Negotiating to buy property is very different from negotiating many other arrangements. The law decrees that any agreement to sell property is invalid unless it is in writing and signed by all parties involved, whereas an oral agreement to sell a car or rent a flat is binding. So negotiations usually revolve around a written ‘offer to purchase’ or ‘deed of sale’.
An important secondary effect is that people in the property industry tend to be more causal about what they say than people in other professions. They are used to an environment in which you cannot be held liable for anything you agreed to, but did not put in writing. As a result, inexperienced buyers may be caught out by what they think are binding promises.
The lesson is simple: Believe only what is in writing. Insist that any undertakings by the agent or seller are part of a written agreement.
Formal negotiations begin when a buyer, usually using the agent’s standard sale agreement, signs an offer to buy the property at a certain price and subject to certain conditions. These could include financing the purchase, often with the seller undertaking some necessary repairs; or warranties from the seller that a particular aspect of the property functions properly.
The agent submits this – and any other offers s/he may have signed up – to the seller, who either rejects it, or signs with certain changes.
It would be foolhardy not to read every clause in an agreement and understand it before you sign. If any item is not clear to you, take it to your lawyer.
Negotiating with the bank
Negotiating your financing can be almost as important as negotiating the property purchase itself. Many first-time buyers feel a bank is doing them a great honour by lending such a large amount of money, especially since the introduction of the National Credit Act. They are so grateful that they normally accept the terms set by the lender. The truth is that the bank is just as grateful as you are, if you are a creditworthy applicant who can afford the loan. In many respects, this is a negotiation between two equal parties in one marketplace.
It must be said that only a few of the many issues can be negotiated. For instance, no bank will agree to change anything but the most trivial wording in the mortgage agreement (if that). This wording has been developed over years from hard experience with defaulters.
However, you can negotiate the interest rate, some of the bond charges and the loan to value ratio. Remember that home loans are among the bank’s biggest operating areas and probably their most competitive. Make use of that.
You must also weigh up whether to use a mortgage originator or deal directly with the bank. The services of an originator are free, as they get paid by the banks to bring in new loans. There is probably not much advantage in dealing directly with the banks, unless you have a special relationship with your own bank/relationship manager. A mortgage originator can save you time, get quicker results and in some instances has achieved lower interest rates from your own bank than you thought you could get.
In closing, remember not to believe a word you hear, but to carefully read every word in the offer or purchase agreement and the loan agreement from your chosen bank. It is preferable to make use of a good property lawyer, to ensure that your interests are taken care of.
The simple, effective strategy for assured wealth
There are many opportunities in the property market that arise suddenly and should be seized. You can also take different risks at different parts of the property cycle, for instance, gearing high at the bottom of the market when you are sure that prices will rise, or selling out at the top of the market so that you will have sufficient cash to get through the bad times. But you should have a core strategy to assure you of constant wealth creation over the decades.
You should follow your core strategy and be conscious of it when you do something outside of the strategy. Perhaps the simplest and most effective strategy to build a property portfolio that will give you growing wealth and income is this: Only add a property to your portfolio when the net income on your current portfolio can cover all the costs of the new property as if it is vacant and not income producing.
The importance of this strategy is that it allows you to buy at any stage in the property cycle and therefore be able to choose the best long-term investment for your future wealth and income.
Property is an income investment. This income is to your portfolio what the blood stream is to your body. The object is to keep it flowing as rhythmically, consistently and strongly as possible. Setting yourself a return on investment, or initial yield, as a minimum hurdle you must beat when you buy a property is your first step in ensuring that flow. Wealth management is all about increasing income, reducing costs and enhancing value, all of which will increase your return.
Any investment portfolio must be adapted to the individual’s own needs, temperament and personal preferences. This is more so than usual with property for two reasons:
Firstly, the individual nature of each property can be both an advantage and a disadvantage. The advantage is that it is possible to find an individual property within a particular property type that really suits you. If you are a high-risk investor, you may decide to invest in the inner city. If you prefer to manage your investment yourself, you might want to accumulate the holdings in just one block of flats. Or, you may decide that studio flats are really great and will eventually have the greatest capital gain. Or you might be a low risk investor who has worked out that flats in the middle income suburbs will give you the most certain occupancies and most reliable income. You may not get great growth in income, but you will be sure of collecting your rent each month. And you could decide to diversify within that area by buying a combination of bachelor, one and two bedroom units.
Secondly, property is a long-term investment. You can buy and sell shares or long bonds from one day to the next. When you sell a property, it can take months and the transaction costs, including sales commission, transfer duty and legal costs, is higher. A property that does not suit your personal needs, or even tastes, can become a millstone around your neck. So it becomes more important with property to develop an understanding of both property and yourself in the process of building up your portfolio.
Through following your core strategy, you will develop a portfolio of properties that, over time, will create enough income and build enough net value over the debt to free you from relying on other sources of income. And, who wouldn’t want that?