For almost everyone, buying or selling a house is a vital personal and financial transaction. Yet most people do not recognize that planning and implementing the right strategy can change the outcome by thousands if not hundreds of thousands of dollars. For buyers, the right strategy can make the difference in getting the house that they want the most.
While the news media frequently report dismal conditions in the nation’s housing market, the fact is that the metropolitan Pittsburgh market never experienced the stratospheric highs of other areas, and it’s not experiencing a crash. In any market, however, if you follow the principles of successful negotiating below, you’ll have a better chance of making the deal you want and avoiding costly mistakes.
Know the market
For buyers and sellers, the first step is getting information about both the real estate market and the unique motivations of the other party. While relevant and accurate information may be difficult to get, limited and imperfect, it’s invaluable.
It’s essential to know current market trends, as well as all recent sales in the area, the neighborhood and the street. The present economy has produced a good market in many neighborhoods in southwestern Pennsylvania for selling very expensive and inexpensive houses; mid-price houses may sit longer. That can change. At any given time, different communities can range from very active to virtually inactive. This is generally reflected in the numbers of houses on the market and the average time from listing to sale. Time of year has an impact, with February, March and April having the most inventory and prospective buyers and November, December and January having the least. Buyers have less to look at but greater leverage in those quiet months. Sellers of one of only a few available houses in the most sought-after locations always have considerable leverage.
The quality and quantity of the information that a seller or buyer can get about the other party will strongly influence what offers and counter-offers to make and how they should be presented. It is particularly helpful to know how sellers and buyers have conducted themselves in prior interactions.
Buyers need to know how long a house has been on the market; whether the sellers are moving out of town and, if so, when; whether the sellers have purchased another house and are making two mortgage payments; and the asking prices, features and conditions of comparable houses on the market. Buyers should assess how badly they want a particular house, including the realistic cost of required repairs and improvements.
The buyer’s initial offer should be the lowest price that will be taken seriously and produce a counter-offer from the seller. That’s a judgment call related to the information gathered by the buyers and their realtor. A low ball offer generally won’t produce a counter-offer and risks poisoning the atmosphere.
Sellers should understand that the asking price and the appearance of the house are beginning points of the negotiation. Most sellers understand the importance of conveying an impression that they’ve been maintaining their house. They should make the house as superficially attractive as possible. A modest investment in painting (neutral colors), cosmetic repairs and basic landscaping is mandatory if financially feasible. It is rarely worth investing in major renovations.
More important, the seller must establish the right asking price. Forget the idea that someone from a foreign land like Japan or California, who is used to astronomical house prices, is going to pay more than fair market value. Assume that buyers are reasonably intelligent. An asking price that’s too high can be disastrous. It will deter many potential buyers and most realtors from seriously considering the house (possibly forever), and sellers lose that unique time when they have the most leverage and the best chance to get the highest price. When a reasonably priced house is first offered, interested buyers will often pay close to asking price to shut out other potential buyers.
Sellers must not deceive themselves into thinking that offers close to the asking price will inevitably be followed by higher offers. I’ve witnessed a number of sellers who rejected such offers, only to sell many months later at much lower prices. A first or early offer is often going to be the best, and sellers ignore this maxim at their peril. There is no logic behind the idea that, “If we got an offer this good so soon, just think what we will get later on.”
Another common mistake by sellers is thinking that they can net what they need despite market reality. One seller moving to an extremely expensive city had to spend a considerable amount to get a house comparable to his Pittsburgh residence. He rejected an outstanding early offer of $700,000 because he needed more to afford his new house. After incurring tremendous carrying costs, he accepted less than $600,000 one year later.
Each seller and buyer has his own priorities and is generally motivated by factors in addition to price. One seller may be willing to accept thousands less in order to have a quick closing. Another may be influenced by the character of the prospective buyers. Still another may be indifferent to those factors. This means that buyers and sellers should never try to put themselves in the other person’s shoes. They should, however, try hard to learn what is actually in the other person’s head.
People want what they want, not what you would want if you were in their position. In fact, if you listen effectively, think flexibly and respond creatively, you can often do far better than you expected. For example, two professors decided to accept a relatively low price before their house was even formally offered to the general public. The realtor representing the first couple who saw the house noticed that the sellers were poor housekeepers. She suggested to them that if they accepted her clients’ offer, they wouldn’t have to clean the house every time a prospective buyer came to see it. That would have been irrelevant and ineffective for almost all sellers, but it worked with these sellers.
