Real estate investing and negotiate home prices go hand-in-hand. You just can’t be a successful investor if you don’t understand negotiating. So what are the best home price negotiation tactics?
Home price negotiating starts with understanding the needs of the seller, and ask: what are the seller wants out of the deal? Then I’ll outline my favorite tactics for negotiating great home prices.
Home Price Negotiating Key: Understanding the Needs of the Seller
Before discussing actual tactics for negotiating home prices, new investors need to understand the importance of understanding the needs of the seller in any negotiation. In other words:
What does the seller want out of the deal?
And, while many sellers want to maximize profit in a deal, it’s not always about money. Consequently, as real estate investors, we need to view ourselves as problem solvers first. We need to learn the primary problem driving the seller, and we need to figure out a way to help him or her solve that problem. If we don’t understand the seller’s needs, we lack the information necessary to negotiate.
Here’s a personal example. A few years back, I found some off-market sellers. Their father needed to – quite quickly – move into an assisted living facility, and he didn’t have the cash to afford it. As such, the sellers needed to sell his home quickly to put together enough cash for the move. Unfortunately, though, the home happened to be in awful shape, as the father had let it fall into disrepair as he grew older.
In discussing this situation with these sellers, I clearly understood the problem motivating them: they needed money, and they needed it quickly. As a result, speed and convenience motivated these folks far more than maximizing profit in the deal. They just wanted someone to buy the house so they could get the cash they needed.
We solved the problem for them. We bought the house quickly and without requesting any repairs, thus providing them everything they wanted. And, for us, we received a great deal on the property.
Big takeaway? When you understand the needs of the seller, you can find a solution that meets those needs while also supporting your investment goals.
Having outlined the importance of understanding seller needs – and solving their problems – I’ll use the rest of the article to outline some specific home price negotiating tactics I use and recommend.
Be the Expert
Real investors realize this eventually – most home sellers are not experts in the home selling/buying process. This provides investors an outstanding negotiating opportunity, particularly when it comes to estate-related home sales (e.g. a parent dies and leaves a home in a will).
It’s a sad fact of life, but most of us don’t want to plan for a loved one’s passing. As such, people typically enter probate (the period when a will is confirmed) after a death without understanding how that process works. In addition, these family members have for more pressing concerns than working with lawyers – grieving, organizing funeral arrangements, etc.
In these situations, real estate investors can act as the estate expert, solving the seller’s problems while also purchasing an investment property. More precisely, real estate investors can actually bring an estate attorney into the deal. Rather than the seller needing to find and pay for an attorney to work out all the estate-related details of a property left in a will, the investor offers to pay for those services as part of a sales contract – for an associated reduction in sales price.
I’ve done this in the past by building relationships with respectable and competent estate attorneys in my area. By establishing these relationships, I’ve worked out deals where I pay their fees following the home purchase. I simply work this attorney fee into my total budget calculation for the flip.
Win-win: the sellers don’t have to navigate the estate process on their own, and the investor gets a great deal on a property.
Build a Relationship and “Peel the Onion”
This tactic really builds on the above discussion about the importance of understanding the seller’s needs. Part of that understanding comes down to building a relationship with the seller – not in an insincere way, but really looking to find common ground as the foundation of a solid relationship.
This process begins with the initial phone call to the seller. This represents the first opportunity to “peel the onion.” When you first ask a seller what he or she wants out of a deal, you likely won’t get a straightforward answer. But, you’ve now set the foundation of the relationship.
Once you actually meet face-to-face and have a chance to tour a property, you have a far better chance of really building that relationship by identifying common ground. Maybe you see some posters for a local sports team in the house – that’s one way to bond. Or, maybe you find out that the seller loves to travel – and you do as well.
To be clear, I am absolutely not advocating disingenuous behavior. Rather, truly look to find some overlap in passions between the seller and yourself. These common interests serve as the foundation for any relationship, and they let you continue peeling back the onion. Typically, by the third or fourth time you talk with sellers about what they’re looking for in a deal – that is, the problem they need solved – you’ll get a clear answer.
And, as discussed above, once you know the seller’s problem, you can solve that problem.
The Fact-finding Mission
The next tactic involves what I call the fact-finding mission during a tour of a property. When walking a property with a seller, think of yourself as an investigator trying to uncover all the details you possibly can.
When did you last replace the hot water heater?
Is the electrical wiring in your remodeled guest bedroom up to code?
Have you repaired any drywall recently? If so, what caused the damage initially?
At the end of the day, you can think of an endless list of questions to ask. The point here is establishing your position as an informed – and skeptical – buyer. The more questions you ask on your fact-finding journey, the more likely you will uncover items in your discussions with a seller that will provide you leverage in negotiating a lower price.
And, related to questioning, investors should also always deflect if a seller asks directly how much they want to pay. While not an absolute guarantee, you can pretty much rely on the real estate negotiating truism that he who states a price first, loses. In other words, once you – or the seller – float a price, that price becomes the foundation of all future negotiations, and it’s usually not to the advantage of the person who stated that price.
“Is That the Best You Can Do?”
I think of this tactic as an escalation tactic following an initial offer from a seller. Let’s say the seller says he or she will sell for $150,000. Here’s how I would approach the situation with this tactic.
First, I’d simply ask, is that the best you can do?
