Effectively Negotiating the Purchase
or Sale of Real Estate
or Sale of Real Estate
Fair
market value is simply that price a qualified, reasonably knowledgeable buyer
is willing to pay, that a seller (not under duress) is willing to accept, after
the home has been properly exposed to the market. Since that changes all the
time - the market has been known to go up or down 20% or more in a single year - all one can do is to try to negotiate the absolute best price and terms
today.
Generally speaking, ours is not a society comfortable or highly experienced with assertive negotiations, but skillful negotiating can reap substantial rewards in the large, complicated financial transaction of buying or selling a home in the San Francisco Bay Area. This is true no matter what the state of the market is.
Basic Principles of Negotiation
The most important rule to remember: You
never know until you ask. Never assume you
know how the other party will respond or what their final position actually is
(regardless of what you are told). Indeed, often times the other party
doesn't know themselves until the specific offer or counter-offer is in front
of them.
Buyers: when in doubt, make an offer - see where it goes, what do you have to lose? Sellers: never discourage a buyer from making an offer - Not only can initially unacceptable offers sometimes be negotiated to where you want them, but one offer can often be leveraged to make another offer, from a different buyer, better.
ALWAYS counter-offer unacceptable offers (and counter-offers) instead of rejecting them outright - even if it reflects your position being unchanged from your last offer. This keeps the negotiation alive, the conversation going. Not responding to an offer/counter-offer leaves a void that often kills the possibility of reaching an agreement.
Make concessions
grudgingly: Concessions given easily convey that there is
more money left on the table and have little value in furthering your
interests. Make it appear like even your small concession is causing you physical
pain. If possible, "tie a string to any concession and ask
for something in return" as elegantly put by Karrass, the negotiation training company. Sometimes "baby steps" - tiny concessions - can keep a negotiation moving forward.
Money negotiations are a
zero sum game: Every dollar goes into one pocket or the
other. The true win-win (beyond a general satisfaction with the result) lies in
discovering what can be exchanged that costs one party little but holds high
value to the other. Many people use the concept of win-win as an excuse to avoid negotiating
forcefully - which can be costly.
It's not always all about
the money: Personalities, circumstances, time, fear, sentimentality and ego often play
important and sometimes dominant roles in negotiations. The better these issues are identified, the
more they can be used to your benefit.
Strong emotion will
usually negatively impact your objectives:
Patience and dispassion are the ideal states for effective negotiating.
Consider it a business, not a personal transaction:
if you don't make this deal, you will make another one. Desperation makes the worst deals, and anger often needlessly kills them.
Time is always of the essence. Being able to react or re-strategize quickly or, conversely, consciously slowing down the negotiation by not responding quickly - both of these have their uses. Typically, the default mode in real estate negotiations is to rush, but sometimes doing the opposite serves your negotiating stance better and, of course, also gives you more time to think about how to proceed.
If
the other party feels they are being treated disrespectfully, they may kill or
damage the deal for that reason alone. There's
nothing wrong with being a strong, aggressive negotiator, but don't make it personal,
be courteous and respectful and, as much as possible, avoid insulting the other parties involved. (On the other hand, don't let the fear of making the other party unhappy stop you from proceeding with your chosen position.)
People
typically respond positively to compromises that seem to be fair.
Unless you have the other party completely over the barrel
and can dictate terms, it is often useful to provide a rationale or make an
effort to sound fair. Our society is also programmed to consider "splitting the
difference" as fair, so that can be a useful negotiating technique. (There is nothing inherently fair in splitting the difference.)
Sometimes
hardball works: If you are absolutely clear that you will not give a
penny more, or you believe the other party will respond advantageously to an
ultimatum, then express that: "Take it or leave it. Don't bother with a counter
offer. Accept this offer or we're gone and never coming back." (This can
backfire if you're bluffing.)
Shut
up and wait for the response. Once you've made your offer, don't
undermine your position by implying a willingness to make further concessions
before the other party actually responds (ideally in writing).
Every negotiation is
unique to the market, the property, and the principals and agents
involved.
There are many negotiation strategies and
there are risks to each one: What works perfectly in one situation may fail in
the next. Collect as much information about the property, the other party and the other party's agent, as possible; be light on your feet, attentive to changing situations, and keep strategizing ways to proceed as the negotiation develops.
Don't allow anyone
to pressure you to do something you are uncomfortable with.
If you have a smart,
knowledgeable agent, you will want his or her counsel, but you are the sole
decision-maker as to how to proceed.
If your agent seems more
concerned with making his or her commission quickly than in aggressively protecting your
interests, find another agent.
Effective negotiation is one of the main services
you're paying for. Besides which, an agent putting his or her own interests
above yours is a violation of their legal fiduciary duty.
Other Negotiating
Tips for Buyers
If you find a home you'd
like to purchase, make whatever offer you wish to make, regardless of
asking price, regardless of representations by the listing agent. It
is impossible to predict how the seller will react to an offer until the offer
is made. (This does not mean one does not take into account the heat
of the market or a competitive offer situation.)
Don’t ignore older or expired listings (as 90% of buyers do):
You’ll have the strongest negotiating position with properties with longer
days-on-market. The market often passes by good properties for a number of
reasons – overpricing being the most common – but they can be excellent purchase
options further down the road. Competitive bidding by other buyers becomes much
less likely, and the seller is often more amenable to making significant concessions.
Making a strong case for
your offer with comparative market analysis data may
improve
the odds of its acceptance, if you’re offering less than
asking and not competing. This also applies to due-diligence renegotiations,
i.e. explaining why your request for credit/price reduction/work is “fair.”
Make a positive
impression on the listing agent and seller: Coming across as
straightforward, serious, well-informed and financially well-qualified in your
communications and offer – can make a big difference in the negotiation. Sellers and
listing agents will often lean toward the offer of the buyer and buyer’s agent
they like and trust most – sometimes even if less money has been offered.
