, vendors will potentially not be worried about this one. But if you can get it done beforehand and avoid having to put it in your offer, than can be another point in your favour.
One thing to remember - many of the auto generated clauses are very much in favour of the vendor. The house almost has to be at risk of falling over before you can use them to exit the contract. So make sure you use wording that at least gives you a reasonable chance of pulling out of the contract if you need to.
Due Diligence
A due diligence clause is something most regular house buyers would have no clue about. But as a property developer, it can be very handy. If you're buying a site to develop, there's lots of things you need to check out before you go ahead. But as I've mentioned earlier, in a hot market you don't want to spend weeks doing due diligence only to find someone else has already jumped in and bought the site.
Now, I don't want to suggest in any way that you skip the due diligence! But if your preliminary numbers and enquiries look positive, using a due diligence clause can be a way to get the property off the market but still allow you time to do what you need to do.
Word of advice - only ask for the time you need. Vendors don't exactly like this type of clause as it's essentially a "get out of jail free" card. And the longer they are, the less appealing they are. And I'm sure you've guessed what I'm going to say next - which is that in a hot market, your chances of getting a due diligence clause, let alone a long one, are low.
Flat or falling markets, however, are a great time to get a due diligence clause into the contract.
Other Things To Think About
No matter what the state of the market is, if you're working through an agent, then you need to take their needs into consideration as well. In some ways it becomes a three-way negotiation.
Finally, regardless of the market, be fair and realistic. Successful property developers are good at building relationships, and it never pays to burn a bridge by taking advantage of people. You just never know where that bridge could take you in the future.
If we then flip that concept on its head, what about when you want to buy a property? Particularly when the market is hot? The obvious conclusion is that you need to make your offer easy to accept, because the vendor understands what benefit they'll get from accepting.
So how do you do that?
From the vendor's point of view, we all know the offer they want to receive. It's above what they're asking, it's all cash and there's no special conditions like building and pest, due diligence or finance. And preferably all within a week or two.
Now let's take a step back from fairy tale land into reality. Although the vendor might WANT all of those things, they don't necessarily NEED all of them.
Your job as a clever property developer is to work out what really matters to the vendor and make sure your offer delivers that. That way, they can look at the offer, see how it works for them and unless they're very greedy or stubborn, say yes.
I want to make one thing very clear here. When you make an offer on a property, there are two core elements - price and terms.
One of the biggest mistakes I see property developers make is to make it all about price. Which then leads to that really frustrating back and forth where the vendor comes down a little, you go up a little, on and on, until you hopefully hit a price in the middle that you agree on.
As a developer, though, the terms are often more important than price. Delayed settlement for 12 months versus getting $10k off the price? I'll take the 12 months any day. Terms can make or break a deal.
Outside of those two core elements is another very important factor that you have little control over, which is the current state of the market in the area. The market has three main states it can fall into - hot, flat and jumping off a cliff.
I'm sure you've already guessed that different market conditions mean you need a different approach when it comes to terms. So let's break that down.
Finance
I think if you took a poll of all vendors, 100% prefer a cash offer. It makes sense - no hanging by a thread waiting to find out if the buyer's finance has been approved. Cash is king.
In a hot market, offers with no finance clause start to dominate. It's one way a buyer can basically gazump everybody else interested in the property. So if that's the market you're in, you want to be as certain as you can that your finance is secure. If you can't do cash, at the very least have preapproved finance so you can avoid using a finance clause.
As a side note on that, preapproval is great but if the valuation falls short you could be in trouble. If it's possible, get a valuation done before you make your offer. Admittedly than can be tough in a hot market when properties often sell fast, but it's worth doing if you can.
In a flat or down market, when you're potentially the only buyer, adding a finance clause is much easier.
Building & Pest Inspections
If you're going to demolish the house to make way for your property development, this potentially isn't a big issue. It's quite a standard clause, so in a down market it shouldn't be an issue.
Even in a hot market, vendors will potentially not be worried about this one. But if you can get it done beforehand and avoid having to put it in your offer, than can be another point in your favour.
One thing to remember - many of the auto generated clauses are very much in favour of the vendor. The house almost has to be at risk of falling over before you can use them to exit the contract. So make sure you use wording that at least gives you a reasonable chance of pulling out of the contract if you need to.
Due Diligence
A due diligence clause is something most regular house buyers would have no clue about. But as a property developer, it can be very handy. If you're buying a site to develop, there's lots of things you need to check out before you go ahead. But as I've mentioned earlier, in a hot market you don't want to spend weeks doing due diligence only to find someone else has already jumped in and bought the site.
Now, I don't want to suggest in any way that you skip the due diligence! But if your preliminary numbers and enquiries look positive, using a due diligence clause can be a way to get the property off the market but still allow you time to do what you need to do.
Word of advice - only ask for the time you need. Vendors don't exactly like this type of clause as it's essentially a "get out of jail free" card. And the longer they are, the less appealing they are. And I'm sure you've guessed what I'm going to say next - which is that in a hot market, your chances of getting a due diligence clause, let alone a long one, are low.
Flat or falling markets, however, are a great time to get a due diligence clause into the contract.
Other Things To Think About
No matter what the state of the market is, if you're working through an agent, then you need to take their needs into consideration as well. In some ways it becomes a three-way negotiation.
Finally, regardless of the market, be fair and realistic. Successful property developers are good at building relationships, and it never pays to burn a bridge by taking advantage of people. You just never know where that bridge could take you in the future.
