Understanding how to conduct a successful real estate negotiation can be the difference in finding and securing great properties. Every real estate transaction involves negotiation between the seller of the property and the buyer. As a new real estate investor, you want to secure the property at a price that builds in both short and long-term profits. These are your objectives. The seller, on the other hand, has different expectations. He undoubtedly expects to sell his property for the highest price possible. A great negotiator has the skills to bring the objectives of the buyer and the expectations of the seller into balance. When this happens, you have a true win/win proposition.
Is it possible to always match the objectives and expectations? The answer is no, and the landscape is littered with the carcasses of failed real estate failed negotiations. You don’t want to be one of them. Your goal should be to learn simple ways to negotiate a better deal while still meeting the major expectations of the seller.
Once you have identified a potential property, how do you proceed? Let’s compare the negotiation process to a campaign to win a war and reach a peaceful agreement, because in essence, that is what we are doing. There are six key elements for a real estate purchase negotiation campaign.
Key Element #1 – Define Your Objectives
Everything starts with your overall objective in purchasing the selected property. Why did you select this specific property? What specific strategy had you selected to further your investment goals. Perhaps you based your purchase on rental properties and this property seemed to meet the requirements of a good rental property. Maybe you identified the property as a good property for doing some fix up repairs and reselling the property, or possibly you thought the property was a potential long-term property for a buy and hold strategy. Regardless of the reason you identified the property as ideal, you now need to define the price and terms you would offer for the property. In order to do this, you will need to know a lot more about the property, the seller, and the market in general.
Let’s assume that you are following a proven investment strategy and that you have set some preliminary objectives as to the initial price you would like to offer, along with certain basic terms, conditions and timetables. Once you have done this, you are ready to implement the next key element of the negotiation campaign.
Key Element #2 – Prepare Your Attack
Preparation in war is essential for victory and the same is true when preparing to negotiate a purchase agreement with the seller. The initial agreement is called An Earnest Money Offer to Purchase and will be the basis for all further negotiations. Nothing should ever be left to a verbal understanding. If nothing is written, nothing is agreed to. When preparing your attack, you are actually looking ahead to the purchase of the property.
- Prepare Your Team. The first thing you are going to do is to prepare your real estate purchase team. If you are going to be successful, you will need to add additional members to your team. Besides yourself, you need to understand the role of the buyer’s agent. A good buyer’s agent will represent you in the purchase process. The buyer’s agent is NOT the listing agent. The listing agent of the property is the seller’s agent, and as such, will represent the seller in order to get the highest price possible for the property. This is the fiduciary responsibility of the listing agent, but it is not necessarily in your best interest. The buyer’s agent will be the individual who will actually present the earnest money offer to the seller or the seller’s listing broker.
As you prepare for the attack, you will also need to identify other potential professionals besides your buyer’s agent. You may need a real estate inspection, an engineering survey, or construction help to remodel or fix up the property. If such is the case, prepare by finding individuals who can complete these tasks. It’s also possible that you will want to verify zoning or legal issues and may need to contact the proper city official.
- Complete Investigation of Property and Seller. Your investigation is much more than a simple viewing of the property. You must decide if the property will meet your major investment objective once the property is purchased. In addition to meeting the overall objective, you must determine if there are problems of any kind that could hinder your investment objective. These problems could be related to the property or they might be related to legal or zoning issues.
Perhaps even more important than the property itself is information concerning the seller and his or her reasons for selling the property. This information can be ascertained by finding out the answers to the following questions:
- Why is the property for sale?
- How long has the property been listed for sale?
- Are there any other offers on the property?
- What are the encumbrances and mortgages outstanding on the property?
- Are all payments current and being made on time?
- How anxious is the seller?
The answers to these questions may be gathered by having your agent check multiple listing service records and by meeting with the listing agent. The more information you have on both the property and the seller, the better prepared you will be when drafting your offer to purchase.
- View the Property. Every time you view the property, you should be with your agent. There are some caveats that you should keep in mind when inspecting and viewing the subject property.
- Act Interested but Not Overwhelmed. It is important that the seller or the seller’s agent understand that you are a credible buyer. What you don’t want to do is to alert the seller that you think the property is a “must have” property. If you do this, your ability to negotiate is diminished.
- Measure and Pace Off Distances. Bring a tape measure with you when you look at the property and measure distance and walls. It shows that you are serious.
- Keep Body Language in Check. Your body language can alert the seller to you being over anxious. Even though you think the property is ideal, don’t say it aloud or advertise the feeling through body language.
- Ask Good Questions. In most cases, you may already have the answers through your prior investigation, but go ahead and ask questions that show you are serious. There are 5 specific areas that you should address:
- Take the time to find out how old the appliances are and what repairs have been needed. Appliances are often an expense that needs to be taken care of immediately after purchase.
- Recent Repairs. If there have been repairs made to the property, you need to make sure that they are identified. This also goes for any repairs that need to be done before closing.
- City Ordinances. Are there legal restrictions that will inhibit or stop you from using the property for your investment strategy?
- Not only do you need to know what the mortgages are, but you must know if the property is facing foreclosure proceedings of any kind.
- REASON FOR SELLING. You need to know if the seller needs all the money for a specific purpose, along with the timing requirements for closing.
