As a long-time real estate investor and founder of Do Hard Money, new investors often ask me: how can I negotiate the house price after the seller has accepted my offer? This situation arises when an investor makes an offer on a house based on a rough estimate of rehab costs. When you need to negotiate house price after an offer is accepted, there are three strategies to deal with it:1. Rehab cost; 2. P&L and Inspection Facts; 3. Find Property Problems.
In this article, I’ll explain a few strategies I’ve used in the past to renegotiate selling prices after an accepted offer.
Specifically, I’ll dive into each of the following topics:
- Why Buyers Negotiate House Prices after an Accepted Offer
- Price Negotiation Strategy 1: Rehab Costs
- Price Negotiation Strategy 2: P&L and Inspection Facts
- Price Negotiation Strategy 3: Find Property Problems
- Final Thoughts on Negotiating House Pricing after an Accepted Offer
Why Buyers Negotiate House Prices after an Accepted Offer
New investors should first understand why buyers would want to negotiate – or renegotiate – house prices after the seller has accepted an offer.
Broadly speaking, this situation arises when an investor makes an offer on a house based on a rough estimate of rehab costs. Then, once the seller accepts the offer and the buyer receives accurate rehab bids from contractors, he or she realizes that the initial rehab projection grossly underestimated the final budgeted costs. This underestimate can derail the deal’s projected profitability.
For example, assume an investor finds a property to flip selling for $50,000. If a rough estimate of rehab, holding, and sales-related costs totaled another $50,000, and the projected after rehab value (ARV) came in at $125,000, it looks like the investor will pocket $25,000 (excluding taxes):
- Purchase price: $50,000
- Plus rehab, holding, sales costs: $50,000
- Equals total costs: $100,000
- Projected ARV: $125,000
- Minus total costs: $100,000
- Equals profit: $25,000
Remember that the buyer used rough estimates for the above rehab, holding, and sales costs. If a contractor returns a final rehab bid for $25,000 more than that rough estimate, all of a sudden the deal’s profitability disappears. The numbers just don’t work anymore.
When this happens, investors have two options:
- Option 1: Walk away from the deal.
- Option 2: Renegotiate a selling price that supports the new numbers.
Option 1 hurts, as you lose the deal. As such, in the below sections, I’ll address three strategies to renegotiate selling price after the seller has accepted your offer.
The first price negotiation strategy aligns most closely with the above scenario. Once you receive the final rehab cost bids from your contractor, if the numbers don’t add up, present the actual bid to the seller.
Continuing the example from the previous section, assume the same initial, rough rehab budget of $50,000 and a final, contractor-approved budget of $75,000. In this situation, you can simply take that bid to the seller and explain that the numbers no longer work for the agreed upon sales price. As such, the seller will need to reduce the selling price, or you walk away from the deal.
In this situation – as with all of these strategies – you need to be prepared. Don’t approach the seller with a vague request to “lower the price;” organize your numbers in a clear and easily understandable fashion, and request a specific reduction amount that your contractor bid clearly supports.
Bottom line, if you don’t professionally and competently present your price reduction request, your chances of acceptance decrease significantly.
P&L and Inspection Facts
The next price negotiation strategy, though somewhat related to the above, deals specifically with the home inspection results. In addition to providing you critical information about a property’s condition, home inspections provide outstanding negotiation leverage for buyers, so I highly recommend against ever removing an inspection clause from a contract.
Here’s how it works:
Once you receive the home inspection report, use this report as a means of demonstrating third-party verified facts (as opposed to opinions about a property) to the seller. More precisely, use this report to demonstrate 1) all the newly-discovered issues with a property, and 2) the costs associated with fixing these issues.
For example, assume that the inspection report identifies a faulty coil in the hot water heater and electrical wiring in a bedroom that does not meet building codes. Typically, a home inspector can provide unbiased estimates to fix all inspection issues, so let’s assume that estimated repairs for these two issues comes out to be $5,000 total.
Next, the buyer needs to put on his or her “investor hat” and present the seller with the updated P&L, or profit and loss, statement – now including these previously unaccounted for $5,000 repairs. With the P&L, you can clearly demonstrate to the seller how, due to facts arising from the home inspection, the profitability of your deal has been reduced by $5,000 and, as such, you now require an associated $5,000 reduction in selling price.
This strategy hinges upon the buyer’s role as an investor. For a traditional homebuyer, a seller can disregard these $5,000 in unexpected costs, as they’re largely insignificant over the life of a 30-year mortgage. But, with an investor looking at a house flip’s immediate profitability, the seller must now accept the shorter time horizon driving the buyer’s decision to stay in – or leave – a deal.
And, depending on the numbers associated with the particular deal, you may not need the seller to accept the requested dollar-for-dollar reduction in selling price. Even a concession totaling 50% of the inspection-identified costs can retain a deal’s profitability.
Find Property Problems
The final price negotiation strategy I’ve used involves an indirect reduction in price. However, as with the above strategy, it also revolves around a home inspection.
When a home inspection uncovers previously unknown problems (as with the water heater and wiring example above), buyers also have the ability to request that the seller fixes these issues prior to closing.
In this situation, investors don’t negotiate a direct reduction in selling price, that is, the buyer doesn’t actually lower the selling price at all. Rather, buyers receive an indirect reduction in selling price, as the seller pays for repairs that otherwise would need to be completed by the buyer.
Rather than receive a $5,000 reduction in selling price to offset the above repair costs, investors receive an effective $5,000 reduction, as they no longer need to pay for the repairs that they would otherwise need to complete during the rehab process.
While this may not seem as satisfying to an investor as a direct reduction in selling price, the numbers work out just the same, and you’ve effectively negotiated for a post-acceptance reduction in selling price.
As a final takeaway, I can’t emphasize enough to new investors: you can remove yourself from a sales contract – and keep your earnest money deposit – as long as you’re still in the contract’s due diligence period. Consequently, the only thing you lose by asking for a reduction in selling price is your time. In other words, if you ask for a price reduction, the worst thing to happen is for the seller to say no.
And, the better your relationship with the seller, the higher the likelihood that he or she will accept a renegotiated price after accepting the initial offer. For this reason, I highly recommend looking for off-market properties, as they allow you to work directly with the seller, establishing the rapport necessary for successful negotiations.