Negotiating a Real Estate Transaction
Updated: Jun 29, 2021
I started my Real Estate Career in 2010 right after the housing market crash. The company I worked for had on average fifty to one hundred Bank-Owned/Foreclosures in their inventory at any given time. Believe me when I say that negotiating with the big banks, Fannie Mae and HUD was a learning lesson. On top of this, I was sometimes negotiating against my Broker who usually had a fiduciary relationship with the Seller. That being said the experience shaped me into the Agent I am today.
So let’s get down to negotiating a Real Estate Deal. These tactics can be used by both Seller and Buyer and their respective Agent.
Before we start let’s get ourselves into the right frame of mind. A good rule is not to get your emotions involved. Don’t let yourself get too emotionally attached to a property or to an offer being made on your property as this can affect your actions.
The following information may sound a little biased towards the Buyer at first but believe me it is just as important for a Seller to understand these tactics as well.
As a Buyer make sure that your pre-approval letter or proof of funds only shows the amount you are going to offer. Your lender should be able to print a pre-approval letter each time you are making an offer. If you are paying cash then ask your bank for a letter stating that you have the exact amount you are going to offer.
This way the other party has no idea what you can afford to pay. Remember you can always get an updated pre-approval letter or proof of funds letter after the negotiations are finished.
Sellers, if there are concessions (money the Seller is giving the Buyer for closing costs) involved you will want your Listing Agent to make sure that the Buyer can still afford the property if by chance the concessions need to be taken away. I will explain why this is important a little later.
Remember that every little thing you do in the initial negotiating process will determine how much you as a Buyer pay or how much you as a Seller you will get for the property.
As a Buyer you want your offer to be realistic. Of course, you always want the best deal possible and you never want to overpay, but you will also want to avoid offending the Seller. I have seen Sellers get offended, outright reject the offer and then refuse to negotiate any further.
Try to come in low enough to get the Seller to engage without offending them. Remember it’s an inch game. One side gives a little and then the other side gives a little and hopefully they meet somewhere in the middle.
Sellers, make sure your Listing Agent puts a little extra on the listing price so there room for negotiations and or concessions if needed.
Remember it pays to use an experienced Realtor. They know the area, values, market conditions and as a Buyer, their service is free to you.
So should I offer lower then the listed price?
First let your Agent determine the fair market value of the property before making an offer. This way you are making an educated offer. Then I would have them ask if there are currently any other offers.
Of course, there are few other factors to consider, how long it has been on the market, is it already priced fairly or even below the market value?
Also, how bad do you need or want the property? My first Broker used to say to Buyers, if you have to have it then ask yourself, “how much am I willing to lose it for?”
As you can see a lot of factors come into play when negotiating the purchase of a property. Like Supply and demand, is it a Buyer or Sellers market, the current economic market conditions, the condition of the property when comparing to other similar properties, the Sellers motivation for selling, and so on.
Here is something I hear Buyers say a lot, “I am paying cash so I know the seller will take a lower offer.” Not always, remember at the end of the day/after the closing, the Seller will be getting “cash” wired into their bank account, whether or not you use financing or not.
That being said, cash does give you an advantage over the other potential Buyers as there is no appraisal contingency and this is always a concern for a Seller and their Listing Agent.
And yes, sometimes in a multiple offer situation, the Seller will pick a lower offer amount if the Buyer is paying cash as it takes away the worry of the appraisal coming back lower than expected.
If you do pay cash for a property remember that once your inspection period is over (usually 10 days from contract execution), you will most likely lose your deposit if you back out.
On the other hand with financing you have the financing contingency and if you cannot obtain financing by the end of the contract, you will almost always get your deposit back.
As for contracts, I prefer the “AS-IS Contract.” It has been used for many years now in the industry and most Agents understand and like it.
There are a few Buyer protection clauses already inserted into the contract.
Even though it’s an “AS-IS Contract” there will still be an inspection period and during this time the Buyer can back out of the deal for pretty much any reason. I don’t advise doing this as no one wants to waste their time and as a Buyer should be sure you want the property and are serious about following through before making an offer.
That being said the Inspector may find several unseen issues with the property during the inspected. Or they may find an overall lack of maintenance. I have had Buyers walk away from the deal for this.