- Draft the Initial Offer to Purchase. This is your first offer and may not be your last offer. When drafting this offer, make sure that your agent understands what you are trying to accomplish. Even though you may be willing to pay more and offer better terms, it is better to keep this information to yourself. Before you tell your agent everything, make sure that you have chosen the best buyer’s agent possible.
- Price. The price you put on your first earnest money offer is not usually the highest price you will be willing to pay. You should have investigated what similar properties have sold for and offer a competitive, but lower price. Unless there are other offers on the property, it is usually best to offer something less than the full price.
- Terms. The terms of purchase can be even more important than the price. If the seller is willing to carry the financing of the property, terms are extremely important. The following items should be addressed within the offer to purchase:
- Who is going to pay for the appraisal? Once the appraisal is completed, what recourse do you have if the appraisal is too low?
- Inspection of Property. When will this be done and what outstanding issues should be initially addressed in the offer to purchase?
- Furniture and Personal Property. If you see something on the premises, make sure that you address it specifically in the offer. Don’t assume something is staying unless it is documented in the offer.
- Possession and Closing Dates. If you want possession at some date prior to closing for doing repairs or some other purpose, you need to spell it out in writing. Make sure the closing date is reasonable. Don’t include the phrase or clause “time is of the essence”, as this is detrimental to you the buyer.
- Subject to Clauses. If your purchase is subject to a zoning change or approval, put it in the document. If you are waiting for financing approval, make the purchase “subject to financing.” These “subject to clauses” are your exit strategy during your due diligence period.
- Earnest Money Deposit. The actual deposit should show your interest and ability to close. Make it a reasonable amount and subject to closing.
Key Element #3 – Make the First Move
The ball is now in your court and you are responsible for making the first move. That move consists of actually making the offer and presenting it to the seller or the listing agent. It is important that you understand who the other players are and what they are going to do. You, as the buyer, should not present the offer. It should be presented by your agent. Your agent is really like the general on your team. He or she is going to lead the attack by presenting the offer. There is a great deal of power inherent in third party negotiating. When your agent (the general) presents the offer, you eliminate the problems of becoming personally affronted if the offer is rejected in part or in whole.
The seller has different expectations than your objectives. When the seller receives the offer from your agent, he or she is going to evaluate if the offer is something that can be accepted in whole or in part. You need to know if you are dealing with one seller or if there are multiple people or entities who are listed on the deed to the property. You also need to know what timing requirements must be met. All of this information should have been gathered during the attack phase of the campaign.
When your agent presents the offer, he or she will only present what is written on the offer. You don’t want your agent to express anything that is not written. In no case should your agent let the seller know exactly what you will do and what you will pay. He or she may express the point that something may be possible, but only when you have said that he could do so. When you selected your agent, you should have chosen a professional person in attire and dress. The more credible your agent appears, the more credibility you will have.
Key Element #4 – Move Out of the Way
Now it’s time to let the negotiation process get going in full steam. Your role should now be to step back and let your agent do the negotiating. The value in this is that there is nothing personal and your agent will keep it from being so. Some buyers have wanted to go with the agent to present the offer. This is a mistake. As long as you allow the buyer’s agent to present the offer, you can evaluate and analyze any counter offer. If you are with the agent, you may be put in the position of making a decision without the time to decide if the decision is in your best interest.
It’s wise to give your agent as much information as you can to show that you are a credible buyer. If you have a pre-approval for financing, let your agent have the information. Another thing you can do to build credibility is to allow your agent to give specific personal information about yourself.
Key Element #5 – Manage the Battle
Even though your agent is now acting as general and presenting the offer, you are still in charge of the battle and the negotiation campaign. Any decision as to the actual offer and subsequent counter offer must come from you, the buyer. When a counter offer is drafted, the seller is now actually writing a new offer to sell you the property according to the new terms in the counter offer. In general terms, the underlying earnest money to purchase agreement will be altered and subject to the new terms and price in the counter offer. When you receive the counter offer, you can accept it as written or you can make a new counter offer. This process goes on until the buyer and seller agree to the final terms of purchase.
This process is totally in your hands. Be careful that you don’t start negotiating with yourself. Don’t be drawn into the situation when there are a number of different counter offers and you become confused and offer something you didn’t mean to do. If this becomes the case, it is better to draft a whole new document and start over.
Once the counter offer battle is underway, it is important that you establish a point when you are willing to just walk away. Never feel like you are being forced into a purchase. On the other hand, never become so emotionally attached to a property that you feel you absolutely have to have the property, regardless of the price and terms.
Key Element #6 – Sign the Peace Agreement
In reality, the final agreement will be a peace agreement because you have reached the point when the buyer and seller have balanced objectives and expectations. Once both parties reach a final agreement, the signed document will be used to draft the closing documents as all underlying “subject to clauses” are eliminated.
As you can see, the negotiation process doesn’t mean that there is a winner and a loser. When negotiations are done properly and professionally, we end up with a true win/win situation. Proper planning is the key to a prosperous future, and it is key to success when negotiating for the purchase of any real estate property, and if it is done correctly the expectations and objectives of both parties are balanced. When you understand the six key elements of a good real estate negotiation, you will be well on your way to wise and successful real estate purchase.