Successful Negotiating in Real Estate

    Everyone thinks that “I Win…You Lose” is the only successful negotiating outcome, right?  What's the best strategy to take?  Do you make a low ball offer?…What if it’s rejected without a counter-offer? Your spouse says..."But honey, I really want this house"…so, do you make a full price plus offer and maybe overpay?

    As a REALTOR® I have spent hours and hours discussing strategies for success with my clients. The key to successfully getting through the negotiation process in a real estate transaction is to get away from this adversarial relationship between the buyer and the seller. It may be possible for both sides to come away feeling like winners! Here are some things to consider:

Know the market

Knowledge is power! Is it a buyer’s or a seller’s market? Is the long range projection for housing prices trending up, or down? What are the recent statistics on appreciation over the past year? Five years? Is there a change coming? What is this home worth? The answer to these questions directly relates to the motivations of the buyers and the sellers in a given regional housing market. No one wants to buy at the top of the market. Likewise, no one wants to sell at the bottom.

    For sellers. Have a REALTOR® do a Comparable Market Analysis or CMA for you. This is an analysis of the current market conditions and takes into account (1) all active homes on the market similar to yours, (2) recently sold homes, and (3) those homes that expired without being sold. Additionally, it will look at differentials between neighborhoods in a given area, accounting for price premiums or discounts, size of lot, days on the market statistics, and absorption rates. As a general rule, your agent will give you a range in which bounds your best price. Where in that range you select depends on a variety of factors, some of which we will touch on later.

    For buyers. You want the same information too, don’t you? If you identify a property that you want to make an offer on, have your REALTOR® do a preliminary CMA for you too. It will give you an idea of whether the seller’s asking price is fair, inflated, or under-value. Where in that range you make your offer might also depend on the upgrades and amenities in the home, how it compares to other homes you’ve seen, and how well it meets (or misses) your needs and wants.

Know yourself

    What can you afford? How much money do you need to get out of this house so that you can make your next move? What will the bank qualify or approve you for? Is selling or buying this house a matter of want? Or need? The answer to these questions gives you some boundaries in terms of how far you can go in the negotiation. Knowing at what point you have to walk away, and where the deal breakers are sets the limits. You MUST be armed with this information at the start of the process. Also take stock of the elements OTHER THAN MONEY that are important to you. What is moving together as a family worth? Do you need to stay in the home for an extra 30 days? Can you afford to make two mortgage payments for another month? Is the best high school in the district more important than lot size?

    For buyers. Is the amount that the lender has qualified you for actually the amount you want to spend? Work the problem backwards from your monthly payment budget, and figure out what you can afford. Perhaps you could look a few percentage points higher than that to make sure you are finding the right houses, but keep within a reasonable range. Knowing what your absolute BEST offer can be can often keep you in a strong negotiating position.

    For sellers. Understand the costs of closing escrow, the fees, and what you owe on any outstanding liens is key to knowing what you will NET from the sale. Have your agent work up a Net Sheet for you. Calculate it backwards from your bottom line so that you will have the most effective yardstick to evaluate incoming offers. If the offer allows you to do what you want to do next, and everything else is acceptable, you should think twice before rejecting it, especially if it’s a buyer’s market!

Know your opponent

    Ok, maybe opponent isn’t the right word. Remember, I said it doesn’t have to be Win/Lose…and can generally find Win/Win situations. But, you know what I mean, right?

    What is their motivation? Is it a relocation, and they need a place to live right now? Or do they need to sell as soon as possible? How long has the house been on the market? What type of traffic has it seen? While the agent for the other party will not be able to tell you this (they have a fiduciary relationship, and an obligation of loyalty to their client), you can figure some out on your own. For example, if the house is vacant, and has been on the market for 60 days or more, you can be somewhat confident that closing escrow quickly is likely going to be a positive element of any offer for the seller. Similarly, if your buyer is living in a hotel, with three school-age children it’s a good bet they want to move in soon!

    What can you do with such information? It doesn’t always have to translate into sales price. There are multiple layers of terms in a real estate contract; (a) offered price, (b) terms of financing (qualification/approval status, amount down, cash, conventional loan, 100% financing, etc…), (c) contingencies such as having another house to sell, (d) closing date, and others. If sales price is the only thing you are negotiating on, you are leaving ammunition in the box. If the seller needs to sell quickly and get escrow closed so they can move as a family, then a slightly lower offering price can be mitigated by having no contingencies, a quick escrow, and waiving of excessive inspections.

    Likewise, knowing that they need to stay in the house an additional 30 days could be used offset a need to get your house sold, assuming a full price offer. It is the low-ball offer, coupled with the sale-contingency and the request for a home warranty or 100% financing that makes an offer less appealing.

Summary

    The best end result of any negotiation is both sides walking away feeling like they got what they needed. You can avoid trouble in these situations by knowing what a fair offer is, by focusing on your bottom line, and by understanding what other elements of the contract can be used to offset those items of importance to you.

Good luck.