Very little in a real estate transaction is set in stone. Instead, buyers and sellers can negotiate almost everything in a deal – price, timelines, clauses, etc. And, successful investors clearly understand the value in possessing strong negotiation skills. As such, I’ll use this article to outline some real estate negotiation tips for buyers and sellers.
Effective real estate negotiation hinges on two items. 1) Investors must understand the local market: buyer’s or seller’s. 2) You must understand the needs of the other party. As a seller, what does the buyer want? As a buyer, what does the seller want? From here, you can negotiate with confidence.
I’ll dive into some more negotiation considerations and tips in this article. Specifically, I’ll cover the following topics:
- An Overview of Real Estate Negotiations
- Buyer’s vs. Seller’s Markets
- Key for Buyers: Understanding the Needs of Sellers
- Key for Sellers: Understanding Your Ideal Buyer
- Real Estate Negotiation Tips with Off-Market Properties
- Real Estate Negotiation Tips with MLS Properties
- Final Thoughts
An Overview of Real Estate Negotiations
From an outsider’s perspective, it may seem that everything in a real estate transaction is rigid. That is, rules clearly dictate how the entire process unfolds. While yes, buyers and sellers must follow certain guidelines, you can negotiate basically everything in a real estate transaction (e.g. purchase price, closing dates, seller concessions, earnest money deposit size, lender-required repair responsibilities, contingency clauses – or lack thereof, furniture included with the deal, etc.).
Accordingly, real estate transactions represent true arm’s length exchanges, with the seller and buyer both entering a deal with their own best interests as objectives. This means that, as an investor, your ability to negotiate in a deal can provide you significant advantages. For instance, as a fix & flip investor, you can use negotiation techniques to reduce the contract price on an off-market property while still in the due diligence period. Or, after renovating a fix & flip property, you can use negotiation techniques to more quickly sell a property to a primary home buyer.
Recognizing the above, I’ll use the rest of the article to outline my thoughts and recommendations on real estate negotiations.
Buyer’s vs. Seller’s Markets
Simply put, a buyer’s or seller’s market means which party has the upper hand in negotiations. Therefore, understanding the details of both market type will help you negotiate.
What’s a Seller’s Market?
In a seller’s market, the seller has the advantage.
It comes down to supply and demand. In a seller’s market, there are few homes on the market, and, therefore, sellers can command high prices and make additional demands from buyers. From an economic perspective, when demand remains the same (or increases) and supply decreases, prices increase. This reality provides sellers a pricing and negotiating advantage over buyers.
Put simply, in these markets, buyers don’t have a lot of options, so sellers can price their homes higher than they normally would.
Here’s a personal example. My wife’s a real estate broker, and she recently placed a home on the market. On the first day, she had 15 showings. On the second day, she had an additional 10 showings. In many markets, sellers would be lucky to have 25 showings in two months, let alone two days.
And, she received four offers from these showings. Of these, two of the buyers included offers that, if the property didn’t appraise, they’d pay out of pocket up to a certain amount to cover the difference. In other words, if they agreed on a price of $200,000, and the property only appraised at $190,000, the sellers would pay the down payment and the extra $10,000 to close on the deal.
Bottom line, in a seller’s market, buyers will do almost anything to make a successful bid on a property, a reality that lets savvy sellers play competing bids against each other to drive up the contract price on a sale.
What’s a Buyer’s Market?
With a buyer’s market, the opposite environment exists, that is, the buyer holds the negotiating advantage over the seller.
Once again looking at this in terms of supply and demand, a buyer’s market means plenty of supply exists on the market while general demand for housing remains the same (or decreases). When supply increases and demand stays the same, prices fall, and buyers can become more picky looking at potential properties.
In basic terms, a buyer’s market means that if you don’t get a good deal on a property, you can just go look at another one for sale. This removes the negotiating power from the seller and places it in the buyer’s hands. Instead of needing to jump at the first home they see, buyers can go out shopping, as the homes on the market just aren’t getting tons of showings or offers.
In this advantageous position, buyers can typically negotiate for significant concessions from buyers to include some of the below common ones:
- Price Reduction: If a seller lists a home for $250,000 and it sits on the market for six months without offers, potential buyers can make a strong argument that the asking price exceeds market – and therefore warrants a reduction. Many motivated sellers will jump at the opportunity to sell their homes for a little below asking price rather than continue paying the holding costs of a vacant property for sale.
- Seller Covers Closing Costs: While a seller may not be willing to reduce asking price, they may cover the buyer’s closing costs as a concession – which has the same effect. And, this benefit means that as the buyer, you need to pay less out-of-pocket for the deal.
- Inspection-related Work: Most contracts include an inspection clause. This way, if a home inspection uncovers major problems, the buyer can back out of the deal – or ask the seller to fix the issues. In a seller’s market, a seller may employ a take-it-or-leave-it approach, refusing to fix these issues. In a buyer’s market, buyers often have the leverage to demand that sellers fix all issues uncovered in an inspection.
The ultimate buyer’s market arose out of the Great Recession and associated housing foreclosure crisis. As homeowners foreclosed at record rates – and house values dropped precipitously in many markets – buyers with access to capital could basically pick and choose whatever they wanted, making any demands they wanted. If a bank auction of a foreclosed property didn’t make sense, these buyers could just wait for the next one – or make bottom-dollar offers to sellers desperate to avoid foreclosure.
Key for Buyers: Understanding the Needs of Sellers
Real Estate Negotiation Tips for Buyers and Sellers
Before discussing actual tips for negotiating, 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?
