Insider Secret #10
Proven Negotiating Strategies that will have you wheeling and dealing just like the wealthy real estate investors!
We’ll talk about four things here:
a.) Types of sellers and their motivation.
b.) Types of market and how to negotiate in each one.
c.) Multiple offers on multiple houses – simultaneously and why.
d.) List price vs. market value – is the existing offer already the BEST?
e.) Escalation clause … what is it and how to use it.
f.) Negotiating after the contract is ratified.
g.) Length of time on market – a good indicator for a motivated seller?
h.) How much less should you offer, and how many counter offers are effective?
Naturally, everyone wants to figure out what the magic is behind negotiating and the different techniques that can be used. You can't look at negotiating in a vacuum.
Negotiating is always affected by the market you're in. And it’s always affected by the individual you're negotiating with -- and whether or not you're negotiating from a position of strength.
Types of Sellers: There are different types of sellers you’ll be negotiating with, and their motivation is what’s key. If you're trying to buy a home from a retiree, who’s getting ready to retire and move south … they’re really not that motivated. They’d like to move, but whether the house sells this month, next month or next year doesn’t matter much to them. They’re not a motivated seller.
So, the first thing to find is a motivated seller, when you’re looking for the best negotiating position. A motivated seller, obviously, would be someone in foreclosure or someone, unfortunately, who is getting divorced, or maybe even someone who’s behind on the payments.
They’re not in foreclosure yet, but they have some financial difficulties, or have lost a job perhaps. These people are going to be more motivated.
Obviously, if the mortgage loan balance is higher than the purchase price, then the seller can't do much. That’s when you start getting into ‘short sale’ situations, similar to what we covered in a previous lesson. So, determining the seller’s motivation is the first thing you need to do.
Types of Markets: The type of market will determine your ability to negotiate and the tactics you can use. If you're in a seller’s market, then negotiating will be a different situation because you're competing with other buyers to buy that same house. So you're not going to have much of a position to negotiate from; not much of a position of strength. But you will have some techniques that can be used, in order to buy the house and beat out other buyers.
Multiple Offers: When you make multiple offers on multiple houses, simultaneously, you’ll remove the control from the seller. This can work in any market type other than a seller’s market. If you're not totally, emotionally wrapped up in one home, and if there are two or three homes you also like, then this tactic will put you in the greatest position of strength. You would put offers on all three homes at once and tell all the sellers, upfront, what you're doing. You’d just say, “I’ve got three offers out on three houses. Whoever gets back to me first, with a satisfactory response to my offer, is the house I'm going to buy.” This way you’ve removed control from the seller.
It’s no longer a one-on-one negotiation. You’ve changed the entire dynamic of that seller’s position.
They don’t think they’re negotiating with a buyer emotionally wrapped up in their house. They think they’re negotiating with a buyer, who could care less if they buy their house or one of the other two houses. Now the seller is on the receiving end of that -- so the seller needs to come after you to get you to buy their house.
A lot of buyers don't want to do this because they want to get involved with one home and one home only, and that’s fine. But these are transaction negotiation strategies that can be effective in many different situations.
This next issue is something that I’ve seen happen to many buyers in the past. I, personally, try to keep it from happening, but a few buyers are very strong headed and don't want to listen – so they have to learn on their own. Although, I find most buyers are pretty logical and open to the proper guidance if it makes sense.
Gift Horse - List Price vs. Market Value: Should you offer less or is the seller already offering you more? You need to determine the value first.
Don't ever go into a house that’s listed for sale at an example price of $200,000.00 and automatically assume, you need to try to offer $180,000 or $190,000 in order to get a better deal. If the house is already worth $200,000.00 in market value, and they’re priced at $200,000.00 -- in most markets, most buyers will buy it for $200,000.00.
Whether it’s you or someone else, someone will buy it. Most real estate agents know this and educate their sellers on this fact.
On the other hand, if the house is listed for $200,000.00, but it’s actually worth a ‘market value’ of $185,000.00, and you go in and negotiate that house down to $185,000.00 …you haven’t won anything, have you? You haven’t done anything remarkable. All you’ve done is bring the seller down to the ‘market value’, which is where the seller should have been in the first place.
As a matter of fact, that whole negotiation was nothing more than extra effort on your behalf since you won’t be getting any of the ‘perceived’ benefit of the price reduction.
You might feel you’ve won, but the reality in the big picture is that you haven’t gotten an extra dime in market value from the negotiation, because the house was overpriced relative to its ‘true market value’ in the first place.
