How to Negotiate Purchase Price when Buying a Home
The Ultimate Guide to Winning a Property via Auction or Private Treaty Sale
Part art, part science, putting an offer on a home is tricky.
Come in too low and you’re skipped over in favour of more attractive buyers; too high, and you might find you’ve negotiated against yourself.
So, how do you put together a winning offer?
We've bought dozens and dozens of homes, negotiated with hundreds of agents and learned how to buy beautiful homes at great prices.
After spending 7 months as one of OwnHome's in house buyers agents, I thought there was no better way to summarise the period by sharing our learnings on property negotiation.
This is a comprehensive guide to making a winning offer on a home, using many of the techniques we apply at OwnHome.
This article will
- Explain terms you need to know: ‘unconditional offer’ ‘cooling off period’
- How to decipher the asking price vs what you should actually pay for a home
- Provide a checklist to follow for both auctions and private treaty sales
- Share conversation guides, and what not to do, when talking with agents
- Arm you with a toolkit to protect yourself from an emotional purchase
Before we begin, it is worth recapping roles
- A real estate agent’s role is to extract the highest price on a home for their vendor
- Your role is to pay the fairest price for the property (that is, to not overpay for a home)
Three factors that make for a great negotiation
- Take your time. To negotiate effectively, you need to do the research. You may feel pressured, but don't let others rush you to make a decision.
- Stay objective. Buying a home is an emotional experience. But don’t let your emotions sway your decision. Trust the process.
- Gather data. The best way to guard against emotional or irrational decisions is to gather data, be curious and ask questions. Use the agent to access the information you need to proceed to an offer—don’t make assumptions.
Prepare to invest the time.
On average, a buyer will look at more than 300 listings and attend 11 weekends of inspections before making their first offer. Buyers spend an average of nine months searching for the right home.
The Australian national sport of trawling through domain and realestate.com.au is time-intensive, so it pays to be prepared.
Preparing well is especially important as investors buying properties typically make much faster decisions than first home buyers and owner-occupiers.
So, while you want to take your time, when you find ‘the one’ you want the confidence to move fast.
Remember, you will likely get a few nos before you get a yes. Make notes and treat this as a learning experience.
Steps to negotiate the purchase price of a home in Australia
This is a comprehensive step-by-step guide to help you navigate the purchase experience. We’ll take you through each step in detail:
- Desktop research: valuation models, online ads and the market
- Valuing a property: how to tell what a home is worth
- Gathering insights from the real estate agent
- Building a negotiation strategy: how do I negotiate with an agent
- Types of offers: conditional vs unconditional
- A private treaty and an auction: what are they
- Offering great terms: what are terms and how to use them
Start your research journey online: research the home, the agent and the agency.
Take the time to understand the following:
Similar properties/market depth
What else is for sale in the area? How many homes are in surrounding areas with similar characteristics? What price are they listed for? Are they superior, similar or inferior to the home you are looking at? When looking at a property online look out for: ‘renovators delight’ and ‘brimming with opportunity,’ these are usually good signs that a home needs... work!
Find 3-5 comparable recent home sales. Understand what properties sold recently and how much they sold for. How long was each property on the market for? Who sold it? This will help provide timely context to form facts about the homes market value.
Gather data from automated valuation models (AVMs)
Check out the market conditions
What are the auction clearance rates (see below)? How long are homes taking to sell? Has the market price dropped? Are interest rates still rising?
Quick research into the local property market will help you understand the market depth (the supply of properties in a certain area), the average sale price and any recent shifts.
The information you gathered from seeing the home
The best way to know the value of a home and if the numbers are supporting the value is to go and see it.
The rule of thumb is that lower clearance rates imply the Vendor’s expectation is not being met, which implies a mismatch between vendors pricing expectations and a buyer's willingness to pay. This lower clearance rate means less properties are selling - indicating a slowing market.
Valuing a property
Once you’ve completed your desktop research, you’ll know how much the property will likely be valued on the open market. However, every home is unique. Each property will have features that will impact the value of the property.
Features that typically drive up a home price
- Brand new renovations
- Additional bedrooms, bathrooms
- Approval for extensions
- Close to great transport networks
- Within school catchment areas
- Land size
- Internal floor space
- Car spaces
- Location to amenities
- Ability to add value
Features that typically drive down a home price
- On or near a noisy road
- Outside of school catchment areas
- Renovations required
- Significant building defects or pest related issues
If your desired home has many of the value-driving features, it is likely to be more expensive than an identical home that sits on a noisy street.
It is important to look at comparative sales and the data to understand if the property you are looking at is superior or inferior to a recent comparable sale.
