The Syndicate
From knowing what you want to buy to actually going out and buying it can seem like a gigantic and often daunting leap of faith.
I had a plan that I thought was simple. I wanted to buy a good, desirable property in a bluechip suburb at a genuine discount price. My plan was to buy in bulk and receive a discount, just as many people do with almost anything from cars to movie tickets.
Consumers take advantage of these discounts every day, perhaps without even realising it. Supermarkets commonly offer a third item for free when you buy two items, or you might go to the theatre with friends and receive a discount for a group booking. Whatever the value of the product, most retailers are happy to sell something for less per item if they can thereby sell greater quantities.
Discounts do not just apply to products. They can also apply to services like dry cleaners, hairdressers, or car washes. The more you use these services, the less you pay per visit.
This is a simple concept that I was comfortable with. I can receive a discount when buying Coca-Cola in bulk, so why not get a discount for buying houses in bulk?
Some readers will not be comfortable with the idea of buying numerous properties at one time, particularly when just starting their property portfolio. This chapter is about how I bought properties in bulk because chronologically this is how my investment portfolio began. Later, I give examples of how I bought homes individually.
Some readers’ journeys begin at this chapter. Others will begin at page one. Some readers will want to begin by finding out how to buy individual properties. Where readers begin their journey is not important. I want to give information and ideas that all readers can relate to, and which will help them reach their goals.
I am rather conservative. I did not want to buy multiple properties at once and risk over-committing myself and being unable to settle the properties. I therefore invited some close friends and my younger brother to join me and form a syndicate.
An eclectic group
It was an eclectic group, with vastly different backgrounds and ideas. One friend is ultra-conservative, one is exceedingly optimistic, one prays a lot, and one is always late. Two of my friends bought the home that they live in, while the other two had never purchased any real estate.
None of them had any current practical real estate knowledge, but they were all keen to find out how they could buy investment properties. We started off meeting once a week at a pub to discuss strategies.
Initially we achieved very little, but we had a lot of fun. My ultra-conservative friend acted as secretary, bringing paper, folders, hole punch and pens to each meeting. He was so enthusiastic about ‘spreadsheeting’ everything that it became our ongoing joke, but we were all grateful that he was so methodical.
My optimistic friend was always ready for action, he just wasn’t sure what to do. And despite the fact that every week we met at the same pub at the same time, my brother was always late—even though he managed the pub.
How we started
We each came up with a list of five blue-chip suburbs where they would like to buy an investment property. Each person would look for suitable properties under construction in the suburbs they chose and report back to the group.
Unfortunately, this led to pandemonium. Potentially suitable developments were everywhere and we were travelling large distances to check each site. Some friends knew an area well while others did not, and reaching any agreement was becoming increasingly difficult. The situation was becoming unmanageable.
We decided to concentrate all our efforts into one suburb. We met there each weekend over the next couple of months. We divided the suburb up into smaller areas. Each person was responsible for driving along every street in their area. We would record any properties we might want to buy, as well as any that looked recently built, which we could use as a price comparison.
We were looking for a medium size unit or townhouse development still under construction. We found a number of projects but dismissed most of them for a variety of reasons. They backed onto railway tracks, or the road was too busy and so on.
We did find one suitable development and ascertained the price, size, builder, anticipated completion date, and all the other relevant information.
Comparing prices
We then compared recent sale prices for properties of comparable size in the area, checking sales results published in newspapers and online, and asking local estate agents. These sources gave us the sales results of most of the recently built comparable properties we had noticed driving around the suburb.
Most properties comparable to the ones we were interested in sold for around $330,000 or slightly above. After driving along every street in the suburb and obtaining dozens of comparable sales, we were confident that we could obtain an independent valuation for them of $330,000 each.
Our goal was to buy the properties with a minimum 5 percent discount. Based on our expectation that we could achieve a valuation of $330,000 each, we agreed that we could offer as high as $313,500 for each property.
We wanted at least a 5 percent discount because most banks, including the major banks, will lend up to 95 percent of the sale price or the independent valuation figure. If we could obtain a loan of 95 percent against the independent valuation figure—assuming that the townhouses would be valued at $330,000—we would then only have to pay stamp duty, legal costs and bank fees. We estimated these costs would total only a few thousand dollars.
