Home Buyer: Negotiation and Communication
The goal in a real estate negotiation is to reach a good agreement – one in which the underlying interests of both buyer and seller are met. The results of a poor agreement often return to haunt the parties after closing. Many of our real estate clients have been experienced negotiators in other industries, and we have learned from their skill and experience. Review these tips as you prepare for the purchase of your home.
What do you want to achieve in the negotiation?
The first step in getting what you need is simply to let the seller know – in a clear and reasoned way. For most people, the highest priority is the price they will pay for the property. The best way to establish this is by a market analysis of the neighborhood. Set an offering price range that makes sense. Knowing your range allows you to balance the price with other needs. Your interests might include:
1) Buying at the lowest price possible.
2) Setting a closing date that meets your time frame.
3) Settling any repair issues fairly.
4) Having your concerns heard and addressed.
5) Locking in an acceptable mortgage loan rate.
6) Clearing any title or survey issues that come up.
7) Completing your relocation and job change process.
8) Getting your family settled into a home and neighborhood.
9) Forging a good working relationship with the seller.
10) Having no future problems after closing.
Is an adversarial or cooperative approach more effective?
Effective negotiation does not result from stubborn demands. There is nothing more destructive to the negotiation process than combative behavior. Professional negotiators try to preserve the relationship between the principals. The goal is to avoid an impasse in which neither seller’s nor buyer’s goals are met. In many cases, the contract negotiation process begins with some initial distrust between buyer and seller. Effective negotiators move in the direction of trust as quickly as possible.
In preparing your offer, let the marketplace establish your price, while remaining very complimentary of their home. Buyers sometimes submit a letter to the seller pointing out deficiencies and explaining why their house is not worth what they are asking. This will always backfire and start the negotiation off with a defensive seller. Sellers have an emotional attachment to their home, and will have a strong negative reaction to a critical buyer.
How do you handle an adversarial strategy by a seller or agent?
You may find that you have to work with a combative seller or agent. Their strategy may include: defensive arguments, emotional statements, snide remarks, threats to terminate, ego involvement, and stated positioning. Creative solutions are difficult to find in this environment. Good control over your own emotions is critical when working with a combative style negotiator. Here are some pointers:
1) Do not argue. Arguing will position them more strongly and drag the negotiation off course.
2) Do not respond emotionally. An angry or defensive response will escalate the negotiation into a no-win battle.
3) Do not accept or reject their arguments. Listen and show that you understand their points.
4) Accept the fact that strong emotions are present. Strong emotions arouse fear and anger in others. They may be a negotiation tactic.
5) Avoid an “us-against-them” strategy. Attach cover memos to your responses in order to communicate with the seller and break down barriers.
6) Show that your proposals were not been made unreasonably. Firmly anchor pricing, repair requests and other points to outside data.
7) Be careful not to allow hazy proposals to stand. Put everything in writing. An emotional negotiator will often produce an unclear agreement.
8) Make your offer as attractive to the seller as possible. Look for ways to meet their underlying interests.
9) Offer some wins on some of the terms. Face saving is important. Do not try to win every point.
10) Keep your long term goals in mind. The seller may have a beautiful home that meets your needs.
Is every point in the contact negotiable?
Yes. However, one of the most effective ways to come to an agreement is to rely on accepted norms when possible. For example, it is common practice in our area for the seller to pay for the title policy, and buyer to purchase the survey. Using consistent standards reduces the need to haggle over every point. However, every term in a contract can be used to help structure the deal. By trading off, both parties can come closer to getting what they need.
How do you move in the direction of “trust”?
Keep in mind that contract negotiation is a sensitive area, and anxiety can be high. All parties are under pressure, with future plans at stake. It is possible that the buyer or seller may have had a previous bad experience. Acting with integrity does not mean that all cards have to be put on the table. It is not proper to discuss your personal strategy or needs. A high level of trust raises the level of cooperation between the parties and forwards the negotiation. The seller will be much more cooperative if the he feels that the buyer and agent are acting with integrity. Here are ways to develop trust:
1) Listen and understand what the seller has to say.
2) Express appreciation for the seller’s home, gardens, decorating.
3) Respond within a reasonable time to counter offers.
4) Reassure the seller of your ability to close.
5) Reveal some personal information about yourselves.
Finding common ground with the seller can be a very powerful tool in the event of multiple offers. Sellers often choose their contract for personal reasons. For example, the buyers reminded them of their own family when they moved in with young children. Or, they were of the same religion. Or, the new owners would care for their gardens or feed the birds.
How much leverage do you have?
A crucial part of your strategy in a negotiation is an accurate perception of the real estate market. You must know the underlying market condition. If you are in a sellers’ market you must act quickly, and be willing to present an offer at the top of the range. This is most important if the home is in a hot area and has strong appeal. If the seller has multiple offers, you must make your very best offer up front.
In a buyers’ market your prospective home may have been on the market for months. There may be a small buyer pool for the home because of economic conditions or due to repair or updating needs. In this case you have a lot more leverage than you would with a new listing. Some knowledge of the sellers’ needs may help you improve your leverage. If you can meet some of their needs you have gained leverage for a lower price.
It is important to make your offer as straightforward as possible. Contingencies will reduce your leverage for a lower price in a buyer’s market, or for any consideration in a seller’s market. Be proactive about showing the seller your desire and ability to close. Here are some possible contract contingencies:
1) Contingent on sale of your home: Usually, the seller will not accept a contingency to find a buyer for your home. It is more likely to be accepted if your home is under contract. Attach a copy of the contract and status report.
2) Contingent on inspections: In our area this is covered by an option period. Keep the option time within accepted norms. This contingency can be removed to strengthen your offer. Do this only if you are knowledgeable about the property condition.
3) Contingent on financing: Strengthen your offer by obtaining credit approval. An approval letter with your offer improves your leverage, and is crucial in multiple offers. If you are making a cash offer, get a letter from your banker stating that the resources are available.
How much under list price should you offer?
Unless there is a strong seller’s market, buyers usually offer less than list price. Establish your price by a market analysis. It is usually counter-productive to offer so low that the seller will automatically reject the offer. This will set a negative tone from the beginning. In a recent deal the seller responded to a low offer with an above-list-price counter.
How are multiple offers handled?
The listing agent and seller will decide how they will handle multiple offers. They may disclosure to all parties, or disclosure to none, that multiple offers have been received. By disclosing that there are multiple offers, the seller is not “shopping your contract.” Shopping occurs when the seller discloses the terms of an offer to induce a buyer to submit a better offer. This can have a negative result by creating distrust of the process by all parties, and possible loss of the buyers. The standard procedure is to notify each potential buyer that there are multiple offers, and give each a chance to raise his offer by a certain time. When all are received, the seller will review the offers and choose one to work with.