How To Negotiate Real Estate Price
How to Negotiate a Deal in Real Estate
Whether you are buying or selling, your goal is to negotiate the best deal possible in a real estate transaction. Doing your homework, keeping your cool, and knowing when to give in or walk away are the key components to a successful real estate transaction.
Understand how financing affects your ability to negotiate a real estate deal.Whether you are the buyer or seller, understanding the financial aspect of a real estate deal is the single most important thing when negotiating.
- If you are the seller, you should know what financing you would be willing to accept and you should have the evidence to support your claim. For example, you may only be willing to negotiate with buyers that have been pre-approved for a mortgage that would cover the price of your home, minus any down payment the buyers can make. Put another way, you may only want to negotiate with potential buyers that you know have access to the funds and loans necessary to purchase your home.
- If you are the buyer, you need to understand that a lot of sellers accept deals based on your financing arrangements. Therefore, if you have not secured financing for the purchase, you may not even get to the negotiating table. In addition, you will want to show the sellers that the financing you have is secure and stable. For example, being able to show the seller a mortgage pre-approval letter will go along way in securing a spot at the negotiating table. On the other hand, if the only financing you have is a personal loan from a friend, the seller may have trouble trusting your ability to pay.
Have cash on hand for a down payment.The first step in securing financing on a home is gathering enough cash to make a down payment.A down payment will generally be at least 20% of the real estate purchase price.
- If you are a buyer, the more money you can put down, the more bargaining power you will have during negotiations. Sellers like cash deals and, in general, the more cash you have, the lower the purchase price will go.
- If you are the seller, you should understand how much cash they are willing to put on the table. Be willing to work with the buyers if they offer more cash. However, if they are unable to offer a large down payment, you may decline their offer to purchase the property or request more money.
Check your credit history.Before you can get a home loan you will need to check your credit score. The higher your credit score is, the lower your interest rate will be.This is the case because banks and other lenders are taking less risk in loaning money to someone with a history of paying back loans.
- To check your credit score, you can call Equifax, Trans-Union, or Experian.You can also get your credit report for free once a year from annualcreditreport.com.
Get pre-qualified.When you shop for a home loan, you need to know how much home you can afford and the type of loan you are likely to be qualified for. Allow lenders to estimate how much mortgage you will be able to afford.To do this, you will provide potential lenders with certain information about your credit history, income, and debts, and they will give you an idea of what you can afford.
- As a buyer, a pre-qualification letter can help you negotiate with sellers. This is great evidence that tells sellers that you are able to get financing.
Shop for loans.Once you have been pre-qualified, you can begin the search for a mortgage that fits your needs. When looking for a mortgage, you should look at the interest rate, the loan term, the size of the down payment, and the fees associated with each loan.
Get pre-approved.A pre-approval is a firm offer from a lender to give you a loan.Once pre-approved, you will be able to make an offer on the home of your dreams, so long as it is within your finances.
- As a buyer, a pre-approval letter is a powerful negotiation tool and it tells the seller that you are ready and able to make the deal.
Negotiating as a Buyer
Research the property.Whether it is a residential or commercial deal, you need to know as much as possible about the property. Find out the basics of age, square footage, layout, and if there have been any significant upgrades or remodels. This information should be in the real estate listing. If not, ask the seller. If you are not getting answers or don't believe them, check the city or county building department for a history of building permits issued for the property.
- If you are considering a historical property, find out if it is listed on the local, state, or federal historical register.This can be a plus or a minus depending on your goals. If the property is registered, there may be financial assistance and tax relief for restoration and renovation.However, you may be strictly limited in the changes you can make to the structure.
- Find out if there are any grandfathered zoning or code allowances for the structure. When zoning and building codes change, sometimes older structures are allowed to remain as they are so long as no changes are made. However, if new building permits are issued, the codes enforcement agency may require the existing work to be upgraded. That bathroom remodel could turn into new plumbing for the entire house. This should be factored into your offer.
Learn about the neighborhood.List price is less important than comparative market analysis (CMA).If you are working with an agent, she can run a listing of the most recent property sales and listings of comparable properties in the neighborhood. An unrepresented buyer can pay a real estate attorney or agent for a report.
- Don't rely on the report alone. Drive around and check out the properties and see which ones are most similar to the property under negotiation.
- Using the data in the CMA report, you can evaluate if the property price is in line with the current state of the market.
Create a budget and keep financing in mind.If a buyer has cash or pre-approved financing in hand, he may be in a position to drive a harder bargain than one who has to wait on mortgage applications and approvals. The advantage to the seller is a firm contract with a quick closing date rather than gambling with the property essentially off the market for weeks or months while the buyer tries to secure financing.
Consider a property inspection.As the prospective buyer, an inspection can uncover potential deal-breakers, such as structural damage, and give you a list of needed repairs to use as leverage for a reduction in price or a credit against closing costs.