When a bank values a property, they look at similar features to OwnHome, including
- Whether a property is comparatively inferior, superior or similar to others in the area
- The state of the local market
- Previous area growth and future potential
Understanding the value-driving factors is important to knowing if your paper valuation is fair, competitive or overdone.
The important step here is to define the top-limit you’d be prepared to happily pay for the home. Don’t go above this.
Gather data from a real estate agent (detective time!)
The agent has vital information about the home, comparable sales and the seller’s motivations that you can use to help negotiate.
You can talk with the agent before or after you view the property.
We complete an initial call with the agent for every property we look at. Here are the main questions we ask:
What is the timeframe for this sale? Are you scheduled for auction?
- Are they in a rush or if they are happy to wait for the right offer?
- If they are in a rush, then you may be able to work quickly with the agent to achieve a great outcome
- If the property is going to auction you can ask if the vendor will be looking at offers prior. This will indicate if the vendor is committed to going to auction, or if this property has the potential to sell before.
Why is the vendor selling?
- If the vendor has purchased another home or has moved, they may be more enticed by desirable terms like a shorter settlement (discussed below).
- If the vendor is selling due to personal reasons and they need money, they may take an offer quicker than a seller that has time on their side.
- Listen out for things like ‘the vendor is motivated to sell’, this is usually an agent's way of saying they are keen for a quick sale.
What type of settlement date is the vendor looking for?
- This question helps you understand how quickly the vendors want to move. If they need to move quickly, and you’re in a position to do the same (e.g. your lease is about to finish), you may be able to offer a quick sale and settlement.
What is the price range for the property? Do you have other offers?
- This is also a way to dig a bit deeper into price and understand if there are other offers on the table. Knowing the competitive landscape for the home helps strategise where other offers may come in and helps to form a basis for your offer.
- Remember to ask the agent if these offers are verbal or on a contract. Telling an agent you’ll pay X for a property is very different to signing a contract with that number on it!
Can you please send me a copy of the Contract of Sale and professional reports?
- The contract is important to get to send to your legal team or conveyancer if you decide to proceed with an offer. Getting a contract is not a commitment.
- A professional report for a freestanding house is typically a building & pest inspection report. For apartments and townhouses in a strata complex, it’ll usually be a strata report.
- If the agent/vendor hasn’t organised these already, it’s prudent to organise these with an inspector yourself before you make an offer (or allowing some time to do so in the cooling off period). This is an upfront cost you may have to pay for.
Private treaty vs auction properties
Almost every home available for sale will either be available via private treaty or auction. Understanding a private treaty sale vs a property that is proceeding to the auction will help inform your bidding strategy.
Let’s start with the definitions
A private treaty sale is one where the vendor sets the price they list the property at, with no intentions to run a formal auction
- Generally, this is after research into the market and discussions with their agent to determine a realistic outcome. The vendor then starts negotiating with potential buyers via their agent. The property will stay on the market until it sells.
- An auction sale is a sale where buyers compete for a property by placing bids. Auctions can be both live and online.
- This is usually where a vendor will meet the market on the day and sell the property to the highest bidder. An auction has a reserve price, which won’t be disclosed prior. This is the minimum price that the seller will accept as the winning bid. If the reserve isn’t met at the auction, the property can ‘pass in’ meaning the vendor's price wasn’t satisfied.
- At this point, the agent will often negotiate with the highest bidder. It is important to not bid against yourself here - buyers are in a great spot if the home passes in. Properties that are passed in, and don’t sell in subsequent negotiations on the day, will often end up back on the market, offered via private treaty.
How to tailor your bidding strategy to private treaty sales and auctions
A private treaty sale means you will be negotiating with an agent 1:1
- The agent represents their vendor and they will try to negotiate with other parties to sell the home for the best price.
- This is where the tactics below will come into play. By presenting a fair offer and great terms and understanding, you will be set up for a successful crack at a private treaty sale.
- An auction on the other hand will be a culmination of great research and data pulled together to set your max price that you are willing to pay and then participating in a live auction.
- It is important to note that for an auction, you will need to complete all of your contract reviews and due diligence before the day, as there is no chance to do your digging later and come back to the negotiation table on price. Auction terms don’t allow you to pull out after you have won. You are committed to the purchase as it is an unconditional sale (see next section).
Any of the tips discussed in this blog will be relevant for both a private treaty and auction sale. The only difference between the two will be whether you deliver the offer to the agent, or alternatively you show up on auction day! The research and data gathering still ring true in both scenarios.
Common purchase negotiation strategies
There is no right or wrong way to buy a home.
Use the data you gathered in your research phase to consider the best approach. Here are some of the options:
Look at a comparable sale
- Pick the best and most recent comparable sale you can, and take that data directly to the agent.
- Make sure this is a very recent sale and it is backed by the other data points that we looked at.