Our first attempt
The development we were interested in comprised four two-storey three-bedroom two-bathroom townhouses with double garages, approximately five hundred metres from the beach and less than fifteen kilometres from the city. The asking price was $340,000 each.
I met the estate agent who was handling the sale. I knew I could offer up to $313,500 for each townhouse, but I started off by offering $1.2 million for all four townhouses, the equivalent of $300,000 per townhouse. I did this to show the agent I was a bona fide buyer and also to try to get him to work for us.
Commission
Estate agencies usually receive a commission of 2–3 percent of the value of the property. Of this amount, the individual agent who handled the listing and sale of the property receives 40–45 percent of the gross commission.
Therefore, if the commission payable on the townhouses we were interested in was 2.5 percent of the property’s value, the estate agency would make $30,000 (for selling all four townhouses) and of this amount the agent whom I was speaking with would receive about $13,000.
It was unlikely that the estate agent I was meeting with would be able to mentally calculate this within the few seconds he had before the negotiations continued, but he would have realised his earnings for that month would be considerably better if we purchased the townhouses.
An estate agency may not have exclusive authority to market and sell properties. If this is the case, and it usually is with developments like the one we were considering, the estate agency would receive commission only for buyers they introduced to the property.
Most estate agents are entirely commission-based salespeople, who receive a nominal weekly allowance to help pay for some of their costs associated with running a car. If an estate agent does not sell anything they will very quickly go broke. Because of this, agents work just as hard to convince vendors to accept lower prices as they do persuading purchasers to pay higher prices, although agents are employed and paid by vendors.
A potential ally
Construction had only recently begun on the townhouses we were interested in, so it was unlikely that the development had been marketed very much. The estate agent certainly had not opened the houses for inspection. Like any commission-based salesperson, he would have realised that our deal could make him a handsome sum of money for very little effort.
For these reasons, an estate agent can be a great ally in your endeavours to buy investment properties.
We haggled. I told the agent I represented a group of professional investors and could not offer a higher price without their authorization. The estate agent said he believed the properties would sell for more. I didn’t argue. Instead, I pointed out that to do so, they would need to be marketed, which would incur costs for the vendor and require time and effort from the agent, with no guarantee of success.
I then produced sales evidence of similar townhouses that had sold in the area for around $300,000.
Earlier in this book, I mentioned that there will always be properties that have sold both above and below your desired price. How you choose to use this information is crucial.
I showed this information to the estate agent, not to try and persuade him that our offer was fair, but to demonstrate that we were discerning buyers making a reasonable offer based on factual sales evidence. The vendor would be taking a risk by declining our offer.
Everybody benefits from a reasonable offer
By accepting our offer, the vendor would have secured sales. Once the townhouses were complete, settlement could take place without delay. The developers would have minimised interest charges on any money they have borrowed. They could confidently plan their next project, which after all is how developers make money.
If completed properties remain for sale for an 120 extended period of time, the cost to the vendor can be significant. The saving in marketing costs alone usually amounts to about 1 percent of the value of the property.
Negotiating
When negotiating it is very important not to get emotional. The decision to make an offer on a particular property, and the level of the offer, is a business decision. If you cannot buy the property for the right price you will find other suitable properties.
Although the estate agent will most likely be familiar with your comparable sales evidence, it is still in your best interests to show him. By doing this, you demonstrate your thoroughness, you remind the agent of sales he may have forgotten, you imply that your first offer is your final offer, and you give the agent information which will encourage the vendor/s to accept your offer.
Estate agents work just as hard getting vendors to accept less for their home as they do trying to get purchasers to pay more. Even if the estate agent says things like “I needn’t present your offer because the owner would be insulted”, do not apologise, and do not take the bait and increase your offer on the spot. Whatever your offer, and whatever the estate agent might say, your offer will be submitted to the vendors.
Agents and vendors
Estate agents pass on all offers to the vendors for three reasons:
- They are compelled by law to submit all offers to their vendors.
- They need to show the vendor that they are working the property and submitting buyers.
- Most importantly, they are conditioning the vendor. Submitting low offers makes the vendor far more likely to accept a reasonable offer, even if it is a bit lower than their initial expectations.
Estate agents will also pass on comparable sales evidence to vendors, to try and persuade the owner that their home may be worth less then they might have been hoping for, without being responsible for the information.
