If there's a moment I love in a mentoring session, it's when a student starts talking about a deal they have on the table.
They've done the research, they've contacted property owners with sites that suit their criteria, they've met with the vendor to talk about the property.
In fact, they've done all the things I teach in my Property Development Formula course. Basically, they've trusted the process and run with it, and now they're seeing results.
And then they ask the question I really don't want to hear. "How do I make the vendor accept the deal I've worked out?"
No!! Wrong question!
Why is it the wrong question? Because it's only focussed on what the student is trying to achieve. I often say if you think you're a hammer, then everything looks like a nail.
And look, I get it. They've taken the time to do the research, and they've determined the highest and best use for the site. They know their own resources, and so have put together a deal that fits those criteria.
Except it's missing the most vital piece of all - the vendor's needs. Successful off market property deals are usually built around solving the vendor's problem.
You see, if you've put together the RIGHT deal, you won't have to try and convince the vendor to do anything. It will so obviously be the right thing for them to do, that they'll jump at it.
So let's take a step back and look at three things you need to have clear in your head before you take a deal to a vendor.
What Does the Site Need?
My student has done the right thing. All the basic research has been done before even contacting the vendor, so already there's evidence that the site has potential for development.
Now that you have a vendor who's talking to you about selling off market, then you need to do as much due diligence as you can to determine what can be done with the site.
Remember, too, that your strategy might potentially have multiple possible exits. You can sell it with Development Approval, for example, rather than going all the way through to building the finished product. Understanding your property development exit strategy gives you more flexibility when negotiating.
So now you know what the site needs.
What Does the Deal Need?
This is where you're going to take a deep dive down into the numbers. I've gone into this in more depth HERE and HERE and there are three main parts to funding a deal:
You need to work through all of these and work out exactly what's required in order for you to make the deal happen. Identify what you have in place, and identify what you need from either the vendor or a money partner.
At that point you will start to see how best to structure an offer for the vendor that will help get the deal up and running.
For example, say you can get an 80% loan and have enough cash to run the deal (for things such as getting the Development Approval), but you just can't come up with the 20% deposit.
In that situation, you might work towards having the vendor leave some cash in the deal. Or maybe use an option or delayed settlement in order to have the time to secure Development Approval before you need to settle.
But before you go too far down the path of working out how best to get the deal happening from your side of the equation, you need to consider the third, and maybe even most important part...
What Does the Vendor Need?
It doesn't matter how great the deal is. It doesn't matter if you've worked out exactly how to make it happen. If what you're proposing doesn't match the vendor's needs, chances of them accepting the deal are close to zero.
Let me explain. Using one of the examples above, say you need 12 months to get the necessary Development Approval. So you're after a delayed settlement or even an option if you're not entirely sure you'll even get it through Council.
But if the vendor has already committed to purchasing another property, with settlement due in 3 months time, it doesn't matter how good your deal might be in other ways - it's not what they need.
Which is why the MOST important thing you can do when you have conversations with the vendor is LISTEN to what they're telling you. And often, they won't be saying it out loud. Vendor negotiation skills are critical when structuring profitable property development deals.
When you hear those clues, ask questions to draw them out. That way you'll be much clearer about what their true needs are, rather than what they want. Because let's face it - almost every vendor is going to want top dollar in the shortest time period possible. But what they actually need may be very different.
For example, you might ask them what their future plans are. If they say they've already committed to another property, that gives you a clue that timeframe is going to be important to them, and potentially the need for a reasonable sized deposit that they can use towards paying the deposit on the new property.
If, however, they say they want to downsize, but haven't really decided where they want to go or what they want to buy, that's a different scenario. In that case, they might be really keen for a delayed settlement, knowing they already have a sale locked in for a certain price on this one.
These two examples highlight the two main points open for negotiation - price and terms. My usual rule of thumb is:
If you look back at the examples I just used, you'll see that in a broad sense, the first one falls into the "my price, their terms" category, and the second example is "their price, my terms".
What's The Obvious Question To Ask?
Okay, you're thinking, I see how this works. But what if I work out what the site needs, what the deal needs and what the vendor needs, and they don't match up? What do I do then? Isn't that when I need to find a way to make them accept the deal I've put together?
The short answer is no. Walk away.
I can hear your protests from here! Walk away? After all that work?!?
Yes, but there is a longer answer. YOU need to walk away from the deal, because it doesn't match what you're capable of taking on at this point.
Having said that, though, your work doesn't have to go to waste. This is a perfect scenario for you to act as a Deal Finder, and pass the deal on to another Property Developer, whose circumstances fit perfectly with what the Vendor needs. Or you can do a joint venture with someone who has the skills or resources to fill the gap.
Because it's an off market deal, you can list it on Development Sites Australia or Development Site Deal Hub in search of someone who can either work with you or take it off your hands. Everybody wins!
The bottom line to take away from this article, though, is that you should never need to try and find a way to make a Vendor accept what you're offering. Instead, they should be eager to accept. And you achieve this by focussing on finding a way to give them what they need, while still achieving what you need. And if you can’t find a way to make that happen? Well, sometimes that means moving on. Next!
