Buying a home? Don’t lose it arguing over 3 cups of coffee!
The phone call came in from my client. The vendor wouldn’t budge. Negotiations on the house my clients wanted to buy had come to a standstill. The amount of $5,000 was the gap that had to be bridged if there was to be a successful purchase. All was dissolving and their new home looked doomed; until we turned $5,000 into 2 cups of coffee.
You would be amazed how many people have no problem throwing in big offers on an initial purchase, but then fixate on the cents when it gets closer to a deal. I think I am guilty of it myself!
When I took the call from my clients regarding the stalled negotiations, I was not surprised. Being well organised first home owners, (I had been working with them for 4 months on a savings plan and budgeting process) they wanted to get the best possible result on price.
The home was initially listed (and well-priced according to RP Data) at $365,000. After one month of inaction, the price was reduced to $360,000. My clients jumped into the market and prepared themselves for the game ahead. After testing the vendors with a reasonable initial offer, the negotiations began. Counter offer followed counter offer until a stalemate ensued. The vendor was sitting on $350,000 firm and my clients wouldn't budge from $345,000 firm. Would someone break or, was the game over?
My clients were caught (read stressed) between getting a bargain or missing out on their dream home.
To be clear, my clients were not at the edge of the envelope when it came to the purchase price of $350,000. They could easily afford this property. Even at $360,000, this property would be a "better than fair value" purchase.
This is where the coffee came into play.
What is a coffee worth?
My clients were borrowing money to purchase this property. With interest rates being at record lows, we sat down and worked out what $5,000 meant to them in real terms on a weekly basis. When we worked out that the additional $5,000 borrowed was effectively worth 2 cups of coffee a week ($7.76 a week in interest based on 4.04%) the situation changed.
What seemed like an insurmountable gap, was bridged by a couple of flat whites! My clients were quite shrewd however. They used this coffee analogy with the Real Estate Agent and subsequently the sellers dropped the price by a cappuccino. The price was settled at $348,000.
Interest rates are low which made the coffee conversion very easy to swallow. At the moment, most lenders are using around 7.25% as their serviceability hurdle rate. Banks use this rate to establish what a repayment would look like if rates were to rise to see if you could afford a loan, at that higher interest rate. Using this rate, I have identified below how many coffees per week you could be arguing over when it comes to reaching an agreed price. I have used a 30-year term and $4 coffees. The weekly repayment figures represent principal and interest.
A $5,000 price gap is 2 coffees or $7.87 a week
A $10,000 price gap is 4 coffees or $15.73 a week; and
A $15,000 price gap is close to 6 coffees or $23.60 a week.
I could go on forever; but hey, you have to draw the line at how many coffees you are prepared to forsake at some stage!
The important point to note from all this is that my clients are happy.
What can seem like an insurmountable price gap now will almost certainly pale into insignificance in the future. Particularly when you are sitting back enjoying life in the home you love.
Why you need to talk to a finance expert who loves coffee!
Understanding finance is more than just understanding money. It is about engaging with people in their language, supporting them through the whole process and providing information, advice and ideas to make life easier.
Communicating with a coffee somewhere in the mix is a great way to talk about your next dream home.
To make sure you get a great finance outcome, or if you have any questions regarding this article, please contact us.