23 Jan Real Estate Negotiation Principles
Effectively Negotiating the Purchase 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
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.
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.
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.
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.
The party most desperate to make a deal usually loses: If you are desperate, don’t show it.
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 the other party getting angry over your offer 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’s 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.
“Baby-steps” in the negotiation can lead to a deal that would otherwise be lost. If you get an unacceptable response to your offer or counter-offer, counter back again, even if only at a minimal concession or, for that matter, even at your previous position. It may keep the negotiation alive and moving forward.
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’ll 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.
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.
© 2014 Paragon Real Estate Group