- If a home was sold a few months ago, that doesn’t sound like a long time but it can represent quite a large market shift! You always want to purchase at or below the current market value.
Offer a good price, build in a buffer
- Make a great offer based on the data points and price guide, but be sure to leave a bit of a buffer, for when the agent inevitably comes back for more.
- By leaving a buffer of even $5-10k, you have money to work with in a negotiation
- This allows the agent to go back to the seller and let them know they squeezed you for every last cent (whether it's true or not!)
- However, when you say “this is my best offer” - make sure it is. If you keep adding another 10k, the agent won’t think you’re credible and will keep pushing for more.
Low-ball, hope to get lucky
- Remember those data points we spoke about! Let's say, a home has been on the market for about 60 days. That is almost two months of a vendor trying to sell and importantly a real estate agent trying to make commission!
- If there is no other competition at this point, you may be able to score a bargain price, as the time on market implies there hasn’t been sufficient interest from prospective buyers at the current price point.
Find out why the vendor is selling - and use it
- Circumstances shape decisions and this tactic uses circumstances as well as price.
- If you are able to be flexible, this may help you - say so!
- A vendor we have worked with in the past has lived in their home for over 40 years, they weren't in a rush to move and wanted to stay in the house until they found the right new home and requested a 3 month settlement. Because we knew this and weren't in a rush, we were able to agree to this term and win the property - we used a data point that our competitors didn’t.
Best and fairest
- If you love a home and the data stacks up. Then maybe this is the home to offer the best but fairest price for! Remember to ask about other offers and people who are tracking towards an offer, so you can make the most informed decision.
Pop in a letter of offer
- A letter of offer is a non legally binding offer that a buyer can submit to get a clear sense of the vendor's motivations and what type of offer they are likely going to accept.
- You are able to make an offer without signing a contract of sale at the same time, meaning that you can offer low and enter a negotiation
- Alternatively the agent will likely come back and say something like ‘the vendor will accept $X’ which puts you in a great spot to know exactly what you are working with.
- It also means, if the vendor accepts the offer but you find another property, you aren’t legally bound to proceed.
Put in an offer, but make it clean
- If you are serious about a home, and you have done the work to be ready with contracts and due diligence, then you are in a pretty good position to make a clean offer.
- This means you don’t need as many conditions as other buyers may need.
- If you’ve completed your due diligence and had your finance approved, this could be giving up your cooling off period. Alternatively, if you still want some time up your sleeve, you could offer a two day cooling off period instead of five days, which can also be more desirable for an agent and vendor looking to finalise things ASAP.
Remind the agent that while you love this property, you know there are more just like it
- Drum up the fact that you have interest in other properties.
- Even go one step further and send them a link to others you are looking at. You can talk up other comparable properties that may be at a cheaper price point that you are stoked to move on to if you get a no for your current offer.
- There is every likelihood that you could get a no to the offer still, but in a slow market, agents may opt to secure your bid, rather than gambling on a future better offer.
So you’ve got your data, here’s some things to remember
Get your legal team ready. What does this look like?
- A conveyancer or solicitor will help decipher the hidden nasties in your home-buying journey. They will look into the contract, zoning and special conditions to make sure there are no surprises after your purchase. Before you make an offer, make sure you have an initial chat.
Inspect the property, thoroughly!
- Go and see the home. At OwnHome, we recommend you take videos and notes when you go to inspect. This will help you remember details about the home in the weeks to come.
Read and understand your building and pest reports
- Have an understanding of building inspections, pest inspections, and strata reports - more importantly, know the red flags!
- Things like water damage and leaks, broken appliances and wood rot are things you will really want to look out for - in person and in reports. The major call outs to look out for in reports include evidence of untreated termite activity, serious structural issues (including ground movement) or anything flagged as a ‘major defect’.
Buying a home is an emotional journey, but don’t let your emotions drive your purchase experience
- Taking a data driven approach will set you up for a successful negotiation with any real estate agent.
- Ensuring you follow a rational, non-emotional purchasing strategy, will give the agent less opportunity to use your emotions against you to push up the price, timeframes, and terms.
Use your data points gathered in the above steps to drive decisions and conversations. Remember: market conditions, comparable sales, interest rates, the condition of the home, desktop valuations, and legal advice are all tools in your toolkit to get the best price possible.
What to do when you’re ready to make an offer
Negotiation is more of an art than a science.
After months of searching for your dream home it can be exciting but also nerve racking getting to the point where you are ready to make an offer. It is important to remember the data points that you have collated and keep your wits about you.
Remember the negotiation is where a deal can be won or lost. This is not a time to be emotional about the purchase; rather, be logical and rational.
