In big cities where home prices are already high, you need to buy something for the lowest price possible, especially if it’s an investment property.
Learning some basics about negotiating will help you get the best deal possible. A realtor can be a big help too.
The biggest perk of finding a realtor for selling or buying a home is that they can negotiate on your behalf. This is almost mandatory in a competitive market.
However, if you are a seasoned investor, you might be a pretty savvy negotiator already and confident doing it yourself.
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
You can also look for books at your local library.
Most sellers think their home is worth much more than it is, especially if you are NOT the only offer on the table. However, if you stay cool and rational while presenting your offer, you’ll do just fine.
I also highly recommend you use a realtor that specializes in the type of property (condo, house, multi-unit) and neighborhood you want to buy in. The more they specialize in the area or type of property, the better they’ll be at negotiating.
Follow the below secrets and don’t share them with the other party you’re buying from, why give them the upper hand?
Secret #1: Understand Why The Home Is For Sale
Understanding the intention and the 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 motivates them to close a deal.
A married couple who has a job change and is forced to move out by a specific date will lower the price more than a fancy realtor who is flipping a property for the highest profit possible. The realtor 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.
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.
Secret #2: Know How Motivated The Seller Really Is & What Price
After you know the reasons why someone is selling you can estimate how motivated they are to sell. The more you understand their reasons for selling, the more negotiating power you will have.
Quick Tip: My favorite method is looking at all the listings sitting on the market for at least 60 days or longer. A seller who cannot get a sale on their home after 60 days will be desperate to sell. I pick out the best listings and low-ball the owner 20% below the market price. In most cases, they’ll reject it, but we’ll meet at 10-15% below the market value. In a seller’s market, however, this is a lot harder to do so timing the market is also required.
Make your realtor work for their commission. Crunch the numbers and look at recent comps, the more educated you are about the area, the better position you have.
Then figure out if you should lowball 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 over 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, it might be worth the higher bid if you can work some favorable contingencies in the deal.
We’ll cover contingencies more in the next section.
Always be prepared to walk away. Know that it’s okay to walk away, especially if the price goes so high up from other bidders that your monthly payment is beyond your comfort zone.
Put some back-up offers out on other properties too.
One last thing to consider, even if you agree on a higher price because of a bidding war, your bank may not even finance the deal if it can’t appraise the property at that higher amount. So make sure your offer states that you can get your deposit back and walk away if that is the case. It most likely will but double check anyway.
Secret #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 best bet will be to get advice from your realtor.
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 I think. 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.
Secret #4: Consider Using A Real Estate Professional for Investment Properties
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.
Rent Control can cause a significant cash flow problem for a new landlord.
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).
Investment Property Tip: You’re going to inherit rental agreements, tenants, deposits, and all the problems of the tenants and the building they live in. Maybe even the washers and dryer machines if they are located on the property. If you don’t want to deal with all the day to day problems of being a landlord. You’ll also need to factor in property management fees which are typically 6 – 10% of the gross rental income.
The essential takeaways are this:
- 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.
- Have a real estate professional/accountant help you carefully analyze the numbers. If the numbers don’t make sense, it’s time to walk away.
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.
One Last Tip: 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.