Buying a home: Part 4

Buying a home is one of the biggest financial decisions most of us will ever make. And
because it’s not something we do every day, the home-buying process can be daunting for
both first-time buyers and existing homeowners alike. Poor decisions could cost you
thousands of pounds and good decisions save you similar sums.
If buying a home is right for you (whether you’re a first-time buyer or you’re moving home),
it’ll be easier and less stressful if you follow a sensible process.
In a series of 5 guides we set out all what you need to know and do to help you on this
journey.

Overview
Part 1 - Four things to consider about buying a house
Part 2 - 12 things to consider in choosing a home
Part 3 - 3 steps to financing your home
Part 4 - How to negotiate the purchase of your new home
Part 5 - The mechanics of buying your new home

Buying a home - Part 4: How to negotiate the purchase of your new home

Because of the emotions associated with a home, and the fact it is a big but infrequent
purchase, it’s easy to get drawn in to paying more than is sensible or affordable.
Conventional wisdom is that once you’ve found a property you’re happy with, you make an
offer. But the danger with that approach is that you become emotionally invested in the
purchase completing. That reduces your negotiating power.

The skills of negotiating

Negotiating isn’t a skill that many people have developed and few enjoy it. That might be
because they see negotiating as confrontational or adversarial. But negotiating is merely a
dialogue between two parties to find a mutually acceptable outcome.
The three components of a good negotiator are:

• Patience – Being able to wait for the right deal means you can afford to walk away
  from any deal that isn’t quite right
• Options – The more potential houses you find, the more low ball offers you can
  make, and the chances of one being accepted increases
• Knowledge – The more you know about the area, recent prices, the circumstances of
  the seller and the general trends on the property market, the more confident you’ll be
  in making the right offer
• Negotiating is a skill that can be learnt. But like any skill it takes time and effort. A great book
  that will teach you the basics of negotiating is Never Split the Difference.
• Treat buying a home like a part time job. Be prepared to do your homework, make offers on
  several properties and assume that they will be rejected. Get used to rejection. Every no
  means you are one step nearer to a yes to the right deal.

Follow a process and avoid shows of emotion

You need to make a clinical inspection of your prospective new home and these useful tips
for viewing properties could help you with that. Whatever you do, avoid showing any
affection for properties you view – either to the agent or the seller. Remember the agent
works for the seller, not you. And if they see you’re keen, they’ll ask you to pay more than
you need to.

Make your offer(s)

As a buyer you should remember this very important point:
A property is worth what the vendor thinks, needs or hopes it is worth nor is it worth what
someone else (like an estate agent) thinks it is worth.
A property is only worth what someone is willing and able to pay for it.
Before making an offer, find out what similar properties in the area have sold for. If there’s
enough home sale activity, you could do this online here.
Make your initial and any revised offers through the estate agent, confirm them via email and
ask for confirmation of receipt to avoid risk of confusion later on. Again, remember that the
agent is working on the seller’s behalf, so treat with caution any ‘guidance’ they give you on
what offer is acceptable.
If you’re uncomfortable with negotiating, you could ask for help from a family member or
friend or hire a buying agent, but you’ll pay fees for that.
Make your first offer some way lower than what you’d be happy to pay. How much lower
depends on various factors including:

• The general state of the property market, nationally and locally
• Whether the asking price is fair (if the property has been on the market for a long
  time it suggests the asking price is too high)
• How keen the seller is to sell
• How ‘ready’ you are to buy.

Property investor Eroll Williamson uses this simple method for buying houses at 15% below
market value.

1. Use Rightmove to look at SOLD prices (not FOR SALE prices) over the last 15 months.
2. Include in your analysis at least ten properties of the property type you are looking to buy.
3. Work out the average price of that type of property in the target area.
4. Knock 15% off that price.
5. The price in step 4 is your offer price for properties that match your criteria. You'll get
rejected loads of times. Don't take it personally - keep making the offers.

If your initial offer is below other bids, the agent should tell you and give you a chance to
make a revised offer. Just don’t go above what you’re happy to pay. If the seller has
received offers at the asking price and this is your dream home and property prices seem set
to rise, you could consider raising your offer above the asking price to secure the deal.

But never start there. And remember, if you’re a first-time buyer (or you’re a cash buyer
because you’ve already sold your previous home) you’ll be more attractive to the seller
without offering any more money.

Try to avoid overpaying on a sealed bid

Sealed bids have become a normal way to sell a home in some areas. In this situation you’ll
be asked to ‘seal’ your written offer in an envelope which the agent then passes (along with
competing offers) to the seller.
The idea (which works in rising markets) is to get buyers to increase their offers because
they know they only have one shot at the deal. You just need to make sure that you don’t
offer more than you’re happy to.
Note also that even if you don’t win a sealed bid contest, you could make an increased offer
via the agent later on.

Try to avoid getting gazumped

Sadly, the practice of ‘gazumping’ (where sellers pull out of your deal to accept a new and
higher offer) still goes on and especially so in fast-rising markets.

Until you’ve exchanged contracts (in England and Wales – the rules are different in
Scotland) any deal you agree to purchase a property is not legally binding on you or the
seller. So, before ‘exchange’, either party can pull out.
That said, if you’ve put down a holding deposit you could lose that if you’re the one to pull
out. Holding deposits are not very common and should only ever be paid into a special
account by a solicitor – not paid over to the seller.
Being gazumped after you’ve paid out perhaps thousands of pounds in survey and legal
fees is a big problem. And whilst you could make a counter offer to outbid the gazumper, it’s
better to avoid that situation if you can.

So, once you’ve agreed to buy your property (and demonstrated that you have the
necessary funds) it’s perfectly reasonable to ask the seller to stop marketing their property to
show they’re serious about accepting your offer. They’re not obliged to do so but many will,
and this reduces the chance of you getting gazumped after you’ve paid out for survey and
legal fees.

Finally, try to stay calm

You can probably tell by now that there are a lot of things (and people) in this home-buying
game who might test your patience. But you’ll make a much better job of this critically
important purchase if you’re able to stay calm and focus on facts rather than emotions.
In the next and final blog in this series, we’ll explain all you need to know about the financial
and legal process that follows, once you’ve agreed the purchase of your home, click here to
read.