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.