What to do when a developer knocks on your door
As competition for well-located properties intensifies, developers are increasingly seeking off-market opportunities to amalgamate sites. But what should you do if a property developer comes knocking on your door?
A shortage of inner suburban land for sale over the last 18 months amid surging homeowner and investor demand means property developers have had fewer options to choose from when scoping out their next project.
As property developers need larger sized blocks to accommodate their building plans, often in times of shortage they look to persuade residents of adjoining blocks to sell up.
If successful, the current dwellings are knocked down and replaced with multi-unit blocks.
So what should you do if a property developer comes knocking on your door? Well, it’s time to have the neighbours around for a cuppa!
Often these types of developer offers are presented as an all-or-nothing arrangement. Unless the developer can persuade every landholder to sign up, they typically walk away.
Negotiations are always challenging. But it’s especially so when there is an experienced professional on one side and an uncoordinated group struggling to even recall each other’s names on the other.
Often, a wily developer will seek to exploit the landholders’ initially fragmented state to secure a fast, favourable deal.
In this instance, the developer is calculating that the current owners don’t appreciate the magnitude of uplift in the land’s value arising from a change of use, and naïvely settle for a price that – at face value – appears to be a windfall for the current owners, but in reality is a bargain for the developer.
If you’re faced with this scenario, it’s vital for you to understand that you can have just as much power in this negotiation as the developer as long as you know how to use it.
They want your land. Further, it is not for the developer to dictate the rules of the game.
Also try to preserve your independence and identity throughout the process. What is good for your neighbours may not necessarily be good for you.
For instance, if one neighbour is frantic to sell and you’re not, they may try and coerce you to settle quickly and below your preferred price.
So it’s important that your interests are truly aligned and you can trust other property owners not to divulge your negotiating strategy to the other side.
Indeed, consider stringing out the negotiations such that you’re the last one to sell. Try and gauge what the other parties have agreed.
But don’t be conditioned by the developer or the other owners into thinking that this defines how much you can expect.
The good news is that this knowledge puts a floor on how much you will accept, but as an independent party you can always find reasons why your property should be worth more than what the developer suggests is the going rate.
But that’s the pointy end of the negotiations. Let’s rewind a bit. Your first job is getting a handle on the approximate fair market value of your property.
Given that many people in this situation haven’t been watching the market closely before they are approached speculatively by a developer, getting up to speed is critical.
Speak to some outside parties. Obtain a valuation or possibly two. Ask the opinion of an independent estate agent or a buyer’s advocate with experience in the area.
Do your own research about recent sales in the area, then investigate what the property is worth to the developer in its intended changed use.
Ascertain the likely building costs and the final selling price of the subsequently-built apartments, based on similar developments in your area.
Experienced negotiators like to keep their cards close to their chest and encourage the other side to reveal themselves.
Don’t feel that you necessarily have to make the first move. Instead ask the developer to make the first offer and you may put off ever making a counter offer until the end of the negotiations, if possible.
Ask the developer to explain why they think their offer is fair value. Of course, don’t accept this. Tell them it is too low and give some reasons, based on your research.
They may come back with another better offer. Repeat until there is a deadlock and then go back with a figure that is higher than the minimum that you would be willing to accept, providing some reasons why they should pay this.
Keep repeating this process until you reach a point where you believe you’ve received a good offer.
Typically, you should expect to extract a premium from a developer that’s between 30-50 per cent higher than the current market price for the existing property.
If negotiation is not your strong point, get independent representation.