Don’t underestimate the value of establishing a positive relationship between the seller and prospective buyer. Surprisingly, this can have a big impact on whether the negotiation concludes successfully. For example, the buyer should avoid trying to support a low offer by demeaning the house. An experienced professional directed his realtor to tell the sellers about all the improvements that their house required to meet his minimal needs. The sellers loved their house, including many of the deficiencies cited by the buyer. They were offended and refused to deal with the buyer.
A skillful realtor can inoffensively present certain negatives to justify an offer. One useful tactic is to say: “The buyers love your house and think that it is definitely worth the asking price. Unfortunately, they just cannot afford more than they offered.”
Over time, the buyers must finally make their best offer (money and terms), and the sellers must assert their bottom line. Some people avoid making that final offer or demand, thinking it’s pointless or maybe offensive. That’s a mistake, because you never know what will be accepted when sellers or buyers are clearly told what it will take to reach agreement. Also the sellers’ or buyers’ parameters may change over time — what they reject now may become acceptable at a later date.
If sellers have the good fortune to have more than one legitimate offer, they should recognize that the highest price isn’t the only determinant of which is better. They should consider whether either prospective buyer will use the inspection contingency to try to reduce the sale price; whether other terms of either offer make it more or less attractive, such as a mortgage contingency; whether there is a significant difference in financial qualifications; or whether they feel greater or lesser trust in one of the prospective buyers.
In making offers, buyers should recognize that factors like these can provide them with leverage and objectively lead some sellers to accept a lower sale price.
Timing is everything
I’ve seen people walk away from deals over a small amount of money — a seller rejecting $850,000, demanding $5,000 more and accepting $750,000 six months later. Once the parties are within a small price range of each other, there is no longer any science in the negotiation; you are practicing the art of negotiation. Sellers must compare the risk of losing a deal with the potential gain that they might get. This is a classic cost/benefit analysis. Buyers should do the same.
Hedge your bets
Standard agreements contain a contingency allowing buyers to withdraw if a property inspection reveals conditions that are either unilaterally unacceptable or exceed a certain total amount to correct. Unless the amount is inordinately high, which is the exception, both of those contingencies amount to the same thing. Buyers can always find conditions for which they can get quotes exceeding the set amount.
Sellers should try to identify buyers who will use the home inspection to continue the price negotiation. Sometimes a clue to this is when a buyer acts resentful that the sales price is too high or complains too much about the condition of the house. However, telling a buyer clearly and forcefully that you will not contribute to repairs revealed during the inspection often will not work and may even make them unnecessarily skeptical about the condition of the house. Remember that a good faith inspection may reveal repairs to which the sellers should contribute in order to salvage a good, solid agreement with qualified buyers.
Stick to your guns
Sellers and buyers should focus on their goal, no matter how they feel about the other party. Unlike many negotiations in which the relationship continues, you will rarely have to interact with the other party again. Too many sellers and buyers lose sight of this and walk away from deals that could be made because of their feelings about the other party. Sometimes that’s a reasonable response, particularly from sellers who have a reason not to trust the buyers. However, often it is not. Many people have managed to endure obnoxious, petulant, unrealistic, and even insulting parties to reach the result that they wanted. As one buyer told me, “Those disgusting sellers left town, and I’ll never see them again, but I will enjoy living in their house for many years.”
For sellers, a good realtor will bring in many more potential customers than a mediocre realtor or a discount real estate service. The realtor will guide you through the negotiations and the potential pitfalls in dealing with buyers. For buyers, a good realtor will work to insure that you see all the neighborhoods and houses that you might want and help you get the best house that you can afford. A good realtor can also tell you about houses that will soon be coming on the market. An excellent realtor can sometimes help you buy a house that the sellers weren’t even considering selling.
The Internet can be very useful in looking for a house, but technology cannot replace the knowledge, insight and guidance of a good realtor. In selecting a realtor, sellers and buyers should rely on recommendations from people they trust. Experience is important. Integrity and genuine concern for your well-being is essential. Being available, promptly returning your phone calls, making you feel that you are always the most important client, willingly showing you the listings of every agency (not just their agency’s), making you feel comfortable (even after showing you the 40th house) and a desire to satisfy your needs are minimal criteria.
Negotiating is a must
Negotiating is necessary, whether you like it or not. Some people find it distasteful. They want to make an offer and stick with it. That is directly contrary to common expectations, rarely leads to the most favorable agreement possible and may even prevent reaching an agreement.
Almost all people expect to engage in a negotiating process and feel frustrated if denied that. In addition, if you can get others to work hard in a negotiation, they will be far more likely to change their parameters in your favor — for example, accept an amount that they would reject without first engaging in a tough negotiating process. So the question is not whether you like to negotiate or not. The question is really rhetorical: Do you want to negotiate effectively and get the best result possible? Obviously you do.