What are the tactics the professionals use to secure property at a discount price? - Ben Power

THERE are few areas of property investing surrounded with as much myth and mystique as the art of negotiation. It evokes images of the likes of Donald Trump using intellect and rat cunning to get the better of opponents and secure amazing bargains.

With the market softening and capital gains harder to come by now, it has never been truer that you make your profit when you buy. That's putting negotiating at the forefront of investor skills. In this environment every facet of investing needs to be refined and honed.

Unfortunately, there's a lot of misinformation about suitable negotiating techniques. We spoke with a number of professionals - lawyers and buyers agents - who are in the trenches every day to discover eight knockout negotiating tactics.

1. DON'T GIVE BUY SIGNALS

Most experts agree negotiating starts from the first contact with the agent. Deborah Small, the managing partner at buyers agent Expert Property Solutions in Queensland, says agents are trained to pick up on buy signals.

"That is their job - their livelihood - they are fully trained at this," she says.

Small says to avoid giving off any buy signals - that includes showing or saying you're keen on a particular property, or by making comments such as "this is the best one for the price we've seen so far".

She says that even if you're planning to get another party to negotiate on your behalf, by giving buy signals you've already tainted the process.

"(The agents) are going to know that you want that property and no matter who is conducting the negotiations the leverage will be severely compromised," she says.

Henry Wilkinson, principal of Sydney buyers agent Homesearch Solutions, says the buyer, not the agent, should be the one asking all the questions.

"As soon as a buyer shows interest in a property the agent asks everything of them to work out strategies and weaknesses," he says.

"Many buyers tell agents their whole life story."

Wilkinson says be polite with agents, but don't disclose anything.

2. COMMISSION BUILDING AND PEST REPORTS EARLY

Small says another tactic that can be used before starting any contract negotiations is to commission the building and pest report.

"This will cost you (approximately $400 per property depending on the area and the provider), but it will provide you with the exact picture before beginning price negotiations," she says. "This is an added cost if you're considering two or three properties that you could potentially negotiate on, however it's definitely worth considering because in the long run it could save you thousands."

Having the reports gives you more information and therefore more control.

"This strategy works particularly well when dealing with older properties," Small says.

3. ARGUE YOUR PRICE.

Information is potential power. So use it.

Scott McGeever, principal of buyers agent Property Searchers, says most people make offers below the asking price, but don't give a reason.

"Put forward information to suggest it isn't worth what they said it's worth," he says.

"TOO MANY PEOPLE JUST MAKE AN OFFER AND PULL IT OUT OF THE AIR"

"People don't do the research."

When he spoke with API, McGeever was negotiating for a property with a list price in the early $400,000s, which he assumes meant $420,000 to $425,000. He thinks the property is worth $410,000 but offered $375,000, which was rejected outright.

McGeever says he'll now present information to suggest there's nothing in the marketplace to say the property is worth $425,000. That includes recent lower-priced sales in the area.

He'll use the information to argue that "sure, this property may be better, but it's only somewhere between $25,000 and $35,000 better, not $50,000 to $70,000, better".

"It's your argument but it's one that can't be disputed," he says.

McGeever says information used to back up a lower price could also include a risk grading based on economic and employment conditions.

"Give a risk grading to the market in the surrounding area," he says. "You can say, 'look, we're not going to pay that much because we think this market has a high risk rating for a future drop in value'."

4. GIVE TO GET.

McGeever says that when locked in negotiations, you often have to give to get. That can mean increasing the price you're offering.

"Too many people put a price in and they just won't give on that price," he says. "Someone else will come along and offer $5000 to $10,000 more and still get a good deal."

But you don't have to increase the price. You can also give ground on terms and conditions to secure a deal. One example is to rent the house back to the vendors.

"If there's an owner in there and they want to stay there or they're having a house built, you can do a rent-back deal to say 'we'll give you X period on a nominal rent if you accept this price'," McGeever says.

Another is longer settlement time, which may require paying a heftier deposit. "Give them a bit more money if they give you a longer settlement time,"McGeever says.

"Some people aren't fussed, so long as they've got a sale there. It could be 90 to 100 days. This might be particularly good in a rising market."

You also might pay more for the property, but get early access if you want to get most of your renovations done so you can get it straight back on the market.

5. RELEASE THE BOND EARLY.

Henry Wilkinson says another good tactic is to offer to release the deposit early, which could help clinch deals that are going down to the wire.

In most states when you exchange contracts you pay a 10 per cent deposit which goes into an agent's trust account. It stays there until the transfer takes place.

