Buying at the Lowest Price Isn't The Name of the Game
When it comes to property investing, a very popular saying is that you make your profit when you buy. This is usually interpreted to mean that buying the property at the lowest price possible is the ultimate aim.

There are certainly plenty of people in the property space who have done very well with consistently making lowball offers on property or seeking out distressed properties, on the few occasions their offers are successful.

Problem is, when there are a lot of keen buyers in the market, lowballing isn't the answer. Plus it's going to seriously annoy the Agents you deal with.

Now, I'm not saying you shouldn't pay a lower price if that works for the Vendor, but there's a lot more to the concept of making your profit when you buy than just price.
To look at the broader picture, I'm going to use Warren Buffett's famous quote "Price is what you pay, value is what you get." There's some debate over whether he was the first person to say it, as it's a maxim that's been around for a long time, and for good reason.

The fact is, for a deal where you potentially can make $200k, $300k or another equally large figure, is it worth missing out on the deal because you're trying to drop the price by another $10k or $20k? If the deal stacks up at the current price you'll need to pay, then it still has plenty of value - and so the price doesn't matter as much.

Now, let me just go down a rabbit hole for a moment...
I'm not saying for one minute that you should always pay top dollar for a property - definitely not! If you can negotiate a lower price for whatever reason, good for you! My point is simply that too many Property Developers get hung up on the price, and don't look beyond to value.

In fact, there are times when it's worth paying a higher price for a property, if it means you can get the terms you want. As an example, if the Vendor is happy to wait 6 months for settlement, which will assist with getting your development application to Council in the meantime, that's going to save you A LOT of holding costs.

This is where I move into what I think Warren Buffett missed, and is the third line I would add to his quote when it comes to Property Development; "Worth is what you can do with it".

Because, going back to my example, being able to delay settlement for 6 months is worth something to you in cold, hard cash. You can calculate how much you will save in holding costs. Say it's $50k - you can then add some of that to the price. Yes, I mean pay more for the property.

Paying the higher price for the property allows you to secure the deal, which has value to you, and it's worth doing because you now stand to save money while you get all the Council approvals sorted. Everybody wins!

If, instead of having a contract on the property you had an Option, paying a higher price for the property in order to secure the Option gives you time to find out if your development will be given the green light. If it fails, then you take a huge amount of risk off the table, knowing that you can let the Option lapse and walk away (....and as a site note, there are different types of Option contracts, so if you do want to ‘back-out’ then be sure you’ve negotiated the ‘right’ type which will enable this).

Again, derisking a project that you're not sure will get over the line with the number of new lots or dwellings you need for it to be profitable has a huge amount of worth, in which case offering a higher price is a good move.

Now, if you've read this far, you're in for a treat, as I'm about to share one of my favourite strategies for dealing with a Vendor who has unrealistic notions about what can be done with their property, and how much it's "worth" (ie what they expect you to pay!) as a result.

Here's my example. You're negotiating with a Vendor about their property. You've done your due diligence, and you're basically 100% certain you'll get 5 townhouses approved. The Vendor, though, thinks you'll get 6 townhouses.
As a result, the Vendor has put a price of $1.2 million on the property. That's what he/she thinks it's WORTH.

Now, from your perspective, if you really can get 6 townhouses, then yes, the property is worth $1.2 million. But if you can only get 5, then all of a sudden $1.2 million doesn't work - you can only see value at $1.0 million. It's hugely risky for you to pay the higher price, only to find you can't get enough townhouses on the site. But the Vendor isn't interested at that price.

Here's where the fun starts. Go back to the Vendor and have a conversation along these lines. "Okay, so my research is telling me that I'll only be able to get 5 townhouses approved, but your information says it will be 6.
For me, $1.2 million just doesn't stack up for 5 townhouses, but if I can get 6, it does. Here's what I suggest. If we divide $1.2 million by 6, we end up with an amount of $200k, so that's what it's going to cost me per townhouse. If we multiply it by 5, that's $1.0 million.

So here's my offer - we use a tiered pricing model. We sign paperwork that allows me to do everything required to take the project to Council, but we don't settle until the application is final. If they only allow 5 townhouses, then I pay $1.0 million for the property. If they allow 6, then I pay the premium price of $1.2 million."

Obviously this is a very quick and simple explanation, and there's a lot more that needs to be sorted out to make it happen (definitely need a good property lawyer for the paperwork!) but this is the guts of how the negotiation could go down.

It's a great example of how it shouldn't just be about price. It also reinforces one of the main things I constantly tell my students - don't just focus on what you want the deal to look like, focus on the Vendor's needs, and then find a way to make a deal happen that satisfies those needs.

The less you focus on price, and the more you deliver value to the Vendor, the better chance you have of working out what a deal is actually worth to both of you, and so both come out winners.
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