This is a typical rookie homebuyer mistake. Especially if the buyer or the buyer’s agent has not performed a market analysis of the home’s true ‘market value’ before making the initial offer
Don’t be a rookie. Let an expert help you through this! Get your own buyer’s agent to guide you through every, single aspect of buying your home.
Now, what if a house is listed at $200,000.00 and it’s ‘market value’ is worth $215,000.00, and you go in and try to negotiate below the $200,000.00?
First of all, you’re probably not going to get much below that list price, because the seller knows they’re priced well below ‘market value.’ They know they’re going to sell for that price, and it will probably happen fairly quickly. They know if you don't buy it, someone else will -- and the real estate agents on both ends know it as well.
So be careful. Don't look a gift horse in the mouth. As they say, pigs get fat, but Hogs get slaughtered. Don’t be greedy.
Buying it for $200,000.00 has already saved you $15,000.00 because the seller offered you a wonderful opportunity upfront. This is the big picture. Most people read books or listen to tapes and think …“Oh, well, theoretically, I should be able to negotiate a particular amount of a price discount, or obtain these specialized terms …or get the seller to provide ‘x’ amount of concessions.”
If you try these “theoretical techniques,” without fitting them into the confines of the existing types of markets – you’ll soon discover these theories don’t work!
As you know, we don't live in a world of theory. I’m giving you practical, effective tips and techniques, from the trenches -- knowledge we ‘Insiders’ use every single day.
If you're trying to buy a house and other people are trying to buy the same house …how do you know what to offer? If the house is listed for $200,000.00, you know it’s not going to sell for $200,000.00.
If everyone’s trying to buy it, it’s going to sell for more. The question is how much more, and how much more should you pay?
Again, it’s relative to the ‘market value’ of the house. And since you now know how to tell which of the 4 types of markets you are currently involved in, this is where you will need to do your market analysis up front. Do you go in with an offer of $210,000, $215,000 or an offer of $205,000?
How do you know? And what if you went in with an offer of $215,000 and the other highest offer behind you was only $205,000? You just overpaid by $10,000.00, but you wouldn’t know that because the amount of the other offers are never disclosed to the competing buyers.
None of the buyers know what the other buyers are offering. It’s a sealed bid situation.
So here’s how you get around that. You put in what’s called an ‘escalation addendum’ or an ‘escalation clause’, along with your offer.
That clause says, “If there are any other offers (and I don't know if there are), my offer is for $200,000.00 (the list price). However, I will raise my offer by $500.00 (or by $1,000.00 or whatever figure you decide to use) above any other offer that’s presented at the same time my offer is presented.
I’m paraphrasing, so don’t use this exact language. I’m just trying to help you understand the concept of the actual clause. Different jurisdictions are going to have different laws and customs that will dictate how your particular clause needs to be written.
In other words, if the seller responds to my initial offer and tells me I'm going to have to buy the house for $207,000 -- then the seller has to prove to me that somebody else had an offer of $206,000, which activated my escalation addendum, and my $1000.00 escalator clause.
Because, remember, my escalation addendum said I would pay $1,000.00 more than any other offer up to a maximum of $210.000.00.
If you're familiar with bidding on eBay, it’s kind of similar to that, but not exactly.
What this does, is protect you from overpaying by that $10,000.00 in the example mentioned earlier about a home buyer bidding blindly for $215,000, yet the nearest offer was only $205,000.
This technique limits your upside and also limits the amount you’ll pay over the high bid. This is an accepted practice in a lot of markets.
Some banks don't like to deal with this when it comes to bank owned properties, but quite often, you can get banks and most sellers and most real estate agents to use this technique effectively for you.
It really is the smartest way to negotiate and the absolute smartest way to bid on a property when there are multiple buyers, competing for the same house.
Negotiate Even After Your Contract is Ratified: What happens once you’ve written the contract, the sellers agree to your price, and you’ve agreed to their terms? Is there any way to get anything better afterward?
Yes, you can create another opportunity for more negotiation after the contract has been ratified, and all parties have agreed on the price.
Quite often you can add clauses, up front, in your contracts that can allow for items such as home inspection contingencies, radon inspection contingencies, well and septic inspection contingencies, pest inspection contingencies, and even other types of contingencies.
Once you go in and inspect the house and you learn of certain deficiencies, you can say, “Oh, I didn’t know this needed to be repaired, or I didn’t know this was broken.”
You can reopen parts of the contract for negotiation, if you put the right clauses in your contract, from the beginning, that spells it out.
For example, you contract to buy a house for $200,000.00, but by the time you get to settlement, you might end up paying $196,000 or $198,000, depending on how many issues are discovered -- and how well you negotiate with the seller at that point – to get the seller to cover things you weren’t prepared for. The seller may or may not do it. It just depends on each situation.