"Most times it can be released directly to the vendor so they can buy another property," Wilkinson says. "Allowing that can quite often get you over the line."

It's a matter of getting your solicitor to say the deposit will be released to the vendor, provided it's used for the purchase of another property rather than to the vendor for their own free use.

6. PLAYING TRICKS ON LUCKY DIPS.

Lawyer Peter Mericka of Lawyers Real Estate says agents often use a trick known as the 'lucky dip'. They ask everyone to put their highest price in an envelope. The technique is touted by agents as a fair way to sell property, but Mericka says in reality it keeps buyers in the dark because they don't know what competing buyers are offering.

How do you overcome that disadvantage?

"You're going to have to use a bit of trickery on the estate agent," Mericka says.

He says to tell the agent: "I don't care about putting in my highest offer. Just come back to me and tell me the highest offer you've got and I'll beat it by $5000."

He says estate agents will argue it affects the integrity of the system. That's rubbish, Mericka says, because the agent's job is supposed to be getting the best price for the vendor.

If the agent comes back and says the highest offer was $425,000, which is too high for you, you simply reject it. The agent will claim you tricked him. But Mericka says it's ethical because the vendor's interests are still being served.

"The agent has invented the game; you're not allowed access to competing bids and there's no way to establish the truth of what the agent's saying," he says. "The downside is you have to be a pretty tough person to do it and you have to be prepared to lose the property."

7. CALL THE AGENT'S BLUFF ON GHOST BUYERS.

Buyers are often faced with competition from rival 'ghost buyers'. What do you do if you're not sure whether there's genuine competition?

Wilkinson says simply ask for details on the offer. Not only does he ask for further detail, but he asks to see the rival offer in writing. Often the agent will show you.

"But quite often you call their bluff and you don't have to put your offer as high," he says.

The other way to call the agent's bluff and flush out other possible rivals is to turn up at the agent's office with a signed contract at a specific amount.

"You then give them two hours to get the vendor in to have it signed," he says. "Quite often they get panicked into having to sell."

8. GET SOMEONE ELSE TO DO IT.

Negotiating can be an emotional, stressful process. Let's face it, not everyone is up to it.

"If you don't think you can take the emotion out of the process or you're unsure, engage a professional," Small suggests.

"You can have done all the research, but if you have an emotional stake in that property I can guarantee that you'll override and overlook all of that research (even if you have some reservations) to get the property. This is not smart investing."

© Australian Property Investor magazine - www.apimagazine.com.au. Reproduced with permission.

This information is of a general nature only and does not constitute professional advice. You must seek professional advice in relation to your particular circumstances before acting. Please read our warning and disclaimer.

Valuable lessons from the Global Financial Crisis - Ian Murdoch and Jamie Nemtsas

To be a successful investor it's important to learn from our mistakes. However, learning from other people's mistakes is a better option as it costs you less to learn the same thing but it takes a little longer to sink in. The Global Financial Crisis (GFC) has come and gone therefore we thought it important to highlight some portfolio lessons that have come out of the GFC.

1. Never under-rate the importance of bonds and fixed interest

Investing is not about owning only shares. Nor are historical share returns a sound guide to future returns. Virtually all investors should keep some "dry powder" in their portfolios in the form of high-grade short and intermediate term bonds, eg term deposits or 24 hour cash accounts, with a further allocation to medium to long term high grade bonds/fixed interest and preference shares.

How much in bonds? Well that depends on your own situation and objectives and the position of the market. With all the focus on historical returns that greatly favour stocks, don't ignore bonds.

2. Look before you leap into the hot asset classes

It is imperative to invest into assets that you understand. After the lock up of mortgage funds, the failure of sub prime backed assets, the rerating of low grade preference shares, the collapse of leveraged investment banks and the freezing of many property funds, it is important to understand each and every investment that you make. Research the terms and the circumstances of that investment. Most of the failed investments seem to be easy to pick with hindsight. However, you don't have the power of hindsight to make future investment, so tread very carefully and try to understand the investment.

3. Stay broadly and intelligently diversified

When you concentrate your investments in any single company, industry, sector, or country, you run the risk of being hurt by a catastrophe like the collapse of the mortgage securities market - Bear Stearns, WorldCom, Enron and others. In the end, there's the chance you won't be rewarded by the market and maybe even lose big time.

Obviously, a broadly and intelligently diversified portfolio of well chosen investments still carries some risk. However, we would argue that this is the type of risk most long-term investors need to take.

