Negotiation is a complex matter and all transactions are unique. Both sides—buyer and seller—want to feel that the outcome favors them, or at least represents a fair balance of interests. In the usual case there is a bit of bluff, some give-and-take, and neither party gets everything they want.
So how do you develop a strong bargaining position, one which will help you get the most from a transaction? Experience shows there are five basic keys which will determine who wins at the negotiating table.
1. What does the market say?
At various times we’re in a “buyers” market, a “sellers” market, or a market where housing supply and demand are roughly equal. If possible, you want to be in the market at a time when it favors your position as a buyer or seller.
Because all properties are unique—it is possible to buck general trends and have more leverage than the marketplace would seem to allow. For instance, if you have a property in a desirable neighborhood with few sales, you may be able to get a better deal than elsewhere. Or, if you’re a buyer who can quickly close, that might be an important negotiating chip when dealing with an owner who just got a new job 500 miles away.
2. Who has leverage?
If you’re on the front page of the local paper because your business went bust—and the buyer knows it—you have little clout in the bargaining process. Alternatively, if you’re among six buyers clamoring for that one special property, forget about dictating an agreement—the owner can sit back and pick the offer which represents the highest price and best terms.
3. What are the details?
A lot of attention in real estate is paid to transaction prices. This surely makes sense, but the key to a good deal may be more complex.
Consider two identical properties that each sell on the same day for $275,000. The houses are the same, the sale prices are the same, but are the deals the same? Maybe not. For instance, one owner may have agreed to paint the property, replace the roof, purchase a new kitchen refrigerator, and pay the first $3,000 of the buyer’s closing costs. The second owner made no concessions.
In this example, the first house was actually sold at discount—the $275,000 purchase price less the value of the roof repairs, closing credit, and other items. If you’re a buyer, this is the deal you want. If you’re a seller, you would prefer to be the second owner and give up nothing.
4. What about financing?
Real estate transactions involve a trade—houses for money. We know the house is there, but what about financing? There are several factors that impact the money issue:
- Has the buyer been pre-qualified or pre-approved by a lender? Meeting with a lender before looking at homes does not usually guarantee that financing is absolutely, unquestionably available—a loan application can be declined because of appraisal problems, title issues, survey findings, and other reasons. But, buyers who are “pre-qualified” or “pre-approved” (these terms do not have a standard meaning around the country) at least have some idea of their ability to finance a home and know that they are likely to qualify for certain loan programs. The result is that pre-qualified buyers represent less risk to owners than a purchaser who has never met with a lender. If the seller accepts an offer from a buyer with unknown financial strength, it’s possible that the transaction could fail because the buyer can’t get a loan. Meanwhile, the owner may have lost the opportunity to sell to a qualified buyer.
- The lower the interest rate, the larger the pool of potential buyers. More buyers equal more potential demand, good news for sellers. Alternatively, high rates or even rising rates may drive buyers from the marketplace—and that’s not good for anyone.
- It used to be that downpayments were a major financing hurdle—but not anymore. For those with good credit, loans with 5 percent down or less are now widely available. In fact, 100 percent financing, mortgages with nothing down, are now being made by conventional lenders. Reduced downpayment requirements are good for both buyers and sellers.
5. Who has expertise?
Imagine you’re in a fight. The other guy has black belts in 12 martial arts—and you don’t. Who’s going to win?
Brokers have long represented sellers, and now buyer brokerage is entirely common. In a transaction where one side has representation and the other does not, who has the advantage at the bargaining table?