Why listed prices are so high, and how that helps you
In Australia, commission is entirely paid by the seller. The buyer pays nothing. Because of this system, estate agents have their own rule: if you control the listings, you control the money. This fundamental necessity to list every home possible to ensure you can earn a living creates fierce competition between estate agents.
To secure these listings, some agents will give vendors an inflated assessment of what their property is worth in the current market. Naturally, most vendors use the agent who gives them the highest valuation. As a result, many homes are initially listed at far too high a price and agents often need to condition vendors to accept less. This means that agents are usually grateful for any offer.
Estate agents are people too
Of course, estate agents are just people and if the estate agent likes you, your offer will be presented more favourably. It is therefore in your best interests to put up as few barriers as possible when making an offer. Be punctual when meeting the agent. Don’t argue with them. Listen to them, and then give your response calmly.
Your meeting with the estate agent is a business meeting, so act and dress accordingly. Try to appear confident but friendly. Don’t be aggressive or arrogant.
Remember that you want the agent to work for you.
Terms and conditions
Terms can play just as important a role as price. For instance, one vendor may be unable to vacate and settle a property when you want, while others may want a quicker settlement. If the terms and conditions attached to an offer are unacceptable it may prevent a sale, even if the price is right.
I wanted our offer to have the greatest chance of success.
I submitted an unconditional offer, with a flexible settlement to suit the vendor. This may not always be possible, as you must be absolutely sure you can settle the property. If, for example, you are not completely sure that you can get finance, you should always make your offer subject to finance.
Some common conditions that appear on sale contracts are:
- Subject to a satisfactory building inspection
- Subject to a pest inspection
- Subject to the buyer’s home selling
‘Subject to the buyer’s home selling’ is very rarely accepted by vendors. Usually, the period of time involved is too long, and there is a good chance that the sale will not proceed.
If possible, I recommend making an unconditional offer on a flexible settlement. The terms will definitely be acceptable to the vendor.
Another buyer may be offering for the same property at the same time. In these cases, vendors may prefer a lower but unconditional offer to a higher offer that is subject to conditions.
If you don’t get your desired outcome
I didn’t need to meet with the estate agent for very long because I made it clear I could not negotiate, as I was making an offer on behalf of a group of investors. The next day the agent told me the vendor had declined our offer.
Unfortunately, I did not receive a counter-offer from the vendor. A counter-offer is a figure that the vendor would accept. I had hoped for a counter-offer below $340,000. Because I did not receive a counter-offer at all, I could only assume that our offer was a long way from acceptable.
I phoned the estate agent the following day to make another appointment. I increased our offer to $1,254,000, which was the equivalent of $313, 500 per unit. This was our upper limit. The initial offer of $1.2 million was $160,000 below the asking price, so there would be no benefit in increasing our offer by only $5,000 or $10,000. I emphasised that $1.254 million was our final offer. I also reiterated that if we were unsuccessful we would look elsewhere.
The next day our increased offer was also declined. This time the vendor did make a counter-offer of $330,000 per unit, just the amount at which we had valued these properties. This may have been a fair market price, but it did not give us the discount we set out to achieve. I started to doubt my initial idea to buy in bulk.
… try again
Shortly after our first failure, perhaps in answer to his prayers, my friend saw a new townhouse development. This development also comprised two-storey townhouses near the beach and city, but there were fourteen townhouses in this development. We acquired all the relevant information and discovered that eight of the townhouses had already sold.
The townhouses had quite similar designs. The two options were a three-bedroom, two-bathroom, double garage, fifteen square townhouse, or a slightly larger version with a study. Only the facades, colour schemes and landscaping differed. The development was situated in a highly sought-after area, and we decided that with its high, decorative powered security gates, it was exclusive and boutique enough for us.
I asked the estate agent who was selling the townhouses what the other eight had sold for. I did not mention our syndicate, because I wanted to give the appearance that any negotiations would be straightforward.
I needed to be sure that the prices had not increased as the project neared completion. This is common with these types of developments, because usually at this stage developers have covered most of their costs and the last remaining townhouses represent profit. Properties in the first stages of a project are often sold for less to encourage sales. As demand for the remaining properties increases, so do their prices.