- A serious flaw, such as needing a new roof, doesn't have to be the end of an otherwise desirable property. Before asking for a credit, consult with a local contractor to get a good idea of the cost of repair.
Set the boundaries and tone.The seller has his asking price. Using your CMA report, you can formulate an offer. That sets the two end points of the negotiation. If both parties have used reliable data to create their price points, the selling price will be somewhere in the middle.
- Don't insult the seller. Offering an unreasonable offer, "just to get the ball rolling," will likely be interpreted as you not being serious about buying the property.
- You can be honest about issues, but talking down the property in disrespectful terms such as "ugly", "worthless", and offering to "take it off their hands," is likely to result in the owners refusal to work with you any longer.
Prepare to make counter-offers.In the typical list price-offer exchange, the seller will make the first counter-offer. Buyers should not get too hung up on small differences in price. With interest rates between 4 and 5 percent, a ,000 difference in the mortgage is less than per month on the payment. If the seller says 5,000 and you had offered 0,000, strongly consider accepting the seller's counter-offer if it fits into your pre-approved financing range. This is a business deal, not a competition.
Close the deal.All offers and counter-offers should be in writing. When a mutually agreeable offer is reached, both parties should sign it to indicate acceptance. Detail the sales price, any credits for repairs, allocation of closing costs, and a prospective closing date. This will become the basis of your sales contract.
- If you have not had real estate agents involved in the negotiation, you should consider retaining a real estate attorney to handle the closing. Transactions such as title insurance, rescission clauses, calculating and apportioning taxes, and other business details can be handled to make sure the deal remains fair to both parties.
Negotiating as a Seller
Price your property.The price you choose will be a combination of the comparative market analysis (CMA).for your area, your equity versus pay-off amount, and your goals. For example, an investment property in a desirable neighborhood can be listed for a higher price because you don't necessarily need a quick sale. Conversely, if you have moved or need to sell quickly in order to buy a new house, you'll want to price to the lower end of the neighborhood spectrum.
- If you have agent, she can run a listing of the most recent property sales and listings of comparable properties in the neighborhood. An "For Sale By Owner" seller can pay a real estate attorney or agent for a report.
Consider a pre-sale property inspection.Inspections aren't just for buyers. Investing in an inspection before you list the property can reveal small issues that can be repaired before the listing and more serious repairs can be factored into the listing price.
Understand the buyer mindset.Unless you have a very desirable property in a hot neighborhood, the buyer has many choices. He is looking to stretch his budget as far as it will go. Stage your property to highlight its benefits and be prepared to include your property upgrades in the negotiation. For example, if you had planned on taking the appliances, but the buyer expresses an interest, consider adding them to the deal.
Receive your offer.If the offer is verbal, and you believe the offer is serious, request that the buyer put it in writing. You can have blank forms ready.A written offer shows the buyer is serious and makes it harder for him to renege during the negotiation.
Prepare to make counter-offers.In the typical list price-offer exchange, the seller will make the first counter-offer. You need to think about the daily costs of owning the property and figure that into their counter-offer. Mortgage, taxes, insurance, utilities, lawn care, and HOA fees are real costs coming out of your pocket while the property remains unsold. If you have already moved, you are also dealing with the risk of storm damage or vandalism on the vacant property. Ask yourself how much the property has cost you since you put it on the market and if you are willing to continuing to pay those costs while waiting for another serious buyer. Factor these costs into your counter-offer. If you have limited interest in the property consider coming down closer to the buyer's offer.
- Keep your cool. If buyer's offer is insultingly low, don't respond with anger or sarcasm. Make a reasonable counter-offer to show your position. The buyer may still be serious and simply a poor negotiator. Calling the buyer "cheap" or "ridiculous" may lose you a serious buyer.
- Offer to assume or split some of the closing costs. If the buyer insists on an inspection, that is his choice, but you can split costs like title insurance, a real estate attorney, and miscellaneous fees.
Consider owner financing.If you have an otherwise qualified buyer who can't get a conventional mortgage because of credit issues or the bank won't lend on the property because of age, location, or condition, you can carry the loan yourself. The disadvantage is you won't be paid immediately and may have to deal with a loan default. The advantage is you may be able to realize a higher purchase price.
- Unless you have experience with setting up loan agreements, consult with a real estate attorney to craft the best loan agreement for you and the buyer.
Close the deal.Both parties should sign the final offer, even if it is an informal document you and the buyer both worked on. This will become the basis of your sales contract. Hiring a real estate agent or attorney to prepare the final contract and closing documents is a worthwhile investment.
- Set a closing date that is far enough out to allow the title work to be finished and your attorney to prepare the final contracts and deed. Typically, 30 to 45 days should suffice.
Video: Three negotiating tips for real estate deals
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