Learn How to Improve Your Negotiation Skills and Get the House of Your Dream
Buying a house is one of the most important purchases in your life. You need to brush up on your negotiation skills for this is the time you need them the most. The difference between a good negotiation and a bad one can translate into thousands of dollars and can influence your life for years to come.
Negotiation has its own jargon – BATNA (Best Alternative to a Negotiated Agreement), proposal and counter-proposal, concessions, trade-offs, buyer and seller reservation points, bargaining range or zone of possible agreement (ZOPA), deadlocks, and leverage. Negotiation also involves selecting a strategy – “win-lose”, that unfortunately can transform into a “lose-lose” strategy, “win-win”, adversarial or collaborative. The focus of this article is not on formal jargon and strategies, but rather on some simple things you can do to become a better negotiator.
First, exactly what is negotiable when buying a house? Unfortunately, sometimes the only thing that comes to mind, is PRICE. But the price is not the only thing that can be negotiated. You can also negotiate the down payment, some closing costs, whose paying them, the closing date, financing contingencies, the home warranty, home repairs, a leaseback agreement, the appraisal contingency, the home inspection, or if furniture and/or appliances are part of the deal or not. As you can see, many items are negotiable, but in the end, everything translates into dollars in, or out, of your pocket.
Preparation is the key to any negotiation. When buying or selling a house, preparation means: know the market, know the neighborhood(s) you are interested in, know if it is a buyer’s or a seller’s market to determine who has the leverage, know if houses will disappear in a heartbeat and if you will be competing each time with multiple offers, or if houses will stay on the market for months.
If buying a house, when you come across one that you like, find out how long the house has been on the market and the selling prices of similar houses in the same neighborhood (i.e. the price of “comps” as they are called). It will be advantageous to know the seller’s motivation for selling the house: are they purchasing a bigger house, are they moving to another region due to a job opportunity, are they downsizing, or are they facing foreclosure. All this information can give you insights into how motivated the seller is to negotiate, and then you can structure your offer to the specific seller.
Don’t forget to research websites like Zillow.com and Trulia.com and to consult with a realtor that works in your desired market. These sources can provide you with precious information such as:
So, remember that knowledge is power and when armed with knowledge and facts, it will definitely be easier to convince a seller to agree to a lower price and better terms.
Know your reservation point (i.e. the dollar amount beyond which you will not go; also known as resistance point). For buyers, this is the most they will offer and for sellers, this is the lowest offer they will accept. In negotiation jargon, these two limits define the zone of possible agreement (ZOPA).When purchasing a home, it is a good practice to get prequalified for a mortgage, but then you need to decide how much you are comfortable actually borrowing. It may be less than the amount you are qualified to borrow.
Present an initial offer that is based on your research, not fantasy or emotions. Always remember how much you can afford to pay. This means you cannot fall in love with the house and forget about all you have learned during preparation. If you become emotionally involved and want a property too badly, you lose your negotiation power completely. Some experts recommend that the initial offer be an uneven number. For example, instead of offering $300,000, offer $301,250. This type of offer can create the perception that you are a savvy buyer that knows the market.
Realistically assess the risk, based on current market conditions, of submitting a ridiculously low first offer that could antagonize the seller to the point that negotiations never even get started. At the end of the day, you want to buy and the seller wants to sell, so avoid personality clashes.
Silence is golden and can be quite an effective negotiation tool. Ask a question or present an offer and then listen. The silence may be deafening and uncomfortable, but can save you thousands! Never reveal how much you can and are willing to pay for the home. Don’t brag about the maximum amount you are willing to pay and don’t try to show off by going to the house in an expensive car and wearing a designer suit/dress that screams affluence.
After the seller receives the first signed offer, expect the real estate negotiation dance to commence. Always keep in mind that market conditions play a key role in how much negotiating will actually occur. In a seller’s market, where the seller receives multiple offers, the seller may refuse to negotiate and may be reluctant to make any concessions. Remember what we discussed earlier, negotiations should not be limited merely to price. Anything and everything is negotiable, and the more you know about the seller’s motivation, the better prepared you will be to structure a deal that is unique and acceptable to the seller. Remember, the highest offer is not always the one that is accepted, so be creative in structuring offers and think outside the box.