The negotiations are a game. Knowing how to play can save you a lot of anguish--and a great deal of money.
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The negotiations are a game. Knowing how to play can save you a lot of anguishand a great deal of money.
A few people thrive on the horse-trading that's part of buying a house. For the rest of us, negotiating the purchase of a new home can be excruciating. But until the day that houses come on the market with firm price tags, like Cheerios in the supermarket, unwilling bargainers will have to learn the rules of the game.
We consulted real estate agents and home buyers across the country for an insider's look at the negotiating process. Here are their tips.
Everybody knows that sellers build some padding into their asking prices, expecting to be bargained down. Therefore, the rule of thumb is that your first offer should be 10 to 15 percent below the asking price.
A great rule when it works. But a great many factors influence the price a seller sets on his house, so if you apply the 10 percent rule indiscriminately, you risk disappointment.
Probably the most important single factor is what shape the local real estate market is in. You might be able to get away with an offer that's more than 15 percent below the asking price in a stagnant buyers' market. But in a hot market, where homes are appreciating rapidly and typically sell within days, an offer 10 to 15 percent under the asking price won't even be considered.
Carol Whitworth, a real estate broker in San Jose, CA, underscores the point: She remembers a buyer she worked with in the late 1980s, when homes in San Jose were appreciating like crazy. The buyer looked at a townhouse the day it went on the market and made a bid the same day, matching the seller's $215,000 asking price. "When we presented that offer, there were 10 others," says Whitworth. "The house ended up going to someone who bid $15,000 over."
A low offer is also self-defeating if you find a true bargain. Too many buyers miss these bargains because they think true value comes only from the difference between the asking price and what they pay. A seller may price a house too low because he needs to sell fast or because he's ignorant of the market. If you're lucky enough to spot one of these treasures, grab it quickly at the asking price or perhaps a little above or someone will beat you to it.
Finally, don't underestimate the importance of timing. In general, the longer a house has been on the market, the harder a bargain you can drive. If a house is new on the market, a low initial offer is less likely to succeed. Paula Grieves, a broker in Roswell, NM, tells of a buyer who looked at a home the week it was offered for sale. Because the house was run-down, the buyer offered nearly 15 percent below the asking price. Insulted, the sellers turned him down. The house was sold a few weeks later to someone who paid even less than the initial offer. Unfortunately for the original bidder, the sellers' pride in their home hadn't yet been tempered by the realities of the marketplace.
If you encounter a seller who's just not ready to sell at a reasonable price, there's not much you can do but wait a few weeks and try again. In other situations, though, you can improve your chances of success by finding out all you can about the seller's situation before you make an offer. Ask your agent how long the house has been on the market and whether there have been any other offers.
Even more important, do some research to determine how realistic your offer is. Agents report that surprisingly few people do this, considering how easy the information is to obtain. All real estate offices keep files of "comparables"prices and descriptions of local homes that have sold in the past year or two. Ask to see listings for properties sold recently in the immediate neighborhood that are as similar as possible to the house you're considering.
Once the first offer is out of the way, the real negotiating begins. Most home sales follow a certain ritual: Buyer makes an initial offer, seller comes back with a counteroffer, then they go back and forth two or three more times. Both are convinced at one time or another that the deal is dead; then they compromise and the sale is made. During this anxious period, keep in mind these ground rules:
Everything in a home sale is negotiableprice is just one component of the deal. Two other big ones are date of possession and what extras come with the house. Typically, a buyer might offer to take possession on a date more convenient to the seller in exchange for a lower price. Or a seller who won't come down in price could be persuaded to throw in items like major appliances, chandeliers, or lawn furniture. Or he might agree to pay some of the closing costs.
A buyer's ability to get financing is another big negotiating point. "For some sellers, price is less of an issue than knowing that the sale will definitely go through," says Carole Lees, a Boulder, CO, broker. As a doctor, you may find that a seller's anxiety works to your advantage; most sellers realize that physicians are less likely than the average buyer to have trouble getting financing.
Next, remember that the goal of negotiations isn't to wring as many concessions as possible from the seller. Rather, experienced negotiators aim for an outcome where both parties feel they've won. At worst, both parties will be only slightly dissatisfied.
"When you're bargaining for a house, you should always keep two points open to negotiation," says Lees. "That way, buyer and seller can each win on one." Lees cites the example of two skillful negotiators at work:
Buyer's initial offer: $250,000, a July 1 closing date, and the seller to pay 2 points on the buyer's mortgage.
Seller's counteroffer: $260,000, an Aug. 1 closing date, and no points.
Buyer's second offer: $254,000, the Aug. 1 closing date, and 2 points.
Seller's counteroffer: Agrees to the $254,000 price and the Aug. 1 closing date, but not to the points.
In this case, the buyer agreed, and a deal was struck. "Basically, they met halfway," says Lees. "The agreement saved face for both buyer and seller."
Face-saving is important. Keep the seller's feelings in mind during the negotiations. Don't criticize the house within earshot of the seller. As a bargaining tool, you can point out defects or work that needs to be done, but avoid any implication that you don't approve of the seller's taste or home maintenance.
"Most sellers are very proud of their homes," says Lees. "Even if the house is a pigsty, find something to compliment. A seller wants to know that you'll take good care of the house."
