River Realty Selling Guide - Negotiation
If you’ve owned your house for more than 25 years you might be surprised at the changes that have occurred in the negotiation phase of a real estate transaction. The advent of buyer’s housing inspections, the clarification of agency relationships, the rise of new technologies—all have changed the character and affected the outcome of a negotiated transaction. No need to clear the dining room table and put the coffee on: buyers’ agents rarely present the offer in person to sellers these days; it’s usually emailed to the seller’s agent, who may elect to go over details with the seller by phone.
In this topic area we want to take you through the steps of the initial offer and acceptance, the buyer’s inspection, and the resulting second negotiation.
Let’s get ready to rumble.
Your agent has just called with the big news: an offer has been written on your house. But your joy soon turns to disappointment as you hear the offered price and terms: an FHA offer with minimum down, for $190,000 on your listed $200,000 property, with $5000 more for buyers closing costs, 5 days to perform a buyer’s inspection, and closing two full months from now. That’s a total of $15,000 under the asking, just for starters, before dealing with FHA work orders and buyer’s inspection demands. Gulp.
Take a deep breath and relax. This is not an insult. Nor is it the market speaking, telling you what your house is worth. Rather, this is a buyer trying hard to discover your bottom line (not your net sheet bottom line, of course, but the lowest price you will take.) There is usually plenty of room to raise a low offer such as this. And before you curse the buyers for making you play price games, try to put yourself in their position: we know that prices declined for years, with only fitful signs of stabilization--is it any wonder that buyers are still cautious?
Although a few buyers will make just one low offer and walk away, most low offers such as this are routinely handled with 2 or 3 counteroffers. In the example above, your agent may discover that the closing costs are most important to the cash-strapped buyers, and that (with some prodding) they’re willing and able to go up to $197,000, since at today’s rates $7,000 only represents an additional $35 a month in payments. Your agent will help you look at all the variables: if the closing could be pushed up a month, you could save $1500 in mortgage payments. If you limit your commitment to FHA work orders to not exceed $500, the buyers may be willing to shoulder anything beyond that. Just about everything is negotiable in a real estate contract, including personal property that was noted as included in the MLS listing. And your agent will probably want to shorten the length of time allowed for inspection, so you can get right back on the market if things don’t work out.
When the dust settles, you wind up with a gross sale price of $197,000, and net sale price (net of “seller concessions”) of $192,000. Favorable disposition of some personal property and the interest saved by closing early don’t necessarily add to your net sheet bottom line, but they make a real cash difference above your closing proceeds. Perhaps when you first called to get a market evaluation, so long ago, you never imagined your house would sell for only $192,000. But your real “bottom line” has been met: you have enough to move on the next house—which is why you went through all this in the first place. And the buyers, who never expected to spend more than $190,000 for a house, have found they had to stretch to $197,000 (including their closing costs, which ultimately are financed into the price) to buy the house they love. A house they couldn’t have afforded in 2006..
We’ve used the example above to show how a buyer and seller who seem to be very far apart at the outset can come together when their separate interests can be addressed to mutual advantage. Sellers’ interests are always best served by paying attention to their bottom line, no matter how psychologically oriented they may be to the top line—price (spelled very much like “pride”). Buyers, particularly first-timers, have been traditionally motivated by considerations such as “How much a month?” While that is still true, these days it is accompanied by a much more cautious look at the top line, as buyers ask, “What if prices fall?” It’s important for agents to help keep their client’s goals firmly before them if negotiations heat up toward the breaking point. Just as with on-market strategy, negotiation requires patience and flexibility—and an eye on the prize.
Successful reconciliation of apparently conflicting interests between buyer and seller is called creating a “win-win” situation. This takes the efforts of both agents and at least two principals to the transaction. While the fiduciary responsibilities owed to their clients are clearly spelled out, many agents have learned how hard it is to get results in an adversarial atmosphere. The good ones respect the other side and communicate clearly.
You likely had a buyer’s inspection when you bought your home, but we’re going to do a short primer here anyway.
The home inspection was born in the 1980’s as a simple informational aid for buyers and has grown in importance over the years to become an essential element in a transaction. These days we believe that everybody benefits from the home inspection: it brings nearly all conditions of the house to light, providing buyers with necessary information, and an opportunity for them to ask that certain conditions be met in order to proceed with the transaction. It’s a benefit to sellers, too (although you might see it merely as a pocket-picking), because a buyer who has been fully apprised of existing conditions is far less likely to kick up a fuss after the sale.
Here’s how it works: the purchase agreement is made contingent upon the buyer approving the results of a home inspection, usually allowing 2-4 days (the time periods are negotiable) for the buyer to get a home inspection performed on the house, and one more day to formally reject or accept the purchase agreement as written. The seller then has a day to respond to any buyer demands that arise from the home inspection.
Inspections usually take around 3 hours for a single family home; sellers are never present during this time, so plan accordingly. Often the inspector will start without the buyers, and expect them to join in for the last hour or so. As we mentioned earlier, when we recommended you get your own home inspection before going on the market, the buyer’s inspection is much more rigorous than a municipal inspection. Everything accessible in the home will be inspected, including the roof and exterior, all mechanical systems, appliances, foundation and structure: around 400 items in all. The buyers will always get a full written report from any reputable home inspector, but it’s advisable for them to spend as much time as possible with him/her to get an education as well as the report they’re paying for (usually around $350). Many buyers’ agents like to be around for the verbal wrap up at the end of an inspection to hear about any concerns, and to help make sure the right questions are being asked to determine the real importance of any problems discovered.
After the inspection the buyers will meet with their agent to discuss the inspection report and to make decisions.
Very occasionally a house will “flunk” the inspection, often because of a foundation problem that is too expensive to negotiate. But in our experience 99% of inspections turn into either an acceptance of the house as it is or Negotiation Round Two. Of course all existing houses have problems, some larger than others; the home inspection should give the buyers an idea of what can be ignored, or deferred, or what needs immediate attention. After the inspection buyers have a day or more to go ahead with the contract as written; or to ask the seller to correct any unsafe conditions, and for any other work they believe needs to be done as a condition of their final acceptance. There is no standard approach: some buyers present a long laundry list of smaller fix-ups, or ask for a price reduction in exchange for taking on the work themselves. Other buyers have lower expectations in buying a used house and limit their requests to health or safety issues.
The seller then has a day or more to respond. Any reasonable seller (like you) will agree to correct unsafe conditions, but may balk at what looks like an unreasonable list of fix-ups, or a demand for money. Your agent should have prepared you for this eventuality, and may have reminded you during the initial offer negotiations that some of your anticipated proceeds may still be up for grabs. Large items such as end-of-life roofs and worn-out furnaces are the big money drainers, followed by electrical repair and updating. But generally, if your mechanicals are up to snuff, you might expect to spend perhaps $1000 or less (BIG disclaimer here!) for the kinds of smaller items often requested. Rarely does this second negotiation end in a broken deal, but the ride can get a little bumpy if sellers smell any greed in buyers’ demands. At an impasse, both parties need to view the specifics in the larger context and ask themselves: will giving on this issue keep me from my ultimate goal? Again, the parties are communicating via their respective agents, and experienced agents will wisely choose to keep the negotiation positive even over the rough spots, until a “win-win” can be achieved.