I always suggest to my Seller that they do their best to fix the property up before listing. The Sellers that have listened to me have almost always sold for the asking price or very close to it. Plus they usually sell a lot faster than the competition. Most Buyers do not want a fixer-upper or to deal with maintenance issues. They want to buy and move in.
If issues arise during the inspection, I will always try to encourage my Buyer and Seller to work together to remedy the issues and come to a mutual agreement before backing out of the deal.
The second Buyer protection clause is the appraisal contingency. Your Lender will require an appraisal and if the home does not appraise at or above the purchase price they will not finance your mortgage.
This also gives the Buyer or Seller the options to back out of the contract.
If so then the Buyer would retain their deposit.
Again, always encourage my Clients to negotiate and come to a mutual agreement. Of course, a Buyer does not want to pay more for a property than it is “worth”. But a lot of factors can come into play, such as, does the property come furnished? Did the Appraiser take into account all the upgrades and or renovations?
So sometimes a Buyer may need to come to the table with a little cash to reach an agreement.
And remember those concessions, Seller? Well, you may need to take some of them away to compensate for a lower purchase price.
As a Listing Agent, I always meet the Appraiser at the property to point out any upgrades or renovations that will give it value and justify the purchase price.
I have found that most Appraisers will accept information on the comparable properties I used to obtain the listing price. Whether or not they use the information is up to them.
Usually, the Buyers Agent will agree this is a good idea. After all no one wants a low appraisal when it can kill a deal.
Keep in mind that cash Buyers do still have the option to order an appraisal and make it a contract contingency.
Sellers one very important thing. Make sure the Buyer of your property is being represented by a good Lender. This can be a nightmare situation for all parties involved. I have encountered this a few times and learned my lesson.
Understand that not all Lenders are the same. And sometimes the Buyer will be using a fast-talking Mortgage Broker who is working out of their basement. Meaning they are working for themselves and not under a designated Lender. They will work with a hundred different Lenders at one time and have no real relationship with any of them. If they sound like a used car salesman run.
On top of this, they are usually renting a Processor (the person who puts the Buyers information together to submit to the Underwriter) who may also be in another state.
Let me be clear. There is nothing wrong with working from home, but I prefer to use a Lender that is local and does everything in house.
Meaning the Lender has its own Processor and Underwriter in their office. Believe me when I say this saves tons of time and headaches. It’s also nice when the Buyers Lender is the one who is financing the loan. Of course, it will be sold on the secondary market a few months after closing but this is normal.
So make sure the Buyers Lender is properly vetted by your Listing Agent. They need to have the ability to speak directly with them. Usually, before accepting an offer, I will ask the Buyers Agent if this is OK. They always say yes because they want you to accept their offer. So ask upfront.
I would have your Listing Agent ask the Buyers Agent if this is their preferred Lender or if the Buyer found them. Hopefully, it’s a Lender that the Buyers Agent has used in the past and has closed many Real Estate transactions with.
Sellers, if the Buyer is paying cash then you want as big of a deposit as possible. This will determine whether or not they are serious about buying or just wasting your time. Ten percent of the purchase price is typical.
Remember, after the inspection period the Buyer is liable to lose their deposit. So the bigger the deposit, the less likely they will back out.
After the inspection period, and appraisal there is only one more major hurdle. If it’s a financing purchase then you will be waiting for the Buyer to get through the Underwriting process and get what’s called a “clear to close”. Once you have the clear to close you are golden.
But be prepared as the Underwriter will ask for a lot of information from the Buyer. Each item is called a condition and needs to be cleared before the transaction can move to the closing table.
A lot of the time the information they ask for, “in my opinion” is ridiculous and insignificant, but they have the power to either approve or deny the Buyers loan. This can be painful, and especially at the last minute.
Again, this is why you vet the Buyers Lender. An experienced Mortgage Broker will know what the Underwriter needs ahead of time. You do not want to be hit with twenty-plus conditions right before the expected closing date. This can result in needing an extension, and hopefully only one.
Realtors! I have learned to never let the deal, “close itself.” You are the Quarterback and the moment you think that everything is going good and everyone is doing their job, including the Title Company, well that is usually when something goes wrong.
Always be a professional Realtor but never let anyone get away with not doing their job. You have to ask questions and be involved in every step. Be the Quarterback!
Please if you are thinking to Buy or Sell, reach out to us at Freeman Realty Solutions, LLC. We would love to work with you on your next purchase or sale!