An experienced real estate broker who knows the community can save you a lot of time and help keep negotiations on track. But most home buyers misunderstand their relationship with brokers.
Since that friendly real estate agent spends so much time with you and patiently answers all your questions, it's reasonable to assume that she's working for you. But she's probably not. Although some residential real estate brokers now represent home buyers, most still work for sellers. If yours does, you have to be as discreet with the broker as you'd be if you were talking directly with the seller. If you're under time pressure to moveyou're starting in a new practice, you've already sold your homedon't let the broker know. It undermines your bargaining position. And never let the broker know how much higher you're willing to bid on a home. As the seller's agent, she's required to pass that information along.
A broker's responsibility to the seller is to sell a home for the most money, in the least time, and with the least hassle. So if you're waffling, even the most ethical broker might turn up the heat. Less ethical brokers will manipulate you with high-pressure sales tactics. Watch out for these common ones:
Every house the broker shows you is above your price range. There's nothing wrong with an agent showing you an occasional home beyond your range. Maybe you've been unrealistic in setting a price ceiling, and the agent is trying to show you that you'll need to spend more to get a house with the features you care about. But watch out if all the homes an agent shows you are too expensive. In an effort to get as fat a commission as possible, some agents try to convince buyers that homes in their price range don't exist. Be skeptical.
Nothing's wrong with any of the houses. Legally, a broker must tell you about any defects she knows about. And it's in her self-interest to do so; if you discover the flaw after you move in, the broker may be liable. Nonetheless, some brokers insist that every home they show is flawless.
One recent home buyer tells of a house he came uncomfortably close to buying. It was in an area known for flooding, but the broker insisted that the home's basement remained bone-dry. Convinced, the buyer put down a deposit. But a few days later, during a heavy rainstorm, he made another visit on the pretext of measuring the windows for curtains. He never got a chance to measure the windows in the basement; the water was shin-deep. The broker claimed that the storm was the worst the area had seen in 100 years, and that anyone's basement would flood. But she was smart enough to return his deposit with no argument.
The best protection from hidden flaws is to insist on a professional home inspection before you close on the house (see "Avoiding 11th hour disasters"). Meanwhile, remain dubious about "flawless" homes.
She tries to jack up your offer. You see a house you like, and you tell the broker how much you want to offer for it. "That's way too low," she says. "The seller will be insulted." That's possible, so you should consider the broker's advice. If you disagree, though, don't be intimidated; stick to your offer and let the seller tell you whether he finds it insulting. If you make a legitimate offer, in writing and accompanied by a deposit, the broker is obligated to deliver it to the seller.
She uncovers a competing bidder. A favorite ploy of unscrupulous brokers is the couple that pops up overnight and puts in an offer on the same dream house you just bid on. There may indeed be such a couple, especially in a seller's market. But unless you'd pay any amount to own the house, don't allow yourself to be pressured into a bidding war with this buyer, real or imagined.
One way to protect yourself in a seller's market is to insist that the seller respond to your offer within a certain period of timeone or two days is reasonable. That deadline may prevent the seller from using your offer solely for leverage with other prospective buyers.
Finally, remember the single most important rule in negotiating: Don't get so carried away by the challenge of bargaining that you forget your objectiveto buy a house you like. Home buyers have been known to panic when a seller accepts their first offer. "I must be overpaying; I could have gotten a better deal," they think. If you're comfortable with the price and the house is what you want, relax. Enjoy your new house and consider the negotiations successful.
Horror stories abound about last-minute disasters that sink a home sale or keep buyer and seller tied up in court for years. The home's electrical system shorts out the day the buyer moves in. The seller leaves on the day agreed to, but moves clear across country with the carpeting and draperies the buyer paid for. Or the seller stays on for days after he's supposed to be out of the house, while the buyer's family camps in a hotel, with all their possessions in a moving van.
The only way to head off these problems is to make sure they're anticipated in the contract. If the contract is a preprinted form provided by the real estate broker, you may need to modify it or add your own clauses. Here are the major points to cover:
What the sale includes. Make no assumptions about what the seller will leave in the house, and don't rely on oral promises. Even if it's customary in your area for the seller to leave major appliances, for instance, spell out the specific items in the contract.
An inspection clause. This provides that the sale is contingent on a satisfactory report by a professional home inspector. It's common for the seller to agree to be responsible for repairs up to a specified dollar limit. If costs exceed that limit and the seller refuses to pay, the contract could be voided.
Date of possession. Provide that if the seller doesn't vacate the home on the date agreed to, he'll pay the buyer a specified daily penalty. If there's any concern that the seller won't move when promised, some money should be deposited in an escrow account at the closing.
Walk-through inspection. Specify that everything in the house will be in working order, and the house will be "broom clean" at an inspection within 24 hours of the closing. If you spot any damage, provide that the seller will pay for repairs. Set up an escrow account for that possibility.
Home-sale contingency. You could add a clause making the purchase contingent on the sale of your current home. But be aware that such a clause may work against you. In a slow market, sellers may be unwilling to agree to a contingency that will remove their home from the market for a deal that might fall through.
Carol Pincus. Get the best deal on your next house.