Psychologically, this places pressure on the seller, as the question implies that I need a better offer to consider. Maybe the buyer responds with minor price reduction, or maybe a yes, this is the best I can do.
With either response, I then begin the escalation process, adding subsequent perks to my initial question:
Is that the best you can do… if I’m willing to close in two weeks?
Is that the best you can do… if I pay all cash?
Is that the best you can do… if I cover all your closing costs?
Each one of these subsequent escalations provides another opportunity for the seller to lower his or her asking price. And, going into a deal, I generally know exactly what I want to pay – or more specifically, what I won’t pay more than – so each one of these escalations can chip away at the asking price until it falls within my target range.
First-in or Last-in
This tactic really qualifies as two alternative tactics. During your marketing process, when you find a potential seller – someone considering but not yet ready to sell – you can request one of two treatments as a motivated buyer:
- Option 1: Request to be the first-in buyer, that is, the first buyer to make an offer on a property.
- Option 2: Request to be the last-in buyer, that is, the final buyer to make an offer on a property.
Both options have their pros and cons. For first-in, you have the inherent advantage of making the first offer, therefore increasing the likelihood of acceptance by a motivated seller. But this also means that the seller may want to test the market and get a few more offers before committing.
On the other hand, with last in, you have the advantage of knowing all the previous offers and tailoring yours accordingly. But, the associated drawback is, the seller may decide to accept another offer in the interim, regardless of your initial handshake regarding your last-in status.
Personally, I prefer the first-in approach, as most sellers – especially of homes in need of repair – just want to get the property off their hands. However, I’ll explain a key caveat to this in the next section.
Continuing from the above, if you’re the first-in buyer, you absolutely need to walk out with a contract!
As stated, the major benefit of receiving a first-in promise from a potential seller centers on the fact that you get to make the first offer to a motivated seller. But, these same sellers may also want to see if they can get a better deal – an associated drawback to the tactic.
As such, when you have a first-in situation with a seller, you need to do everything in your power to walk out the door with a signed contract. This lets you control the buying process – as opposed to keeping your fingers crossed that the seller doesn’t accept a subsequent offer.
To successfully walk out the door with a contract in a first-in scenario, I like to combine this tactic with the “peel the onion” one. As I’ve emphasized, understanding the seller’s needs serves as the foundation of successful home price negotiations. When you’re building a relationship with a potential seller who’s offered you first-in status, use every opportunity possible to figure out exactly what his or her real estate problem involves.
Do they need to sell a home quickly?
Are they moving?
Do they need the proceeds from this sale to finance some other major life event?
The problem itself doesn’t matter. What matters is that you, as the buyer, A) figure out what the problem is, and B) find a way to solve it for the seller.
Once you accomplish these things, you’ll be able to walk out the door with that signed contract.
Conditional Contracts to Confirm Costs
Ideally, you enter every potential deal with a clear understanding of the projected rehab budget for that property. In reality, you may not know right away if a home sale price will meet your needs.
In these situations, I recommend being frank with the seller, that is, explain that you don’t know if the price works for you, but you’re willing to sign the contract regardless and will use the next couple weeks to confirm contractor bids.
Once again, do not use this strategy to deceive the seller. Instead, sign the contract to move forward with the deal – you can always back out and retain your earnest money deposit as long as it’s during the due diligence period. Then, as quickly as realistically possible (because you don’t want to unnecessarily string along the seller), confirm your contractor bids and associated budget.
If, after running all the numbers, it turns out that the initial contract price doesn’t support your investment goals, use that as leverage to negotiate a lower home price. Frequently, sellers buy into the sunk cost notion of, well, I’ve already spent two weeks under contract, so I may as well lower the sales price a bit to wrap up the deal.
And, worst case scenario, if the seller says that he or she won’t lower the home price, you simply walk away from the deal. You’ve lost some of your time, but you haven’t sunk any money into the offer.
Request Seller Financing
A final negotiating tactic I’ve used is more of an indirect way to reduce a seller’s asking price. If a property absolutely meets your investment goals – but the seller won’t budge on home price – you can request seller financing. In these situations, sellers basically act as the bank, and you pay them directly a set amount of money for a set time period.
So how does this actually lower the asking price?
It doesn’t. Instead, you receive the indirect benefit of 0% financing, with the seller providing you flat rate terms. For example, you agree on a $100,000 price and will pay the seller $1,000 per month for the next 100 months. With this sort of financing, all of your payments go directly to the principal on the loan, so you gain two benefits:
- No interest payments.
- Benefit of time-value of money, that is, the money you pay the buyer later can earn interest for you now.
NOTE: Before agreeing to a 0% seller financing deal, consult with a tax professional on the associated tax implications of such a payment structure.
Using Investor’s Edge Software for Negotiating Leverage
As a final takeaway, I want to reiterate the importance of timely and reliable information in negotiating successful home price. Put simply, the better the information you possess, the more leverage you have in the negotiation.
Our Investor’s Edge software gives you this critical information!
With this software, before beginning home price negotiations, you can confirm exactly how much a seller owes on a property, information that in turn lets you know how much they need to get out of a sale. Armed with this information, you can craft the perfect pitch to balance seller needs and your investment goals.
At the end of the day, successful negotiations depend on solid relationships and accurate information. Bottom line, the better your relationships with potential sellers and the more information you have, the more likely you are to successfully negotiate lower home prices.