If you don't buy the house, or if they don't agree to some of the costs you need to repair the issues, the seller then has to disclose that problem to someone else later on, who’s interested in buying the house. They cannot have any hidden defects, by law. So, quite often, you’ll find the seller will be open to re-negotiation.
Does Length of Time on the Market = Motivated Seller??
Is this a good indicator to find a motivated seller that you negotiate well with? The answer is NO. That’s a horrible indicator. Unfortunately, a lot of novice homebuyers think it’s a great indicator. They think, “The longer they’re on the market, the more motivated they are to sell – especially if they have a driving reason to sell.”
This may or may not be true. And maybe they have not really been on the market as long as you have been led to believe!
If somebody’s on the market for $220,000.00 and the house is only worth $200,000.00 -- and we’re in what’s called a tight market – then that person’s way over-priced.
They’re overpriced by 10%, and they’re going to sit on the market and sit on the market, until they come down into the price range where they belong.
Once they’re in the correct price range, that’s when they’ll actually be presented and exposed to the buyers that are ready, willing and able to buy that house …and at the price range it should have been listed at in the first place.
So if it took six months for them to get there, and now it’s been on the market for one week in that price range. Then the real estate industry and the market place consider it on the market for just one week. Because it was overpriced and not a viable listing for the market beforehand.
Do you really think that a home seller who has been on the market, and overpriced, for six months is a motivated and anxious seller? Of course they’re not. If they were, the house would have been priced properly in the beginning and sold quickly.
There’s also something else you need to be aware of. Many of the MLS listings will list the total number of ‘days on market’ of a house for a cumulative total of the last two or three years – and not just for the current listing period.
The house might have been on the market, separately prior to this particular listing period, and then they add that time to the current marketing time. So the Realtors’ MLS system may say it’s been on the market for 250 days, but it was on the market for 220 days two and a half years ago, and only 30 days for this current listing period.
Not very helpful data, is it?
Right now, it’s been on the market for just the past 30 days. So the seller is not as motivated, as you might think they are. So don't use ‘time on market’ as your sole indicator of a motivated seller.
Should you accept the seller’s Response or make a Counter-Offer?
If the house is listed for $200,000.00, and its market value is worth $200,000.00, it will usually sell to some buyer for that price -- maybe you, maybe not.
But it’s just a function of time. How much less you offer is determined by the seller’s motivation.
If you start coming in on a $200,000.00 house, with offers of $150,000.00, you’ll be laughed out of the house. You're probably never, ever going to have a chance to buy that house again because you’ve ‘totally’ insulted the seller so much. That offer is just not within the realm of reality.
Now if you come in on a house that’s listed at $200,000.00, that also has a ‘market value’ in that same range and you offer $180,000.00 -- and let’s say you and the seller negotiate back and forth – then you may end up at $193,000.00 to $195,000.00. It would most likely be somewhere in that range because the original offer of $180,000.00 felt ‘somewhat’ insulting to the seller.
However, if you had come in with an original offer at $188,000.00, you would generally have a better chance because the seller wouldn’t be as emotionally upset … and that’s critical.
Sellers have a lot of emotion wrapped up in their house. Because it’s not a house for them, it’s their home. So, when a seller feels insulted, it’s rare to see any buyer recover from this initial insult.
So there’s a dance. There’s a balancing act to perform when you want to buy a home that you really want and that’s in good condition and is already priced well.
How Many Counteroffers: How many times can you go back and forth, with the seller? Some people think, “Well, I’ll make one offer, then the seller will make a counter offer, and that’s it.” But no, that’s not it.
You can make another counter offer and then another and another. But once you see movement stop on the other end, it’s over. Let’s say, you offered $190,000.00 on a house listed at $200,000.00. Then you get a counteroffer from the seller of $197,000.00 -- and you come back at $193,000.00.
Now, the seller comes back at $196,000.00, and you counter, with $194,000.00.
Finally, the seller comes back again at $196,000.00 -- it’s over, you’re done. There’s no more movement. The price is $196,000, take it or leave it.
If you’ve had two identical counteroffers from the seller, it’s done. And any effort beyond that is usually a waste of time and also spreads bad faith throughout the rest of the transaction. Of course, these are the averages.
Another example would be a listing at $200,000.00. You come in at $190,000.00, then they counter with $200,000.00, then you should consider that as twice. It’s over.
You're not going to get anything less. This is usually a good average rule of thumb to stick with.
This brings the main portion your e-course to a close. I realize this probably sounds like a LOT of information to absorb … but these ‘Insider Secrets’ are only an appetizer!
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