Unconditional offers and conditional offers
When you’re ready to make an offer, there are important terms to understand.
A conditional offer (and the cooling off period)
A conditional offer is when you make an offer on the property, but you still have some work to do, so you’re not 100% committing to the purchase. It usually involves preserving what is called a “cooling off period”, which is a 5 business day period in which you can change your mind.
Buyers will often do this if they’re reasonably comfortable with the property, but want a few days to finalise their investigations - e.g. to confirm pre approval with their lender, order a professional report or conduct any further investigations or make any further enquiries.
Having said that, changing your mind doesn’t come free! If you pull out while you’re in the cooling off period, you’ll forfeit 0.25% of the purchase price. On a $1,000,000 property, this is $2,500. However, it’s better than finding a major issue with the property, or having your bank knock you back - pulling out when there is no cooling off period (or if it has finished) will usually cost you 10% of the purchase price!
An unconditional offer
An offer where the buyer is committing to the purchase as soon as the contract is signed, and the deposit transferred. This means the buyer must settle on the property and go through with the transaction regardless of whether their finance is approved or not, and irrespective of whether they change their mind. This is the type of offer to use where you’re 100% ready to go, and all your questions have been answered - no cooling off period here!
If all your investigations in a cooling off period are fine, you’re good to go. The cooling off period ends after 5 business days, and the contract is unconditional from that point onwards.
The power of terms & how to use them
Don’t forget about all of the terms we learned about above that you can use to leverage a negotiation. Here they are again as a recap:
- Cooling-off periods (conditional vs unconditional) - If you have completed the appropriate due diligence, you may be able to help make your offer stronger by waiving the cooling-off period. This can be very desirable to vendors and agents where they want to lock in the sale without the risk of having to re do the sale process if the buyer pulls out
- Price - This will always come into a negotiation, but remember the comparable sales and data we spoke about!
After your offer is in
Your first offer
Your first offer isn’t always your only offer.
Using the negotiation strategies above you should approach your offer by deploying your chosen strategy.
Be careful what you say, if you mention ‘this is my absolute final offer’ and then come back with an extra $20,000... the agent won’t think you’re very credible and will continue to push for more.
It isn’t a negotiation without a counter offer, if your offer is something that excites the vendors or is close to taking the property off-market, then the agent will usually come back with a counter offer.
This isn’t a higher offer you have to take, but this is where your buffer of funds could come into play.
You can meet them halfway at this point, or if you can’t you can simply tell the agent ‘I can only do $10,000 more but would love to work with you to close the deal'.
When you say this, be sure you are ready to walk away though.
Don’t double text - ever
As tempting as it may be to ask for an update after you have made an offer - don’t! Let the agent chase you.
In a buyers market, you are in the box seat.
You can set a realistic timeline for when you would like to hear back, something like ‘we are also looking at a property in the area which goes to auction on the weekend, so we will have this offer expire in 24 hours so we have time to do the contract reviews for the next home we are looking at’. The purpose of this is to know your deadline, but to also limit the amount of time the agent has to shop your offer around with other buyers.
Be prepared to walk away
You can expect that an agent may come back to squeeze more out of you.
Remember that you have used a really data driven approach up until this point. That means you should be really confident with the max price you have decided to pay.
If you left some money aside for a bit of negotiation, great! Have a crack.
But if not, you can be really sure that you haven’t overpaid for this property and walk away from that knowing you will get one soon, for a great price.
What happens when your offer on a home is accepted
If you get a ‘Congratulations, your offer has been accepted’, it’s not over yet.
- Once your conveyancer has reviewed and negotiated the contract, you’ll receive a final copy to sign.
- The vendor will also sign the copy of the contract and the solicitors will proceed to “exchange of” contracts. If you’ve kept your cooling off period, it is at this point you will need to pay the 0.25% deposit.
- At the end of the cooling off period you will then pay the remainder of the deposit (typically 5% or 10% of the purchase price, depending on what was negotiated).
- If you decided to go with an unconditional contract because you had already finalised your finance and due diligence, you’ll pay the full deposit straight away.
- If you put in the winning bid at an auction, you will pay the 5% or 10% deposit on the day of the auction, immediately after successfully winning. There is no cooling off period.
Once you’ve finished your cooling off period, won the auction or an unconditional exchange has occurred, it's time to celebrate!!!
Settlement is typically 42 days in NSW and 30 days in QLD, but it can vary by agreement.
If you managed to score the home - Congratulations!
If this home wasn’t for you, this may feel super disheartening - as humans we do imagine ourselves living in a home. So the best thing to do is to remind yourself that you did the work, stuck to your guns, and made a rational decision that will serve you well in the long term!
Keep searching and applying these principles and we are sure you will be celebrating getting into your new home soon!