How to Buy a Luxury Property in London – Part 2: Making an Offer

Once you start viewing luxury properties and making a shortlist of the ones you really like for further research speed can become an important factor and you may need to move fast to secure the luxury home that is top of your list. This is especially true if the property market is hot and if the property you like is fairly priced (which is what you want!). You also need to be quick off the mark if you are buying from outside London and therefore have fewer opportunities to view the properties you are interested in.

1. Before you buy a luxury property in London

We highly recommend that even before you start viewing properties, or in the worst case right at the beginning of your search, you carry out the following important preparation work:

Have your finances in place: However you plan to finance the acquisition you must ensure that your financier is aware of your intentions and can move quickly if required. It is standard practice to put down 5-10% of the purchase price as a deposit on the exchange of contracts while the balance is paid upon ‘completion’. You must have your finances organised prior to making an offer otherwise there will be delays which may cause you to lose the property that you intend to buy. The vendor can pull out of the agreement at any time, especially if the transaction is taking too long.

For a full list of the costs you can expect to pay when buying a property in London please read our post on How to Buy a Luxury Property in London: The Costs

Find a solicitor: It is essential that you use a solicitor who specialises in London property transactions. Just as you would not rely on a criminal expert to work on a corporate case, you should not instruct a solicitor who is not a specialist in property transactions (‘conveyancing’ is the technical term, if you like jargon). Again they must be available to act as soon as you are ready to make a purchase therefore it is a good idea to have instructed a solicitor to act for you before you even start looking for a property.

Find a surveyor: In most cases it is preferable to carry out a survey on the property that you are interested in. That is why you need to have two or three surveyors prepared to act for you at short notice.

Make time to view the properties: Or otherwise rely on someone you trust who can view properties and make decisions at short notice; if you are rarely available you risk missing the best opportunities. You may also have to offer more to make your bid more attractive than that of another buyer who can move more quickly than you, and if you are not fast enough you could lose the property even if you have agreed a price with the seller.

2. View the Properties

One of the main reasons that buyers waste time is that they are not truly focused on what they want; if you do not have a clear idea of what you require you can spend hours looking at unsuitable properties. In addition to the basics such as the asking price, number of bedrooms, bathrooms, or whether you need a lift, you will also need to consider:

• The condition of the property
• The condition of the entire building
• Length of lease (if applicable)
• Views, sunlight and orientation
• Architectural styles – both internal and external
• Service charges
• Other amenities like a garage, swimming pool, gym etc…

Once you have found a property that you like make sure you learn as much as possible about it. Even if it seems perfect at first glance, try to think about it from all angles. It is also a good idea to write everything down - the best house hunters take notes on each property they view which they can compare later.

Make at least two visits; try to view the house in the daylight and at night, and also visit during rush hour as you could get an unpleasant surprise. When viewing the property take note of the following:

• State of Repair: such as insulation, heating, plumbing and the electrical system. In London repairs can take time and cost more than in many other places.
• Structural problems: particularly expensive and time-consuming issues like cracks in ceilings and walls, condensation problems, and mould. Be wary of new paint or wallpaper which might be hiding serious problems underneath.

3. The Valuation

The price of a property is a fundamental element of a real estate transaction yet investors often do not pay as much attention to obtaining a fair valuation as they would with other comparable investments. For instance, even highly sophisticated private investors often forget that the discount that is negotiated on a property may be totally irrelevant if it was not correctly valued in the first place. In other words, negotiating a discount of 20% is no good if the property asking price was overvalued by 40%.

The issue is more evident because the property market is opaque and the information available is often incomplete and outdated. Neither the Land Registry nor any online database is a reliable source when it comes to pricing a property. On the other hand, estate agents are paid to achieve the highest possible price for their clients so a buyer should not rely on the agent’s judgment to identify a fair property price.

As a general rule you should not use one piece of comparable data as concrete proof; just because one house has sold for a high price does not mean that it was the right price, there are many occasions in which the buyer may not have known what they were doing. It is also worth noting that properties located nearby may trade for a significantly different price depending on their view, size, amount of sunlight and building facilities.

Our suggestion is that you double check all available information and find as many comparables as possible. Only when you have a good idea of how much similar properties have traded for in recent months can you start to make an informed decision on what you should be offering for your property. If you want to be even more accurate in your evaluation there is further analysis that can help you determine the long-term value of a property. For instance, a relatively straightforward analysis of historical cap rates (property net yields) would tell you if the whole market may be overpriced/underpriced at any given point in time, while a pro-forma analysis based on the expected cash flows and some basic macro-economic data will help you calculate the expected rate of return of your property investment.

