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What Happens During Real Estate Negotiations?

So.  You have been out looking at houses the last few weeks.  You have narrowed down the list.  Today you have seen a house that you really love.  You are sure that this is “the one.”  Now what happens?  Now its time to make the Sellers an offer.
There are a number of moving pieces in negotiations.  The price you will agree to pay for the house and for which the Seller will agree to sell the house is the biggest part of that.  There are other things to consider as well.  When do you want to take possession of the house, that is, the closing date?  What “chattels” will be included with the sale of the house, that is, what items such as the kitchen and laundry room appliances will be included in the purchase price? Will the sale be conditional?  Do you have a house to sell, that needs to be sold before you can complete the purchase of another house?  Will you need to finalize mortgage approvals?  Will you do a home inspection?  How long will you be allowed to satisfy yourself in regards to these conditions?  Finally, how much deposit will you put down?  All of these details are open for negotiation.  I have seen deals come together and fall apart because of one or more of these items.  But price is the most important.  Most of the other negotiable details can be worked out for the right dollar amount.
So how do we decide what to offer the seller? It depends. Like many things in real estate, how much you offer a Seller is situational.  The first thing we will do once you decide that this house is “the one,” I will review with you recent sales of similar properties.  This will give us some hard data on what we should expect to pay. Quite often, even with hard sales data, we are making value judgments.  Is our target house as nice as this one, nicer than that one, not quite as big another, more features than that one?  Usually we will have seen enough houses that the past sales data will confirm what we already know about our target home. After you have seen a number of similar houses for sale, one of the things you start to get a feel for is your sense of relative value. We put our first hand experience together with the past sales data and we come up with a number that we think the house is worth.
This is where things can vary widely with different situations. Is this a property in demand?  Even in slow markets, desirable homes can garner record breaking top dollar for that home’s category. One question that we have to answer is how much interest there in a property? If other parties are very interested, and you want this house, you may end up having to pay close to asking price. Sometimes you end up paying more when there is competing bids.  In this case you are not really negotiating. When properties are in demand, the Seller is in the driver’s seat. Real estate is a very supply and demand sensitive market. If demand is high for a property, it may mean past sales data don’t mean that much. Here you have a choice to make. If you feel comfortable paying what you have to in order to get the house you want, then move forward and make the offer. If not, then walk away and find another house.
This brings us to one of the big maxims of real estate negotiating. The party who can’t walk away is always at a disadvantage. If a buyer falls in love and must have this house, they can often pay more money than they should.  Sometimes so much that it takes years for the market to catch up to what they paid. The reverse is true as well.  If a Seller is feeling the pressure to sell, then they may be willing to let go of the house for less than what they were hoping to sell it for, less than “market value”.  There are all kinds of things that can reduce your ability to walk away.  Perhaps you have put in an offer on a house and need to sell your current house to firm up.  This can create enormous pressure to accept a lower than desirable offer.  Are you moving because of a change in a work situation? Are you on a house buying trip and you have to buy before you go home? Do you have to sell by the end of the month so you can start your new job in another city? These and a host of other situations can influence your motivations when negotiating.
One of the most common factors that can affect the market vale of a house is the time on the market.  If a property has only been on the market a couple of days and is getting lots of interest from other buyers, a seller may be willing to walk away from an offer that is not very close to list price.  The Seller is likely thinking that if they let this one go, another buyer will offer me what I want for the property.  If a property sits on the market, though, the Seller may be getting anxious to sell.  In that situation they will often be willing to compromise in favour of the Buyer.  The longer a home is on the market, the less it is worth.  Stale listings can often represent a real opportunity for a Buyer to pick up a bargain.
It is often in these situations, when a listing has sat for a while, it is worth it to test the Seller’s resolve with what is called a “low ball” offer.  You will likely not get the low number that you initially put on paper, but that low number can often get the Seller moving more than they might have than when the the listing was fresh.
If you are Seller, how do you respond to a low ball offer? Again, that depends. How much do you need to get the deal done? With most negotiations, it is my general practice to try to keep every negotiation alive as long as possible.  If the offer is ridiculously low, perhaps you make a counter offer that is $1000 lower than asking price.  It is movement, but it is only enough movement to tell the Buyer that you are not going to give the property away. Perhaps you need to get the deal done, and now is the time to hold your nose and move to a price that is less than what you hoped for. In that situation, you move enough to say that you are willing to do the deal, but not enough that you give the store away right away.  You move in solid increments, but not too much, because once you make a move, there is no going back. But the reality is that you may end up selling for less than you expected when the property was first listed.  If you are the Buyer dealing with a confident Seller who knows they can walk away and find another buyer, you may have to step up and pay close to what they demand if you want to close the deal.
Again, the one who feels like they can’t walk away is always at a negotiating disadvantage.
