Buying an investment property can be extremely daunting for many people. It is likely to be the most expensive purchase many people will make. In order to minimise stress and confusion, investors should recognise and understand the steps involved in a purchase. Unlike many other purchases, buying an investment property requires numerous steps over an extended period of time. In a nutshell, the following steps are all fundamental to a successful purchase. Understanding each will help to ensure all the boxes have been ticked correctly.
Submit an offer
The investor needs to make an offer when the right property has been identified (click here for how to identify a property). An offer on a property will entail a purchase price and subsequent conditions of purchase. It is the investor’s responsibility to make an offer that suits their affordability and circumstances.
When dealing with a selling agent, they may attempt to use a range of tactics to increase your initial offer. It is important to know how to value a property and what you are willing to pay for a particular property. You don’t want to fall into the trap of overpaying for a property. Make an offer, which if accepted, you will be happy with. If you miss out on a property, there will always be another deal around the corner. To officially submit an offer, the agent may get you to fill out an offer form in writing. The agent is able to present this to the vendor as the offer is more serious than word of mouth. Moreover, the agent must present ALL offers to a vendor so don’t think your offer will go unrecognised.
Note, the conditions of an offer are critical to a sale. The most common clauses added to a contract are building and pest, finance, and sometimes a special clause specific to property or circumstance. The more clauses to a contract, the more likely the contract will have complications. Therefore, vendors and agents like offers with as minimal clauses as possible. If you are able to minimise the conditions on your offer you will be in a better position. Consider how you may place the best over for the vendor whilst still ensuring the deal is great for yourself and your circumstances.
Negotiate your offer
If you are unsuccessful in your offer, the agent might counter offer your proposal in order for you to meet the vendor’s expectations. This then commences the negotiation phase of a purchase. it is up to the investor to determine if they are willing to negotiate on the purchase price or conditions of their offer. This can be a huge stumbling block for many if they don’t understand how to negotiate effectively.
The negotiations when buying an investment property can take place before and after an offer has been accepted. Both of which can be used by an investor in order to get the best deal they can on a property. It is important to build strong negotiation skills when purchasing a property in order to obtain the best outcome for you as the buyer. The price point is usually the biggest disagreement between a buyer and seller. The seller wants the highest price possible while the buyer wants the cheapest price possible. Therefore, they must find a middle ground in order for an offer to be accepted.
In order to successfully negotiate an offer, a buyer needs to meet the needs of the seller but still make an offer they are comfortable with. Understanding the vendor’s intentions can improve negotiating power. If an investor knows why the vendor is selling, they can use this to their advantage. The vendor may be looking for a quick sale, this may mean the investor has room to negotiate. Alternatively, if the vendor is happy to wait for the best offer it means the investor may need to meet the vendor’s demands to reach an agreement. Knowing the seller’s intention of selling is critical in being able to negotiate a deal.
When the investor’s offer is accepted by the vendor then the property officially goes under contract. When you enter this stage the transaction is not over. In fact, this is where most of the paperwork commences. This stage usually runs for 42 days (6 weeks), although the period of time can be negotiated. As the investor, now is the time to arrange everything else that goes on to secure the purchase before settlement (the end of the 42 days).
The investor will also now need to pay the deposit for the property to the selling agency. Usually, this is done in two stages, once when the offer is accepted and then the remainder paid when the property goes unconditional (all clauses have been satisfied). The deposit is then subtracted from the purchase price at settlement, so you aren’t paying it twice.
What happens if I change my mind? Nearly all properties have a cooling-off period. Usually, this is 5 days and enables the buyer to pull out of the contract if they no longer wish to purchase a property. Though, as the buyer, you are usually liable for approximately 0.25% of the purchase price if you exercise your right to use the cooling-off clause.
Now, you want to organise all of the legal work to be completed. The first step is to engage a solicitor or conveyancer to assist in the legal side of the purchase. Usually, a great solicitor will hold your hand throughout the entirety of the purchasing process. Any concerns or questions you have can be sent to your solicitor in order to clarify any legal concerns you have. They will usually send you a critical dates email or document outlining when everything needs to be completed. This is your reference sheet to ensure you get all the jobs done by their expiration date.
If you have a B&P clause you will need to organise a company to complete an inspection. In most cases, a B&P clause will be 14-days which gives you two weeks to satisfy this condition. It is important to contact an inspector as soon as possible as they can become quite busy. Once completed, your B&P inspector will send you a report highlighting the main concerns of a property. (note: they always over-emphasise any concerns to cover themselves and help you identify potential problems). You can use your report to negotiate on the purchase price of the property if there are any concerns revealed within the report.
Another common condition is a finance clause, as most properties are purchased with finance or a loan from a lender (bank). Most finance clauses are usually 21-days which gives your bank or broker three weeks to satisfy this condition. Again, contacting them as soon as possible will give them the most time to sort everything out. Many buyers choose to get a pre-approval before purchasing, this enables them to have conditional approval from a lender. This can shorten the waiting time to purchase but isn’t a necessity.
Re-negotiate the deal
The investor is able to negotiate on a property even after their offer has been accepted. Both the purchase price and conditions added to an offer can be negotiated throughout the settlement period. In most cases, this usually takes place around the conditions added to a property. You may need extensions in order to satisfy a clause to which you can ask for. The purchase price can also be negotiated by using the B&P report to outline potential issues with the property not seen by the naked eye. As an investor, this is the stage to add the icing on the cake of a deal.
Note, all information discussed is tailored towards a private treaty sale (a standard property transaction). When dealing with an auction the room for negotiations is limited. This is because auctions are inherently unconditional purchases. An investor cannot add in clauses to an auction and therefore does not have room to negotiate like they normally would during a private treaty. Auctions are designed to get the most exposure for a property and subsequently the best price.
When your conditions are met during the settlement period the property goes unconditional. Unconditional simply means the property has no more clauses which need to be met between the buyer and their needs to purchase. There isn’t too much which takes place now until settlement, but it will be important to ensure everyone is on the same page.
Settlement is the end of the purchasing process and is the time when the transaction comes to a close. During the day of settlement, your solicitor organises to exchange documents with the vendor’s representatives. Your solicitor will also organise for the balance of the purchase price to be paid to the seller. The buyer can also retrieve the keys from the existing owner or their property manager. Each of these steps usually happens at a specific time and place. Moreover, the loan (if any) commences from this point onwards and the investor is now officially established as the new owner of the property.
The verdict buying an investment property
Buying an investment property is not a straightforward transaction, particularly for someone who has never bought a property before. Understanding the steps involved in a purchase will hopefully reduce any associate stress or headaches. It is important to understand each stage of purchase as many problems can occur when an investor is uneducated. Hopefully, understanding each step will help you in making better-informed investment decisions.