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.
Key for Sellers: Understanding Your Ideal Buyer
Next, sellers need to understand – and visualize – their ideal buyer. That is, before you list your property, think to yourself: who is the exact type of person I would like to buy this home? When you understand to whom you want to sell, you can craft your marketing and negotiating strategy accordingly.
Generally speaking, two broad categories of single-family home buyers exist: 1) people looking to buy primary homes, and 2) investors looking to buy a distressed property at a discount. Understanding the needs of each will help you as a seller.
Buyer Type #1: The Primary Home Buyer
These buyers want to find a property to occupy immediately with little to no rehab requirements. In other words, they want to find a home. Accordingly, part of a seller’s work involves helping these buyers truly imagine themselves living somewhere. And, investors can facilitate this vision. For example, if painting the living room grey makes it feel like home to a buyer, that may be something you offer in negotiations.
Additionally, sellers need to understand how these buyers will finance their homes. Typically, these people use traditional financing (e.g. a 30-year conventional or FHA loan). As such, the home will need to meet certain lender quality/condition standards to qualify for the loan. Sellers will need to account for this reality in their negotiations.
Buyer Type #2: The Real Estate Investor
Real estate investors comprise the next broad category of buyer. These buyers typically use cash or hard money loans to purchase properties. As such, property condition becomes less of a concern. Rather, these investors likely emphasize price, closing timeline, and contingencies.
Recognizing these priorities, sellers should have a basic understanding of how the fix & flip process works. Investors will likely use a flip budget to negotiate a lower purchase price, so you’ll want to understand how those budgets work. If a buyer brings you an inflated rehab budget to argue for a reduced price during negotiations, you’ll be able to inspect it and call out the nonsense.
Real Estate Negotiation Tips with Off-Market Properties
Once you understand the needs of the other party, you can use certain real estate negotiation tips to help you gain an advantage during this back-and-forth process. Personally, I like to view these different tips in terms of property listing status: off-market or on the Multiple Listing Service (MLS).
With off-market properties, investors look to purchase homes from people who A) have equity in the homes, B) have some motivation to sell, but C) can’t list on the MLS – typically due to major repair requirements. As such, I’ll focus the negotiation tips in this section on the investor/buyer.
Negotiation Tip #1: 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.
Negotiation Tip #2: 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.
Negotiation Tip #3: 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.
Negotiation Tip #4: 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.
Real Estate Negotiation Tips with MLS Properties
Next, these tips pertain to parties listing homes at retail price on the MLS. From an investor’s perspective, this primarily means selling fix & flip properties after completing renovations. Accordingly, I’ll emphasize marketing and negotiation tips for the seller/investor in this section.
Negotiation Tip #1: Use an Agent and List on the MLS
When you want to sell a renovated property to retail buyers, you should absolutely work with an agent and list it on the MLS. Simply put, the MLS provides maximum exposure to retail buyers. People looking for primary residences and many investors focus their property searches solely on those listed on the MLS within their market. Furthermore, real estate agents anywhere can access these listings, meaning that you also gain exposure with out-of-market buyers considering a move to your area. This exposure provides key negotiating leverage: if one buyer balks, you can move on to the next one in line.
When you list a property on the MLS, two factors matter the most to potential buyers: price and home condition. And, these factors lead directly into the next creative marketing technique.
Negotiation Tip #2: Potential Buyer Follow-ups
As stated, I highly recommend using a listing agent when you sell a home. The value they bring in understanding the market, sales compliance, and negotiation with potential buyers more than justifies the commissions they receive. And, as an aside, house flippers should just factor these commissions into their budgets from the beginning.
Unless you find yourself in an extremely hot seller’s market, most properties you list as a house flipper will have several potential buyers visit. After each one of these visits, have your listing agent follow up with them (or their agent) directly to ask what they thought about A) price, and B) property condition. At a high level, this will let you read trends in the market. For example, if five potential buyers in a row all said that the home price is too high, you’ve likely priced it above the market value.
When you see these sorts of trends, you can do one of two things. On one hand, you can just wait it out, keeping the home priced as is until a willing buyer makes an offer. But, this can come with tremendous costs. The longer you hold a property for sale, the longer you need to pay the associated holding costs (e.g. hard money loan interest, insurance, utilities, property taxes, etc.). On the other hand, you can listen to a potential buyer’s feedback and offer to make any requested changes in order to put the house under contract.
For example, say a potential buyer doesn’t like the green paint in the living room. When you hear this feedback, you can offer to paint the property as a condition to closing. This presents a win-win: you go under contract, and the buyer gets a property in the condition he or she desires.
Negotiation Tip #3: Offer Seller Financing
While buyer’s markets mean plenty of supply exists, most sellers won’t be willing to extend seller financing to buyers. Regardless of market, some people will just struggle to qualify for conventional financing. Maybe it’s credit score, or maybe they just can’t put together the cash for a down payment. For these buyers, the option to receive seller financing may make your property the most appealing one to them, separating you from the pack of other properties.
However, the associated drawback to seller financing is fairly obvious and directly related to the technique – you need to actually act as the lender. Some investors don’t want to play this loan processing role. But, if you’re comfortable doing it, extending seller financing can be a great way to negotiate property sale in a buyer’s market.
New investors need to remember: you can negotiate most parts of a real estate transaction. Whether buying or selling a property, you can – and should – try to get the best deal possible. By understanding A) the needs of the other party, and B) some of the above negotiation tips, you’ll do well as an investor.