OFFERS AND NEGOTIATIONS
Whether buying or selling a home, one activity will be part of the
process in all cases and for all involved. Let's look at the offer to
purchase contract and negotiation process from both sides.
When
your clients are close to an offer, generally the first thing buyers
ask a real estate sales representative is how low can they go in the
local market without insulting the seller(s). It is logical, and quite
indicative of human nature. Every market and every seller is different.
This is a generalization that can rarely be made with any certainty at
all. Though there may be statistics that show offers at xx% below list
price, with accepted contracts at x% below list, there is no guarantee
that this information can be relied upon.
The seller may have
priced the home allowing for some bargaining, unless it's a hot market
and properties are moving fast. There may even be bidding battles on
the more desirable properties. Nothing in real estate negotiating is
more important than the list price on a property. Therefore, sellers
should consider listing as close to market value leaving only a margin
for negotiation. Buyers should make an initial offer that reflects
their motivation level and isn't so low that it makes them sellers feel
uncomfortable or insulted.
The next consideration in the initial
price negotiation will be contingencies, also referred to as conditions
of the purchase. What are common contingencies/conditions written into
real estate purchase offers?
- Buyer purchases contingent/conditional on sale of another property.
- The buyer requires a condition/contingency on arranging the necessary financing.
- Contingent/conditional on a home inspection report that reveals a property in sound construction.
We want to talk about contingencies/conditions other than those
required by lenders and others in the normal process to closing. This
would be items that can change the price a buyer is willing to pay or a
seller is willing to accept. All of the negotiation facets we will
discuss are related and dependent upon each other. An offer free of any
contingencies will normally be acceptable at a lower price to the
seller than one loaded with them. The buyer should consider all of the
things they are asking for in relation to their offering price from the
beginning.
Buyers
should be clear in their negotiation planning as to which
contingencies/conditions are important to them, and which they can let
go if the price for them gets too high. Sellers should try to
objectively assess the importance to them of contingent items requested
by the buyer. Emotions should be controlled. If the buyer wants the
outdoor storage building you expected to take with you, determine what
it will cost you to replace it and work it into the negotiation.
As
far as the contingency/condition on the sale of another property by the
buyer, this is usually a sticky situation. Rarely will a seller want to
effectively remove their property from the market by taking a
"contingent on sale" offer as-is, without also wanting to include an
escape clause. This means that the seller will be able to keep his
property on the market, even look at other offers, and, if the seller
finds another offer that is acceptable to them, they will then give the
buyer typically 48-72 hours notice to firm up their offer or, the
seller will be at liberty to accept the other offer. Buyers should be
prepared that some seller might outright reject their offer, or some
very detailed questioning to determine the time line of probable sale
of their other property.
The delayed time bomb in real estate
negotiations is the inspection and repair piece. This is because
inspections may turn up repair items that buyers will want corrected,
but the initial purchase price has already been accepted. A prepared
seller will have allowed in their list price for repairs they may be
tasked to make by a good buyer. If they did not, then a deal can
evaporate if the buyer comes in with significant repair demands after
the initial price acceptance.
Both the buyer and seller should
be aware of the possibility of repair issues in their initial
negotiations. Buyers should consider whether to get to their absolute
uppermost price limit, while sellers should be concerned about the
opposite. Either of these situations can destroy an otherwise
acceptable deal.
Usually, the situations we've discussed are
normal for most transactions. Where it can really get stressful is in a
multiple offer situation. The stress is present for both buyer and
seller; however, the buyer usually gets the worst end of it if they
really want the property badly.
In a multiple offer situation,
the seller is usually in an advantageous position, as they have all the
information in front of them. The trick is to chart out the different
offers such that they can be compared objectively based not only on
price, but with contingencies/conditions as well.
The buyer in
this situation is usually not privileged to any information about the
other offer(s), and thus can feel a huge amount of pressure to go to
the top of their price range if they really want the property.
Generally, the buyer should consider their top end and getting near it
quickly. The seller will be motivated to accept an offer before one or
more buyers change their mind. The best approach in this situation is
usually-speed on the part of the buyer.
No decision in a
negotiation should be made in a hurry, but if you know want you want to
do as a buyer, the best approach in a multiple offer situation is to do
it right away.
Negotiations need not be overly stressful. The
help of a real estate professional is invaluable. And remember that the
response of the other party is almost never a personal one. They have
their motivations, and you have yours. Without the knowledge of exactly
what those motivations are, it is counter-productive to get upset about
an offer or counter offer.