Of course, there are no guarantees, and even a diversified portfolio can still lose money, but diversification always has, and always will, mitigate some of the risks. The only question after the crisis is does it mitigate the risk enough?

4. Markets go up, markets go down

The real question is when, how much and for how long markets will suffer declines. You can tilt your portfolio away from hot areas and make tactical changes, however when global markets fall as they did in the past 18 months, it is near impossible to not suffer some kind of short term falls.

5. Avoid excessive risks

Smart people can make dumb decisions, especially when they're arrogant enough to believe the laws of investing don't apply to them. One such law is that leverage, the act of borrowing other people's money to invest, can work both ways - for you and against you. Thousand of investors believed Storm Financial that 'this is how the rich invest'. The massive drop in prices then wiped out the majority of these investors' equity and homes. Taking excessive risk is fast coming back into vogue - be careful and be aware as the losses can be catastrophic.

6. Beware of financial innovation

Why? Because most of it is designed to enrich the innovators, not investors. Just think of the multiple layers of fees to the salespersons, servicers, banks, underwriters and brokers selling mortgage-backed debt obligations. These new products (credit default swaps are another example) enriched their marketers during 2005-07, only to impoverish the clients who held them in 2008.

Our financial system is driven by a giant marketing machine in which the interests of sellers directly conflict with the interests of buyers. The sellers, having (as ever) the information advantage, nearly always win.

While the events of 2008 reinforced that message, perhaps we can learn from repeated lessons, and experience will help investors avoid similar mistakes in 2009 and beyond.

Ian Murdoch and Jamie Nemtsas - Partners - Lachlan Partners

Visit the Investing Times online - www.investingtimes.com.au 
This article is an extract from the September 2009 issue of Investing Times newsletter.

To order a complimentary copy of the subscribing to the Investing Times Newsletter email susan@investingtimes.com.au or phone 1300 131 526.

Have You Left Your Family Unprotected? - Laura Menschik

Senior executives often assume that their high incomes and potential net worth means their financial future will take care of itself. However, as we all know events outside of our control, such as the Asian crisis, the CGF, etc ... can have a severe impact, shrinking investment capital and undoing years of growth and hard work.

It is not only catastrophic market events that should worry us. Many senior executives do not have adequate protection in place for their loved ones should the unthinkable happen. Termination, prolonged and serious illness or injury, and even death could leave your family vulnerable. Deprived of your salary, how long would your family be in a position to meet loan repayments and maintain their lifestyle?

In continuing our series of articles for CEOs and senior executives, it is understood that executives use their expertise and experience to drive and direct companies, but all too often the time and dedication invested in business comes at a personal cost. Not only is true work/life balance and time with family difficult to achieve, but personal finances are frequently neglected. This represents not only a missed opportunity, but a real threat to the future lifestyle of both executives and their families.

Personal Risk Insurance - Preparing for the Worst

Having appropriate insurance is essential, particularly if you are the primary breadwinner with a family that relies on your income. Insurance is also crucial for the homemaker to provide funds for the care of children or the 'run' your household. This does not just mean life insurance. Modern medicine has ensured that people with critical conditions such as strokes and heart attacks have a very good chance of survival. But survivors often spend many months recovering before they are able to resume work, and some will be incapacitated for life.

Senior executives and CEOs must also plan for the possibility of being out of work for a period of time, particularly in the current economic climate.

Life Insurance

This form of insurance, known as 'Death' or 'Term Life Cover', may cover incidents relating to death, terminal illness or accidental injury. Should you die or be diagnosed with a terminal illness, the life insurance company may pay you or your beneficiaries a benefit to ensure that they can maintain their lifestyle.

Total and Permanent Disablement Cover (TPD)

TPD is often offered as an extension of your life cover. It allows you to receive part or all of your life benefit if you become totally and permanently disabled or lose your independence in any way under the policy definitions. You may have a disability caused by injury or illness that causes you to be unable to work at your usual occupation or any job for which your experience qualifies you. To receive this benefit, you usually have had to been incapacitated for at least 3 continuous months.

Income Protection Cover

This type of insurance is sometimes referred to as 'Temporary Disablement'. Should you become disabled through accident or illness, you will be paid a monthly benefit of up to a maximum of 75% of your pre-disability earnings. Typically, this is calculated as your gross income, excluding investment income.

Traumatic Illness Cover

Sometimes referred to as 'Critical Conditions' insurance, this type entitles you to a lump sum if you are diagnosed with a serious condition such as cancer, stroke, heart disease, brain injury, or paralysis. It is intended to cover ailments that affect major organs, some diseases and other bodily failure that causes a loss, temporary or permanent, of your independence and your ability to earn an income.

