If you’re looking to buy a property from a developer or builder, here are 6 things that might help you get an extra bit of a discount.
1) The Rules of Threes
The first thing to keep in mind is the “rule of threes”.
Basically, builders have a rule of thumb that any property they’re selling 1/3 of that price tag was probably the land cost, 1/3 was probably build cost and 1/3 is roughly their profit (giving a 33% margin).
Now, that means that when you’re talking to a developer, let’s say you’re looking to buy a property of $150,000 you can be pretty sure that 30% of that or $45,000 is gonna be their profit margin.
Obviously, in some situations it’s more, and in some situations it’s less, but this knowledge should allow you to negotiate (and squeeze em a little bit more).
Now one of the big myths of negotiation is that to get a big discount you need to buy more than one, and that’s just not true.[pullquote type=”right”]Now one of the big myths of negotiation is that to get a big discount you need to buy more than one, and that’s just not true.[/pullquote]
You can get big discounts if you’re buying just one providing you know what you’re doing (and you’re a good negotiator).
But keep this in mind: There is substantial profit in every property which a developer can give you given the right conditions.
And what those right conditions are? We’ll look at that in a minute
This 33% margin is probably why I love buying new rather than second-hand property.
2) The higher you go the more they can give away
The more power somebody has in an organization the more discount they can give you.
So, if you’re speaking to the sales rep at the site office and asking for a discount of 30% they might not be able to help you out.
I’m not saying that the CEO could give you 30% but if there was someone who could, it’s probably going to be him/her.
So, the higher you go up in an organization the more flexibility they have and, of course, if you look a bit deeper, they’re actually under different pressures.
The sales director will have different pressure than the sales manager or the regional manager or even the sales rep on the site. They all have different pressures, and that means different motivations to sell.
Just remember, that the higher you go the more discounts you can get.
3) Pressure from Financial Institutions
Developers have a lot of pressure from the financial institutions that they borrow money from. The people on the ground floor, the sales reps, don’t really have a clue as to what’s happening in the finance department. However, as you go higher up the chain this is something you start to realize.
Your regional directors, sales directors and CEOs know that they have to sell units if they’re using financing (and most developers are).
Financial institutions can put all kinds of restrictions on releasing additional funds for developers. It could be a number of units built or sold, purchases agreed, market conditions, you name it. To a developer, selling one unit can sometimes mean a lot more than just selling a unit. It could mean less pressure from the bank and maybe additional funding to keep them in business.
So just keep that in mind and know that those pressures are on and if you can find out, then maybe you can use that information to your advantage.
Now everybody who’s selling property is probably on some sort of commission structure.
That means the more they sell the more money they stand to make.
Let’s say that you are the sales rep in a development and you’re told that you have to sell 10 properties every month.
Your commission is 1% per property but that will jump to 1.5% if you hit your quota.
So you are really incentivized to sell 10.
Now, if you’re at the 9th property sold, you’re going to work really really hard to hit your target. That’s obvious.
So it’s our job as investors to try and find this out.
If you’re a good negotiator you can use the magic words of negotiation. “Tell me” (That’s actually an NLP embedded command).
Those two powerful words will allow people to actually give you the information you want because you just ask them!
Try it out with someone say “Hey, Tell me what kind of commission structure are you on”, and see what they say.
5) Discounts Increase with Time.
Let’s take the same example we just talked about where you’re on that commission structure. Sell 10 and you’re at 1.5%, sell 9 – you’re stuck at 1%.
So let’s say it’s the first day of the month and an investor comes in and buys nine properties from you!
Wow! How happy are you? and more importantly, under how much pressure do you feel to sell the 10th property? How likely are you to give the next person a discount to hit your target? probably not much.
But if we go forward in time and let’s say it’s now the end of the month and you haven’t hit your target, you’re still at the nine…
I’m sure you’ll feel a little bit more pressure.
Are you more likely to give away a discount for that tenth purchase? I think so.
Now, of course, we don’t have this information available to us to actually look at this and say “are those people are on this commission structure and these are their sales targets” but we can ask (use the “tell me” structure).
That’s a really good thing about negotiation… It’s actually easy to build rapport with people and to eventually say “Hey look, let’s get this deal going together… can you tell me your commission structure so I can help you hit your targets?”. Now they might not come out and tell you (although that has happened), but having someone on their side… well that cant be a bad thing.
I once had a lady in a sales office tell me “Sunil you don’t want to buy this property today you want to buy this property in 30 days”.[pullquote type=”right”]”Sunil you don’t want to buy this property today you want to buy this property in 30 days.[/pullquote]
If it doesn’t sell the developer is gonna to tell me to drop the price by 15%”. Now since I had already bought a property from her before she did the very nice thing of actually putting the deal in the bottom drawer and we waited 30 days.
I came back later the deal hadn’t sold (surprise, surprise) and so I got a great deal.
So just keep in mind that discounts can change with time.
6) Starts, Middles and Ends
The last point is understanding there’s a start, a middle and an end to every development.
In fact, there could be many starts and middles and ends in a development.
Now if it’s a small development, let’s say of 20 houses, the developer is not going to have what’s called a phased construction.
They’re just gonna start building all twenty, and when they’re all done they’re done.
But at different points in that process, there could be different discounts available.
At the start of a development, a developer wants to get some houses sold initially because nobody wants to be the first person to buy the property. right?
Now during the middle, it’s usually not a big deal, but at the end, you could have some good deals because the developers got one or two properties left to sell.
They may have a whole sales team there and they’re expending all that money just to have people to sell those last units… They might be willing to give an extra discount for you to pick up that last property or so.
That’s not always the case but potentially it’s good to be aware of those cycles.
Now in a bigger development where let’s say they’re building 1,000 houses. No developer is going to release all those thousand houses to the market at the same time, it’s going to happen over phases.
And they may release 50 or 75 in phase one then another 75 in phase two. Maybe phase three could be 200, whatever it is, in between those phases prices are usually going up.
So being at the end of phase 1 when phase 2 is about to be launched could be a good thing because you’re “buying in a price increase”. Chances are, phase 2 is going to be more expensive.
The same could be said at the end of Phase 2. Buying at key points in a development cycle can automatically have your property increase in value.
So just be aware of those phases and where you are in the buying cycle of that development.
I love buying from developers. I call then “professional sellers”, They live to sell, and I live to buy. A match made in heaven.
Good luck with your investing!