One of the questions I’m most frequently asked is, “What’s the typical discount to the asking price one can expect?” It tends to be asked by people with little negotiation skills or who perhaps are used to buying new build properties. And unfortunately there is a house price index which tracks the average selling price compared to asking prices. This is incredibly misleading, as it presupposes a fixed formula for negotiating property.
To give you an example, we negotiated a 47% price reduction on a house. Now at face value this seems quite impressive, but actually the property was so massively overvalued in the first place that the 47% discount really only represented 5% to 7% discount on fair value. So, if you had thought that a 10% reduction was standard for what was happening in the market at the time then you would have lost a lot of money. Likewise, many of our best acquisitions have been very near the asking price, where the property has been undervalued or the agents and the sellers had not spotted an opportunity to add considerable value to the property and we have bought it pretty much at the asking price just to remove it from the market as quickly as possible.
It’s important to understand how the agents value properties, as this will give you an insight into valuations. The most important fact is that there is not a multiple listing system, like in America. On the whole, each agent can only sell the properties on which they are directly instructed by the seller. There are properties that an agency may offer out to other agencies, but they tend to be ones they know they will have trouble selling, perhaps because they are blighted – e.g., basement flats or those affected by the underground. This will obviously affect how the agent values a property when he is invited to pitch, because he knows that the seller is probably going to be asking at least two or three more agents to value the property too. So it’s a very competitive process and many of the agents don’t really offer much variation on what they do. They all offer a pretty similar service and so some of them think the only way they can differentiate themselves is by giving a massive valuation to win the instruction. Obviously this is not necessarily in the best interest of the seller because an overvalued property can languish on the market for ages.
This tends to happen when there is a lack of properties and the market. The agent really just wants to win the instruction, as it is unlikely that the seller will move to another agent when a reduction in price is recommended at the time of a sale. The agent will still get the commission, so securing the right to sell the property is their big motivation. As we all know greed can be a big motivator, so even if another agent values the property correctly and can prove why the property should sell at his recommended price, a seller will often go with the agent who gives an unrealistically high price. Unfortunately this means that an unwitting buyer can overpay, which does happen.
Conversely, some agents undervalue the property. This happens when there’s an oversupply of property, but it can also happen if you’ve got an inexperienced agent or, quite frankly, people can just simply get it wrong. Valuation is, you’ll hear time and again, not an exact science, but some people do hopelessly undervalue. So, again, if there’s an opportunity you don’t want to try to be fixed to, say, a ten percent discount, because the property could actually be a fantastic bargain and you want to get it off the market before you get into a bidding war.
A good example of this process in action is a property we helped a client to sell. It should be pointed out that we do not sell properties directly. We only ever acquire properties. Indeed there are some very good agents out there who do an exceptionally good job at getting high prices. So what we do for our clients is manage the sales process.
The client in Kensington wanted to sell her apartment so we asked five agents to give their valuations. The apartment was on the lower ground floor and required complete refurbishment. It was also poorly configured and would have been difficult to rearrange. (I would strongly suggest you never buy a lower ground apartment and we had not acquired this for her.) On the plus side, the location was excellent. The highest valuation was £1.8million. Meanwhile the lowest valuation was £1.2million. That’s a one-third drop, which shows you the wide spread that you can get in valuations even between good agents.
I decided that £1.8m was possibly a touch too high and might deter buyers despite the strong market. I felt that my client would be likely to achieve the highest possible price by slightly undervaluing the property to attract as many bids as possible. We placed it on the market at £1.6m with a good agent in the area whom I trust. Fortunately everything went according to plan. A bidding war erupted and the property was finally sold in a sealed bid for £2,051,360. This was the highest bid by £200,000 and I am stunned that anybody paid that much for it. If we had received a bid at £1.8m I would have advised my client to exchange as quickly as possible. There are a number of lessons to learn from this episode. But it shows how valuations can differ and why you cannot assume a fixed discount.
Another problem is the sheer variety of property in London. There are six centuries of architecture, so a first floor apartment in a Georgian building will generally be far more desirable than a first floor in a late twentieth century building.
But, most importantly is the fact that you’ll be dealing with individuals who will have different motivations for selling. You may have somebody who has found their ideal home and just wants to sell their current home quickly. Then again you may be trying to buy an apartment that has been overvalued because the owner does not need to sell and is just fishing for a high bid. It will be very hard to get a discount and you may have to walk away from the property if it’s mispriced.
Even if you’re buying a new development you’ll be negotiating with an individual who has a sales target. Indeed, when you’re buying in a new development it’s often possible to achieve larger discounts when there are only a few apartments remaining as the developer or the people that invested in the development may want to realise their profit. There are some very big and prestigious developments where the initial price has been very, very high. We have certainly bought some for clients who have nearly trebled their money in a space of six years, but if they had waited another year to buy they would have got even bigger discounts because at this stage nearly 90% of the development was sold and the developers just wanted out to get the rest of their profits so they could move onto other projects. Of course, the danger is that the project may prove to be very popular and sells quickly, so it does not always pay to wait!
Having said all this, if you’re planning to buy in a new development it’s definitely worth asking, “What’s the average discount you’re offering on the asking price?” If the agent isn’t very good or indeed if they’re just having a bad day he might let slip that they are giving five percent off the asking prices. That doesn’t mean that you’re going to offer them five percent, it means that you’re going to offer less with the view of getting a 5% discount as the worst case scenario. You should also demand larger discounts if buying multiple units.
And indeed, even when it’s not a new build always ask the agents, “What offer do you think the seller will accept?” You must remember that most agents have sales targets that they have to hit and if the seller has told them “Well, our house is on for £5million but we’d probably accept £4.7,” then the agent is likely to tell you this. Of course they may well accept less than £4.7m but this figure is probably now your ceiling price (assuming that it’s fair value). Again, this depends on the market and we’ll the talk about negotiation in more detail, but the key is to get as much information as possible.
It’s also important to keep asking the same questions throughout the negotiations because sometimes circumstances change. You may be told they’re not offering discounts or “my client is insistent he wants the asking price,” but that can change for numerous reasons, so keep probing for new information and changes of circumstance.
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