While the odds of surviving one of those traumas are relatively high, recovery can be emotionally and financially draining. Trauma insurance can lighten the load by providing funds to pay for medical expenses, and it can also help with topping up your income while you are off work, to help pay for the school fees, mortgage, other loans and bills.

Business Expense Cover

A business expenses plan provides payment up to 100% of eligible business expenses for up to 12 months if you suffer injury or illness, to help you meet your fixed expenses when your business cannot. Key person insurance helps you keep the business running even in the absence of a key person. Premiums for both business overheads and key person insurance are tax deductible.

Key Person Cover

Key person insurance (also called Key Man Insurance) is a Corporate-owned life insurance which insures an employer against the death or incapacitation of a key employee, usually an executive or partner. It is used by both large companies and small partnerships alike.

An employer may take out a Key person insurance policy on the life or health of any employee whose knowledge, work, or overall contribution is considered uniquely valuable to the company. The employer does this to offset the costs which the employer may suffer in the event of the loss of a key person.

Smaller companies with partners may use it to protect each partner. Having insurance permits the easy facilitatation of any Buy/Sell Agreements that may be in place.

As with all aspects of your financial affairs, you should to seek professional advice to ensure that your personal circumstances are well considered and advice is suitable to your needs. Using a professional and qualified life insurance broker and Life Risk Specialist (LRS) should help towards getting the appropriate cover you need.

Laura Menschik
Director and Authorised Representative
WLM Financial Services Pty Ltd.
CERTIFIED FINANCIAL PLANNER TM - SMSF SPECIALIST ADVISER TM
Fellow of the Financial Planning Association of Australia Limited

WLM provides wealth and lifestyle management services in a professional and personalised manner, by qualified advisers, on a fee-for-service basis. WLM is independently owned by its Directors. Visit WLM Financial Services online wlm.com.au

When the market falls, is this a buying opportunity? - Julia Lee

It's true that when markets fall, it becomes cheaper to buy stocks. The problem is that if it falls even further, wouldn't you have rather bought at the lower price. The key is to wait until the market has already bottomed out and to buy once the market has started to riseagain.

Within any upward movement, you still get pullbacks. This is where the market retraces usually between 5-10% before continuing on its merry way. We saw that at the beginning of October and now we are also seeing it at the end of October as well. This is a healthy sign. The big question for traders is whether this is the pause that refreshes or whether this is a deeper retracement.

One of the reasons for caution is that we have seen a big jump back in P/E ratios and a fall in dividend yields back to more historically normal levels. Here is a graph of the P/E ratio of the market over the last 20 years:

PE Ratios from 1989 - 2009

The Price Earnings Ratio or P/E ratio = Price Per Share / Annual Earnings Per Share

You can see that P/E ratios which are a way of valuing the market have returned to pre-Lehman levels.

When the market falls, dividend yield rises. The graph below shows that dividend yield peaked during the financial crisis at 6.9% for the all ordinaries index. It is now back to a more normal level of 4% for the market.

Dividend Yield from 1989 - 2009

Dividend Yield = Annual Dividend / Price Per Share x 100

Fundamentals aren't looking bad for the market but no longer is the market looking like the bargain of a lifetime.

We can't know if this is a pause or a bigger retracement using indicators such as a moving average. This is because an indicator is a lagging indicator. For now, it's time to think about stop losses.

A stop loss is a conditional order. It allows you to set a price and if the stock reaches that price, an order to sell the share hits the market. It's a way to put a floor on your losses even if you aren't actually watching the market. It essentially is a tool to help you limit your losses. As the market moves back up again, remember to move your stop losses upwards as well.

All in all, a pullback or retracement is a healthy part of a rising market.

While the sharemarket has risen 48% from the low inMarch, it still needs to rise another 46% before we get back to the high that we saw in 2007.

Happy trading!

Julia Lee - Equities Analyst - Bell Direct

To buy or sell shares from as little as $15 per trade, go to www.belldirect.com.au  

Bell Direct does not provide investment advice. This information is general information only. You should consider your own financial situation, particular needs and investment objectives before acting.

Subscribe - If you would like to have our newsletter e-mailed to you, please subscribe.

Unsubscribe - If you don't want to receive our newsletter, please unsubscribe.
We will forward an email to confirm your removal from our newsletter subscription list.

Advertising - If you wish to advertise in or contribute to our newsletter, please contact us.