Home Buying Tips and Negotiating Tactics

Home Buying Tips and Negotiating Tactics

There are many techniques to negotiating a new home purchase. Almost everyone has their own brand and approach to negotiating, as evidenced by the dozens of books written on the subject.

There really a right and wrong way to negotiate as long as you have the basics down.The biggest difference in negotiations is the personality and egos of the people who are negotiating.

That being said, I thought I would chime in and share some of the negotiating tips I have learned over my last 15 years in the mortgage business.

These are what I would call "the basics", with a twist of my personality added for good measure. I hope you enjoy.

The Golden Rule

Negotiating is a game of leverage, meaning the person that has the advantage in a negotiation is most likely the one to emerge victorious in that round of the negotiations.

For example:

I emphasized "that round" for a reason, because when buying a home, the price is only the first battle in a long string of negotiations. Knowing who has the advantage in each round of negotiations is a key factor to winning the war.

Let's assume that you and your wife have found a home that you love and want to buy. Whether you know it or not, when you make an offer on a home you are negotiating from a position of weakness. The owner knows  that you want to buy the house or else you wouldn't be making them an offer to buy it. Apart from those sellers that are in bad financial shape, the seller will usually win the first battle. Advantage seller

However, most people forget that the negotiations last throughout the length of the sale until the deal is closed. A mortgage transaction could take as long as a month and maybe longer to close. You still have appraisals, home inspections, mortgage issues and many other negotiating battles to be fought and won. So, don't be too hard on yourself if you didn't come out of the first round of negotiations "smelling like a rose," just get ready for the second round.

Meanwhile, the seller has put a chunk of his own money down on a new home in anticipation of you buying his home. He has scheduled movers, picked out drapes, and applied for a mortgage. The savvy negotiator realizes that the once reluctant seller is not so reluctant anymore. The power in the negotiations has now shifted, just in time for the home inspector. It's now the seller that needs you to do something for him, namely buy his house. Advantage buyer.

Deal with a motivated seller:

Have you ever began negotiations with someone who has the attitude like "I don't really care to sell this, but make me an offer anyway?"  That's usually just a negotiating gambit used to get the buyer to make the first offer. Much like the home shopper who plays coy with the realtor or home owner as to how badly they really want the home.

However, there really are people in the market who really don't want to sell and whole-heartedly expect you to make them a ridiculous offer. Your first job in negotiation is to be able to distinguish between the two. If you are dealing with the latter, you should walk away or be prepared to pay a lot for the home.

Know when to walk away:

I have walked away from a dozen homes in the last 15 years, partially over the mechanics of the deal but primarily over emotions. Personal emotions have no place in a negotiation, and I should know since I have blown quite a few good deals over my ego. The point I am making is for you to be prepared to walk away. I tell most couples in the market for a new home "that after you find the perfect home, go find another one that is near to perfect." If you are using a realtor, don't let on which home you want to buy until you have the two homes picked out.

To negotiate price from a position of power, you must be prepared to walk away and you must do it if you don't feel you have a good deal. Some of the best deals I have made on properties materialized two weeks after negotiations had broken down. Don't get me wrong, you won't always get that second call and that great deal, most often you won't. However, one way to improve your chances of getting that second call is to always leave the negotiations in a civil manner.

I always like to use the "oh shucks" method which basically says "I really like your property, and it is probably worth every dime you're asking, but I just can't afford it and thank you anyway." This will leave the door open for further negotiations.

Ask for it all and then some :

Everyone likes to think that they are a shrewd negotiator and hate to feel like they have lost in the negotiations. The best negotiators in the world get exactly what they want and leave their opponents smiling at the table. The way to do this is to make a fair offer on the home, and by fair I mean a price a little higher than you would like to pay. Then, attach a laundry list of things you would like the seller to address. Ask them to fix the roof, put in carpet, leave the refrigerator, paint the inside and anything else you can dream of.

This creates a myriad of issues that you and the seller can each give and take on. By offering the seller a fair price, you have their attention and haven't insulted them with a low opening offer. I wince when I see new homebuyers, aided by inexperienced real estate agents, throw a low-ball number at a home owner and expect them to capitulate. The entire negotiation will end with two counter offers and be decided by an impasse on price. If someone could say "I'll pay that price, but you give me the roof and carpet," each negotiator has an opportunity to win.

Maintain your objectivity:

This isn't always easy. At least two compelling influences will test your ability to remain objective: a hot market and finding the "perfect" home. A hot market can sway you to offer more than the home is perhaps worth. Finding the perfect home can also have such an effect. It is true that no two homes are exactly alike. For practical purposes, most homes are very much alike, however. When you think you've found the perfect home, chances are there's another one available just like it and for possibly a better price.

You can always increase your offering price:

But you can seldom decrease it. Unless you have the misfortune of buying in a hot market, start by offering lower than asking price. Just how low you make your first offer depends on several factors. How well is the home priced? If it's priced well and you don't want to risk insulting the seller, offer close to what the CMA suggests. If it's a hot market, you may have to offer full price or more. If it's a slow market and you think you have a motivated seller, you may be successful offering a relatively low price.

Get it in writing:

Your state may require that contracts for the sale of real property be in writing. Do not expect oral agreements to be enforceable. Give up something to get something. Ask for something you can easily give up. If the seller sees you're making concessions, they'll be more likely to give you what you really want. In your offer, include some things you can do without.

Here's a hypothetical example:

A home is for sale for $110,000. What you want most is to buy it for $105,000. You offer $100,000, 45-day escrow, you get the refrigerator and a $1000 credit to clean the home.

During negotiations, you give up the $1,000 credit, the refrigerator and agree to a 30-day escrow. The sellers feel like they won something, and you get the home for $5,000 less than you were willing to pay!

The Impasse:

There may be an item which bogs down negotiations. When this happens, quickly move off the item and onto something you can agree upon--no matter how small. This approach is also used to delay negotiations over an item you're sure will be a challenge to overcome. By reaching agreement on several smaller points, an environment of successful cooperation is created which helps to resolve larger issues.

My last bit of advice is that you pick a good experienced Realtor™ who isn't going to pass you off to one of her newbie buyer's agents. Begin your negotiations with her commission and keep in mind that you want her to work for you. This means if you beat her up too bad on the commission, she will email you houses from the MLS and call you every two weeks. Pay her a fair commission and make her earn it.