Negotiating the price when purchasing a home can be one of the most anxious moments in the home buying process. Will the seller say yes to my offer? Will I get the house at a price I can afford? Will I be paying a fair price, given the current market conditions? Do I have to play this negotiation game with the seller? All are questions you may ask yourself when buying a home.
A good real estate agent will guide you through the negotiation process of purchasing a home and act as your representative in the discussions. Negotiating the purchase price is about knowing the market, understanding the seller’s situation, and being confident with your “highest and best offer.” Contrary to popular opinion, your agent’s “aggressive negotiation” or “tiger-like tendencies” rarely determine the final price on a home. I’ve gotten big discounts on some homes that were overpriced or had motivated sellers, and gotten little to no discounts on popular, well-priced homes. Neither means that my buyers necessarily got a “better deal,” and in fact, I’ve had buyers purchase under-priced homes in bidding wars that end up being an exceptional price relative to neighborhood averages. Ultimately, price negotiation is about matching what a buyer is willing to pay with what a seller is willing to sell. It is a balancing act of sorts to find this mutually agreeable point.
This article will focus on purchasing from a private-party, “regular” seller. Buying a short sale or bank-owned property is an entirely different animal, and we’ll follow up this article with tips on negotiating short sales and negotiating bank-owned deals. Here are some tips to help you when negotiating the price of a home.
First, it is helpful to consider how the seller initially prices their home. A couple of things go into this:
- Comparative Market Analysis – The majority of sellers will consult a real estate agent to do a pricing opinion (Comparative Market Analysis, or CMA). The CMA will include sold data for similar homes and will also look at how competitors are priced.
- Financial Situation - The seller also looks at their own financial situation. Often there is a “bottom-line” that the seller needs to hit. Remember that a seller will have selling costs (in the 6-10% of sales price range) that they have to pay out of the sales proceeds. If the seller owes a certain amount on their loan, that often dictates their asking price. That does not mean that their bottom-line price is fair, given current market conditions, so you need to do your homework to make your own determination.
- Emotional / Life Situation – The seller’s emotional circumstances also play into their asking price. Many sellers want to start their asking price high to see if they can get an offer. Others will price aggressively to get the home sold quickly. You should never underestimate a seller’s personal attachment to a home where they have lived and raised a family for many years.
Going into the negotiation, remember these tips:
- Do your homework – Have your agent pull recently sold homes and compare the home to other similar properties you have seen in person. Know the listing history and research the home’s sale and mortgage history. Ask why the seller is selling and make an educated guess on what you think their motivations are.
- Pay attention to Days on Market – If you feel the property is overpriced, and the seller has just come on market, it will likely be too soon to send a low offer. Sellers need a certain amount of time on market to come to the realization that they are not going to get the price they hoped for. Offering 20% off on the second day on market will likely get you no response. Wait a couple of weeks and then present your offer if it will be substantially lower than the asking price. The same concept applies at the point of price reductions. If the seller dropped their price $25k yesterday, and you show up the next day asking for another $50k off the price, you may get a very cold response.
- Be serious - Put your offer in writing and get it in front of the seller. Sometimes a seller needs to see a dollar amount staring them in the face for the conversation to turn serious.
- Start Low – In general, start at a point lower than what you are willing to pay. Be patient and allow the negotiations time to play out. A seller may reluctantly drop their price in baby-steps at first, and then agree to a more substantial drop. Remember that both sides are trying to “test the waters” to see how low/high the other side will go. It can sometimes be a silly game with an almost pre-determined conclusion, but there is a basic psychology at work that allows both parties to feel that reasonable compromises have been reached.
- Understand the “striking range” – Every deal has a “striking range” where sellers feel comfortable negotiating downward and buyers feel comfortable negotiating upward. Start too far out of that striking range, and you may reach a dead end with the seller.
- Be the first to the table - In general, it benefits you to be the first offer. If multiple offers do come in on the property, it gives the seller confidence in you, and shows that you may want the property more than your competitors. Some sellers actually feel a sense of obligation to the first person to the table, and will choose the first offer, if other terms are reasonably similar.
- Remain diligent - Should the negotiations die, wait a couple of days and re-present an offer. Never let the discussions die without giving it a chance to play out. Our record currently stands at 8 weeks for the longest negotiation. Most won’t go anywhere near that long, but in the end, our patience and persistence paid off.
- Price isn’t your only negotiation point – You can also negotiate on closing costs, closing date, inspection timelines, and earnest money. Consider compromising on one of these other areas to get to a mutually agreeable point.
- Seller’s mindset - Remember that the seller does (presumably) want to sell their home, and they face a lot of uncertainty and angst in whether another offer will come in. They have an emotional attachment to the home and have a perceived value that they feel the house is worth. They may get frustrated, angry, or feel offended. They may want to stall the negotiations. Even the coolest, most logical people sometimes come unglued during a real estate negotiation. As we’ve said before, remain patient, put emotions aside, and stay steadfast in your offer.
- Be fact-based - Personalities come into play here, so it is best to keep a direct, fact-based approach when dealing with the other side of the transaction. Present your case but don’t try to debate specifics – ultimately this is a battle of opinion and willingness to compromise.
- Know your high point – Be rational about how high you are willing to go for a specific house – and make those decisions based on what you believe the fair market value is and your own financial situation. Don’t let your emotions guide your checkbook.
- Look at the big picture - Sometimes negotiations will stall out over $5K – $10K. While this may feel like a large amount of money (it is), think about what it’s worth to get you and your family into the right house, and what it means as a percentage of a very large transaction. Consider the alternative of starting over.
- Don’t be afraid to go above asking price for the right house – Bidding wars are not unheard of, even in a slow real estate market. Sometimes sellers purposefully price their home aggressively to stimulate offer activity. You will recognize if a home is priced under market value if there is high traffic and multiple offers in the first few days. If you have been shopping for awhile and it feels like a great house at a great price, there is probably a bunch of people with the same feeling. In this case, discuss with your agent what a fair price for the home is and have them perform some detective work on the other offers. Multiple offers will short-circuit the back-and-forth bidding process, and you will need to go in with your highest and best offer to start with. Stay cool and don’t outbid your comfort zone and remember that there is always another house.
Try not to let your emotions rule the day when negotiating the price of a home. It is a back-and-forth process that you need to go through to get to agreement. Do your homework and stay rational about what you are willing to pay and remember that you can always walk away and find another home. At the same time, recognize that there is another human on the other side of the deal that has equally strong feelings about what they want. If you can balance those factors, you will have a better chance at success and a relatively stress-free buying process.