They've done the research, they've contacted property owners with sites that suit their criteria, they've met with the vendor to talk about the property.
In fact, they've done all the things I teach in my Property Development Formula course. Basically, they've trusted the process and run with it, and now they're seeing results.
And then they ask the question I really don't want to hear. "How do I make the vendor accept the deal I've worked out?"
No!! Wrong question!
Why is it the wrong question? Because it's only focussed on what the student is trying to achieve. I often say if you think you're a hammer, then everything looks like a nail.
And look, I get it. They've taken the time to do the research, and they've determined the highest and best use for the site. They know their own resources, and so have put together a deal that fits those criteria.
Except it's missing the most vital piece of all - the vendor's needs. Successful off market property deals are usually built around solving the vendor's problem.
You see, if you've put together the RIGHT deal, you won't have to try and convince the vendor to do anything. It will so obviously be the right thing for them to do, that they'll jump at it.
So let's take a step back and look at three things you need to have clear in your head before you take a deal to a vendor.
What Does the Site Need?
My student has done the right thing. All the basic research has been done before even contacting the vendor, so already there's evidence that the site has potential for development.
Now that you have a vendor who's talking to you about selling off market, then you need to do as much due diligence as you can to determine what can be done with the site.
Remember, too, that your strategy might potentially have multiple possible exits. You can sell it with Development Approval, for example, rather than going all the way through to building the finished product. Understanding your property development exit strategy gives you more flexibility when negotiating.
So now you know what the site needs.
What Does the Deal Need?
This is where you're going to take a deep dive down into the numbers. I've gone into this in more depth HERE and HERE and there are three main parts to funding a deal:
- Deposit
- Serviceability/li>
- Running the Deal
You need to work through all of these and work out exactly what's required in order for you to make the deal happen. Identify what you have in place, and identify what you need from either the vendor or a money partner.
At that point you will start to see how best to structure an offer for the vendor that will help get the deal up and running.
For example, say you can get an 80% loan and have enough cash to run the deal (for things such as getting the Development Approval), but you just can't come up with the 20% deposit.
In that situation, you might work towards having the vendor leave some cash in the deal. Or maybe use an option or delayed settlement in order to have the time to secure Development Approval before you need to settle.
But before you go too far down the path of working out how best to get the deal happening from your side of the equation, you need to consider the third, and maybe even most important part...
What Does the Vendor Need?
It doesn't matter how great the deal is. It doesn't matter if you've worked out exactly how to make it happen. If what you're proposing doesn't match the vendor's needs, chances of them accepting the deal are close to zero.
Let me explain. Using one of the examples above, say you need 12 months to get the necessary Development Approval. So you're after a delayed settlement or even an option if you're not entirely sure you'll even get it through Council.
But if the vendor has already committed to purchasing another property, with settlement due in 3 months time, it doesn't matter how good your deal might be in other ways - it's not what they need.
Which is why the MOST important thing you can do when you have conversations with the vendor is LISTEN to what they're telling you. And often, they won't be saying it out loud. Vendor negotiation skills are critical when structuring profitable property development deals.
When you hear those clues, ask questions to draw them out. That way you'll be much clearer about what their true needs are, rather than what they want. Because let's face it - almost every vendor is going to want top dollar in the shortest time period possible. But what they actually need may be very different.
For example, you might ask them what their future plans are. If they say they've already committed to another property, that gives you a clue that timeframe is going to be important to them, and potentially the need for a reasonable sized deposit that they can use towards paying the deposit on the new property.
If, however, they say they want to downsize, but haven't really decided where they want to go or what they want to buy, that's a different scenario. In that case, they might be really keen for a delayed settlement, knowing they already have a sale locked in for a certain price on this one.
These two examples highlight the two main points open for negotiation - price and terms. My usual rule of thumb is:
- my price, their terms
- their price, my terms
If you look back at the examples I just used, you'll see that in a broad sense, the first one falls into the "my price, their terms" category, and the second example is "their price, my terms".
What's The Obvious Question To Ask?
Okay, you're thinking, I see how this works. But what if I work out what the site needs, what the deal needs and what the vendor needs, and they don't match up? What do I do then? Isn't that when I need to find a way to make them accept the deal I've put together?
The short answer is no. Walk away.
I can hear your protests from here! Walk away? After all that work?!?
Yes, but there is a longer answer. YOU need to walk away from the deal, because it doesn't match what you're capable of taking on at this point.
Having said that, though, your work doesn't have to go to waste. This is a perfect scenario for you to act as a Deal Finder, and pass the deal on to another Property Developer, whose circumstances fit perfectly with what the Vendor needs. Or you can do a joint venture with someone who has the skills or resources to fill the gap.
Because it's an off market deal, you can list it on Development Sites Australia or Development Site Deal Hub in search of someone who can either work with you or take it off your hands. Everybody wins!
The bottom line to take away from this article, though, is that you should never need to try and find a way to make a Vendor accept what you're offering. Instead, they should be eager to accept. And you achieve this by focussing on finding a way to give them what they need, while still achieving what you need. And if you can’t find a way to make that happen? Well, sometimes that means moving on. Next!