Some ways to make that impression: Introduce yourself to the listing agent at the open house and if your agent isn't with you, identify your agent to the listing agent; (if your agent is well known and well respected in the area, so much the better); get financing pre-approval to provide with your offer; review any disclosure package carefully before making an offer; and consider writing a brief letter to go with your offer that reinforces the impression you wish to make.
If you don’t know how much
competitive bidding there will be on the property, and there is a set time for offer delivery, consider writing two or more
offers
with your agent, with the understanding that
if no other offers show up, the low offer will be presented, but if a certain
number of other offers show up, the high offer will be presented (and, of course, there may be a middle option as well).
If
you know other offers are being delivered, if possible, try to present yours
last. You might be able to garner useful information regarding the
other offers at that point from the listing agent that may change your offer
price or strategy.
Offers should allow
thorough investigation of the property’s condition & circumstances
unless you are absolutely confident that current, comprehensive and reliable
information has already been provided.
If you lose in a multiple
offer situation, ask to put your offer into
back-up position since a fair percentage of deals fall through. You
typically have the right to cancel your back-up offer at any time prior to
being elevated to first position, so you can keep looking at other purchase options
in the meantime. Back-up position is a no-lose advantage to the savvy buyer.
Generally
speaking, it makes more sense to have your own agent, dedicated solely to protecting
your interests, than to use the listing agent
acting as a dual
agent for both parties in the negotiation. (If both buyer and seller
feel confident in their own negotiating abilities, then dual agency may make
sense if the agent seems particularly competent to facilitate and manage the
operational details of the transaction.)
Know when to
walk away:
there often comes a point where even the most attractive property no longer
makes financial sense. Don’t get caught up in an auction mentality and don’t buy a
house whose monthly housing cost you cannot afford now and into the foreseeable
future.
Remember: Most buyers are now making 5 or more offers before getting one accepted – it can be an important part of the education process regarding the state of the market. Don't get discouraged: new listings come on the market virtually every day.
Negotiating Tips for Sellers
Never, ever, discourage a
buyer from making an offer! Real estate negotiation is a
conversation that cannot really begin until a written offer is made. And even
terrible offers may help leverage other offers higher. Discouraging
someone from making an offer is just about the stupidest mistake sellers and
listing agents make (typically out of a misplaced sense of ego) – and make
regularly.
Counter-offer
unacceptable offers instead of rejecting them outright. Don't get insulted: it's just business, as they say in the mafia movies. And buyers making low offers are often willing to pay more,
sometimes much more,
but outright rejection typically ends the negotiation.
In a strong market, it
often makes sense to slow the offer review and counter-offer process down.
Do this in a way that doesn’t make the buyer feel abused, but it may
allow new and better offers to arrive, or subtly pressure existing buyers to up
their offers. It also allows for better decision making.
No-contingency
offers can be as dangerous to the seller as to the buyer: In
a state as litigious as California and with real estate as expensive as it is
here, it is in all parties’ best interests that the buyer fully understands the
condition of the property before close of escrow. Thorough inspections by
qualified professionals should be ordered – either by the seller before putting
the home on market or by the buyer during a reasonable due diligence period.
The vast majority of
buyers and buyers' agents will not make offers on overpriced listings:
Unless they perceive the asking price to be no
more than about 5%
over “market
value” (i.e. what they're willing to pay), most buyers will simply walk away.
Since a listing will never get as much attention as in its first few weeks on
market, pricing properly to begin with almost always results in the higher
sales price.
Preparing the home to
show in its best light almost always results in a higher return well beyond the
costs required to do so.
Don’t
overestimate buyers’ and buyers’ agents’ ability to see beyond surface
appearances. (See
our article, Preparing Your
Home for Sale)
Comprehensive marketing is
hugely important in achieving the best sales result. Off-MLS or
“pocket” listings can easily miss reaching the single buyer who would be
willing to pay the most money and are much less likely to foster a competitive
bidding situation. (See
our article, Pros
and Cons of Off-MLS Listings)
Disclose, disclose, disclose:
Not only is it a legal obligation in California, but the main cause behind
buyer lawsuits is the claim that the seller failed to disclose material facts
regarding the condition or circumstances of the property. Litigation is ruinously
expensive and life-blighting: Don’t let your desire to obtain the highest
possible price deflect you from proper disclosure.
“A
good agent’s negotiating skills and knowledge of property values
can add 5 to 10 percent to your house’s sale price.”
Brown & Tyson, House Selling for Dummies
The quality of agent working on your behalf—his or her competence,
negotiating skill, knowledge of the market
and commitment to your interests —
can make an enormous difference in the outcome.
Generally speaking, ours is not a society comfortable or highly experienced with assertive negotiations, but skillful negotiating can reap substantial rewards in the large, complicated financial transaction of buying or selling a home in the San Francisco Bay Area. This is true no matter what the state of the market is.
Basic Principles of Negotiation
Some ways to make that impression: Introduce yourself to the listing agent at the open house and if your agent isn't with you, identify your agent to the listing agent; (if your agent is well known and well respected in the area, so much the better); get financing pre-approval to provide with your offer; review any disclosure package carefully before making an offer; and consider writing a brief letter to go with your offer that reinforces the impression you wish to make.
Remember: Most buyers are now making 5 or more offers before getting one accepted – it can be an important part of the education process regarding the state of the market. Don't get discouraged: new listings come on the market virtually every day.
can add 5 to 10 percent to your house’s sale price.”
Brown & Tyson, House Selling for Dummies
The quality of agent working on your behalf—his or her competence,
negotiating skill, knowledge of the market
and commitment to your interests —
can make an enormous difference in the outcome.