4. The Negotiation

Always remember that properties do not have fixed price tags and you may be able to make substantial savings with a little skilled bargaining. It is important to get the opening offer right as this will play a big part in the amount you will eventually pay. Generally the opening offer is no more than 10% lower than the asking price and the two parties take this as a starting point for further offers until an agreement is reached. Be aware that the asking price is often set high in order to encourage a higher opening offer and you are expected to negotiate.

The negotiation will be affected by various factors which you should take into account:

• How many other people are interested in the same property? If you are the only one you are in a strong negotiating position and the seller will probably accept a lower price. If there are two or more parties making offers the seller and their agent will be far tougher during negotiations and it may be sensible to offer the asking price.
• How quickly does the seller need to sell? If they need to sell quickly, they will be more likely to accept a lower sum than the asking price.
• How long has the house been on the market? If the seller is having difficulty selling the house, there is a high probability that they will accept a lower offer. Check whether the asking price has dropped since it went on the market.
• What season is it? Demand for houses is higher in spring and summer so prices will be slightly higher at these times of year (in London this could be up to 10% according to recent statistics).

This is a very brief and basic list of tactics and it is worth reading more on the subject of negotiation. However, if you put these ideas into practice you will have a far greater chance of concluding a successful deal:

1. The key to a successful negotiation is to have as much information as possible so keep asking questions throughout the negotiation - one piece of information could make an enormous difference. Some other useful questions to ask the agent include:

• How many viewings have you had since the house went on the market?
• How many offers have you had?
• How did you calculate the asking price?
• What price do you think the vendor would accept?
• Why are they selling?
• What have they said about the lack of offers?
• Where are they moving to and have they already found somewhere to buy?

2. Before you enter the negotiation you must commit to a ceiling price which you cannot exceed. This will be based on the data you have accumulated and the discount or premium you are willing to pay. If you stick to this, you cannot ‘lose’ the negotiation even if you do not come to an agreement.

3. Never make your first offer the asking price or your ceiling price. You may want your first offer to be declined– if it is accepted you know you probably could have acquired the property for less. The owner is also more likely to renege on the agreement later, thinking that he may be underselling the property.

4. Make any increases in your offer in decreasing increments – e.g. £5m, £5.5m, £5.75m, £5.9m. This will give the buyer an indication that you are coming to the end of your threshold. Also if you make large increases in your bid the seller may think, rightly or wrongly, that you have more money available and may demand more.

5. Always ask yourself: “What can I offer the seller that would be of huge value to them, but of little cost to me?” For example, a swift exchange with a delayed completion, paying in dollars rather than sterling, etc.

5. Making an Offer

- Once your offer has been accepted it must be made formally, in writing, and is subject to certain terms and conditions. Ensure that both the agent and seller understand the terms of your offer.

- When putting forward your offer always put it in writing with a list of all of the items so that there can be no confusion or arguments later in the process. Make sure that any offer is made ‘subject to contract and survey’ and always insist on an exclusivity period ‘from receipt of a full set of papers’ in which to exchange contracts to avoid other potential buyers trying to increase their bids.

- Remember that the London prime market is generally characterized by a constant supply shortage. In this type of market one of the typical problems encountered by home-buyers is gazumping, a practice which can be both emotionally and financially draining for the affected buyer. To avoid being gazumped it is a good idea to demand that the property be taken off the market as soon as your offer has been accepted (although unfortunately this is not always possible). For more details you should contact your solicitor, who will be able to advise you on this.

- If possible you should try to avoid putting down a non-refundable deposit at this stage as it is usually not worth the risk. However there are occasions when a non-refundable deposit may make sense; for example, if the property for sale would be immediately removed from the market and higher offers would be refused as long as the transaction is completed in the agreed time.

- Specify which fixtures and fittings you want to be included and what work on the property needs to be completed before the sale has gone through.

- Remember that agreeing on the price is only the end of the first phase and a significant percentage of purchases fail between the completion of negotiations and the exchange of contracts. The legal process can be rather drawn out and the longer it takes the more likely it is that the deal will collapse as in the meantime the seller might receive a higher offer or rethink the selling price.

Now you have made an offer you still have a way to go before the transaction is completed. To find out what to do next read How to Buy a Luxury Property in London - Part 3: Completing the Transaction.

Do you find these tips on how to buy a luxury property in London useful? What advice would you give? What has been your experience? Let us know below.