There is one situation that we do need to discuss. Because pricing a house can sometimes be something of an art rather than a science, it can be hard to peg down an exact price. Both realtors and Sellers can get gripped with optimism, especially with nice or unique properties. Sometimes the market is busy and it feels like the right time to test the upper limit of the market. The price is set. Interested parties come and see the house, perhaps a lot of them over a very short period of time. When a house shows well, people will come and see it. But if it is priced too high they will not offer. Once an agent has come through the house, they are very often asked for feedback. You will hear things like: “It showed very well, but we felt the price was a little high.” If you hear that once or twice, you might be able to discount it. Start hearing it five or six times, even when the property has only been on the market a few days, and it starts to mean something.
Lets say that at this point you get an offer, but it is a low offer, lower than expected. What do you do? This can be a tough situation for a Seller. All the showing activity seems to be saying that there is lots of interest in the property.  Yes, people are interested, but their feedback is saying, “Not at that price.”  There is a general rule of thumb in real estate that your first offer is often your best offer.  I would say that is the case in 9 of 10 situations or more. It is in your best interest as a Seller to work with this first offer, even if it is lower than expected.  More often than not, this is your best shot at getting the most possible value for your property.  There is always the exception, but my experience has confirmed the rule of thumb. Usually it is obvious when an first offer is not really serious and in those situations you can often confidently move on. More difficult is the low offer where the buyer is serious about getting a deal done, but not at the number you were initially hoping to get.
You might have a number in your head that is your basement sale price, and this offer is well below that.  The people seem serious, but this offer seems ridiculous. Sometimes, this is where a cold dose of reality is needed. Again, stay with the negotiations until the deal is dead. Remember, you don’t have to move all the way right away. Make a small move, and send it back to the Buyer. Let them know you are willing to negotiate, but you are not going to give the property away. You may have to send it back and forth in incremental movements four, five, six or more times. Usually if you can’t get a deal done after six counter offers, it is not going to happen.
What might happen here, and I have done this when helping Buyers, is that the Buyer’s agent may provide some recent sales that justify their case. The Seller’s agent may do the same. Discussion is usually had around things that need to be repaired or updated, the positives and the negatives of the property and so forth. What also usually happens in the early stages is that you agree on the things that may not matter as much such as closing date or chattels. This gives you the feeling that the deal is coming together and you are getting closer. The other thing that this back and forth does is it gives the Seller time to see if another offer is going to come in.  If this negotiation has take three, four or five days or more and another offer has not come in, chances are it is not going to come.  This is it.  This is your best offer. Time to hold your nose and get the deal done.
Here is the cold, hard truth: if you are overpriced, even on a nice, desirable, unique property, is that you need this buyer more than this buyer needs to buy your house.  They can often walk away and find another house as nice as yours that is closer to market value. If you let this buyer go, chances are less than 10% that another buyer will pay as much as this first buyer. This first buyer will often go a little higher than later buyers because they are the first offer and they are worried that if they don’t budge they won’t get the house. They are willing to hold their nose and pay more than they initially wanted to.  The next buyer will not be so willing. In 90% of these situations, it is best to hold your nose too and get the deal done.  The longer a house sits on the market, the less it is worth.  The key window is the first two weeks.  That is your peak interest period.  Any offer in the first two weeks, is most likely your best offer.  Any offer after two weeks is almost certainly your best offer.  This can be a tough business It is one of the most supply and demand sensitive markets around. The real estate market can be very fickle and it can turn on a dime.
If you want to increase your negotiating leverage, especially as a Buyer, you can often move a negotiation in your favour by presenting an offer that is free from conditions, such as a mortgage financing clause or a home inspection clause.  If you need a mortgage, this may present some risk. But if you are able to do your homework and are very confident that you will be approved, you may want to consider drawing up the offer without the clause.  That said, the clause is there to protect you, so you have know that the approval is just a formality.  If you have the time, you might want to do a home inspection before putting in the offer.  The risk is that you pay the $300-$400 for the home inspection and then you are not able to get the deal done and you have wasted the money.  It is a risk.
But the upside of taking these risks is to present an offer to the Seller is that is free from conditions.  This allows you to press the price.  Why? Because the Seller knows that the moment they sign on the dotted line that the deal is binding.  There is no waiting for it to clear conditions.  It will not fall apart after week where the property is labeled a “Conditional” on the system, effectively killing interest in the property during the conditional period.  Then, if the deal does fall apart, new Buyers will wonder, “Why did it fall apart?” potentially stigmatizing the property. There is real value in a condition free offer.  Sometimes it is a few thousand dollars, sometimes significantly more.  But this is money in your pocket as a Buyer.  Sometimes the extra risk and doing a bit of work in advance can pay off for you.
Hopefully this has helped introduce you to negotiating a real estate transaction. This just scratches the surface of the many different types of situations you will encounter when negotiating a deal. Each client situation is different and each negotiation has its own flavour that is shaped by the people involved, the market circumstances and even the property in question. When you work with me we will take all that into consideration in trying to get you the best price, whether that is the sale price or the purchase price.