I reminded the agent that settling six properties is far more difficult than settling one. To get a loan, I would need to satisfy the bank that I had not paid too much for the houses. Eventually the bank would find out what the first eight townhouses had sold for through their valuer. If they had sold for less than I was prepared to pay, the bank might not finance my offer.
In about six months, information including the sale price would be available from the PRISM system, which is maintained by the Valuer General’s office. Licensed users, such as valuers and estate agents, have access to this information.
I told the estate agent that I could eventually find out the sales prices by checking the PRISM system, but I was prepared to buy the townhouses now. The agent told me the first eight townhouses all sold within the first month of being listed for sale, to owner-occupiers. The sale prices looked like this:
No. 1 Three bedroom plus study townhouse. Sold for $490,191.
No. 2 Three bedroom townhouse. Sold for $420,726.
No. 3 Three bedroom townhouse. Sold for $430,000.
No. 7 Three bedroom townhouse. Sold for $415,000.
No. 8 Three bedroom townhouse. Sold for $420,000.
No. 12 Three bedroom plus study townhouse. Sold for $440,000.
No. 13 Three bedroom townhouse. Sold for $430,000.
No. 14 Three bedroom plus study townhouse. Sold directly by the developer to a relative for an undisclosed price.
No. 3 Three bedroom townhouse. Re-sold two months later for $446,000.
After receiving this information, we still researched comparable sales in the surrounding area. The remaining six townhouses would probably sell relatively quickly, for close to the asking prices.
We believed we could reasonably obtain independent valuations of $430,000 for the 3 bedroom townhouses and $440,000 for the three-bedroom plus study townhouses. We believed that these prices were fair and reasonable, but we still wanted at least a 5 percent discount.
Accordingly, we were prepared to make an offer for all six properties, but we would only offer as high as $408,500 for the three-bedroom townhouses and $418,000 for the slightly larger townhouses. Six properties remained: three with a study and three without. We would offer up to $2,479,665 for all six.
I adopted the same approach as for the first development we were interested in. I offered the agent $2.4 million, based on a purchase price of $395,000 for the smaller townhouses and $405,000 for the larger townhouses. Just like in our first attempt, the agent told me that the offer was too low, and he had the comparable sales evidence within the development to prove it.
At this point I informed him of our syndicate. I told him I could not act without the authorisation of the syndicate, who, as discerning buyers, were only interested if they could receive a discount for buying in bulk. I did not refer to any sales results, because the developer clearly knew what the townhouses were worth. After all, eight had already sold.
I did not try to persuade the agent that the townhouses were only worth what we were prepared to offer. Instead, I pointed out the ongoing costs that would be incurred, the additional time and effort for the agent and developer, and the possibility that the six townhouses would not sell for more than our offer.
Our success or failure depended only on whether the developer would be satisfied with selling the remaining six properties for $2.4 million and moving on to the next project.
Results!
Our offer was declined, but this time the vendor made a counter-offer. If our syndicate bought all six townhouses, the vendor would accept $2.55 million. I increased our offer to $2.45 million. We finally settled on a figure of $2.48 million, or $408,500 for the smaller townhouses and $420,000 for the larger townhouses.
We were delighted with this result. For each of us, this was the beginning of our investment property portfolio.
When we formed the syndicate, we all agreed that we would individually sign sale contracts and purchase properties in our own names. This meant each of us could buy one townhouse, with one left over. We sold the sixth property for $427,500.
Buying in bulk is a technique I have used on many occasions, and results like this can be easily achieved. The methodology and negotiating techniques are exactly the same regardless of property value.
The discount you want to receive for buying properties, in bulk or individually, depends on the strength of the real estate market at the time. The weaker the market, the larger the discount you want. In strong markets it is difficult to negotiate large discounts, because competition between buyers forces prices to rise. When we bought these townhouses, the real estate market was extremely strong. For example, Townhouse No. 3 initially sold for $430,000 and two months later sold again for $446,000.
Before any negotiations commence you must have a clear picture of exactly what you want to achieve, and you must have carried out extensive research to find out what properties have sold for in the area you are looking in. Remember if you are unsuccessful, another property is just around the corner.
Summary
- You can get a discount for buying properties in bulk, too
- Compare prices
- Agents work just as hard to get vendors to accept lower prices
- Negotiate confidently and courteously
- Acceptable terms can influence a vendor to accept a lower price
- Know what you can offer and what you want to achieve.
