In big cities where home prices are already high it helps to be a good negotiator if you want to buy real estate for the lowest price possible, especially if it’s an investment property. Learning some negotiating basics and finding a realtor who knows how to negotiate on your behalf will make all of this possible.
Quick tip: Becoming a negotiation master takes time and experience. Over the years the subject of “How To Negotiate” has been thoroughly written about. Consider this book as an example for diving into the subject a bit deeper: Negotiating Real Estate Strategies
For now, let’s review some negotiation tips that I’ve used for getting the best deal on a house purchase, I learned each one of these from reading and seeing various strategies used by different real estate agents over the years.
Tip #1: Understand Why The Home Is For Sale
Understanding the intention and emotions of the seller will show you how flexible they are in negotiation. Other factors such as how long the house has been on the market and how desperate they are for closing the deal can also affect the final sale price.
In your sales contract you can negotiate on terms, price, repairs, rent backs, seller financing, credit backs, and other pertinent details. Credit backs are especially popular for fixer-uppers where you need that extra cash to remodel the property.
As you continuously counter back and forth, observe the actions of the other person. Then match up the actions to any additional information you have discovered about what it will take for them to close a deal in your favor.
- A married couple who has a job change and is forced to move out by a specific date will lower the price more than an investor who is flipping a property for the highest profit possible. The investor is not crunched for time, but the married couple is.
- A housing developer who is selling 50 plus homes also has time to fish for the best deal. They have the upper hand right off the bat unless it’s clear that you’re in a buyers market.
- A seller who cannot get a sale on their home after 60 days will be more desperate to sell than a new listing. Typically this happens in a buyers market.
The bottom line is this: You need to find out the most you can about the intentions of why someone is selling a property. Then use your gut feeling for how much you can negotiate the deal in your favor and at what price.
Tip #2: Know Their Price
Use your best judgement to estimate how motivated the seller is, then crunch the numbers and look at recent comps. Your realtor will have access to all of this data and should provide it to you. You can also view home prices on a site like Zillow. The more educated you are about the sold prices in the area, the better position you have.
Then figure out if you should low-ball the price or offer the asking price. Again, your thinking about the intentions of the seller, how long the listing has been on the market, and if any other buyers are competing with you.
Offering more than asking price?
In some rare instances, you might find yourself involved in a bidding war; you may actually have to offer more than the asking price. This is not something I would ever do for an investment property. I think it’s better to walk away. But for a family home in a good area with excellent schools in a seller’s market, your options may be limited and it might be worth the higher bid (if you can work some favorable contingencies in the deal.)
Tip #3: Negotiating Contingencies
Other things to consider are the contingencies that could come up in the sales contract. Contingencies will limit a buyer’s or seller’s responsibility to fulfill the contract and close the deal. As a buyer, you can negotiate these terms more in your favor. However, if the seller has multiple offers, negotiating these could be more of a challenge.
The most common contingencies I’ve successfully negotiated are listed below.
- An expiration date – Set a favorable date for the deal to expire.
- Concessions – Get the seller to pay the closing costs. In a buyer’s market, you can just about always get the seller to pay the closing costs.
- The amount of the earnest money deposit – I usually like to put down as small of a deposit as possible. No more than 1% is ideal. Ask the realtor to let you know what the minimum amount should be.
- Contingent on the sale of your existing home – If you have not sold your current home yet, you can say the offer is only good if your existing home gets sold by the end of a specific date.
- Contingent on your financing approval – If your lender does not give you the final approval for financing then you can walk away from the deal. Showing a pre-approval letter with the contract will provide the seller a bit of confidence that this contingency won’t be a show stopper.
Tip #4: For An Investment Property, Consult A Real Estate Attorney
If you plan on purchasing anything more than a single-family home you might want to consider a real estate attorney to help review all of the paperwork. Especially if you have to deal with Rent Control laws. Rent Control will limit the amount you can increase monthly rent payments. Having an attorney review that with you is a blessing because they can help you project the legal amounts you can raise the rent. You’ll also be reviewing the income and operating expenses of the property. An accountant can help you figure out if the ratio of income vs. expenses makes it a good investment (aka, The CAP rate).
Rent Control can cause a significant cash flow problem for a new landlord.
You need to negotiate the deal based on all the positive and negative things that affect the properties value.
Determine what the rental income will be, then factor in your expenses for repairs, the mortgage, taxes, property management and future upgrades.
You don’t want to have negative cash flow! Unless it’s for a very strategic tax reason that a Tax Professional plans for you.
Negotiation can be serious business. But your realtor can do most of the tough work for you. Just remember the options we discussed, it’s more than enough information for the average home buyer to know.
Make sure you document everything that’s included in the deal you negotiated. I once bought a property and assumed the refrigerator was included. The owner gives me the keys just before closing and says “By the way, if you want that refrigerator it will be 300 dollars cash!” My jaw dropped, but I paid them, it would be a hassle replacing it, and it was in great shape!
Be confident in the details and get the best deal you can. Feel good about it too, that’s the most important thing.