In simplest terms, a real estate negotiation is a discussion that generally takes place between two sides with an issue to resolve. Both sides attempt to use influence and/or leverage to obtain their respective goals, which are often not the same. The nature of these discussions can take on a “win-lose” or a “win-win” approach. According to Saul Alinsky, “…there is an art of how to take and how to give.” Regardless of your political views I think we can all agree, Mr. Alinsky’s notion seems like a good starting point for crafting a strategy on how to negotiate. And just for the record, even William F. Buckley thought Saul Alinsky was highly effective. See, even political polar opposites can find some common ground for agreement! It might be stretching it a tad to say those two figures were ever in total agreement, but total agreement is irrelevant to a successful negotiation. But how is Mr. Alinsky telling us to attempt to optimize outcomes for two sides with conflicts of interest in a real estate negotiation?
One can infer that Mr. Alinsky is telling us that “reciprocation” is an extremely influential motivator. One may further presume from his statement that in order to parley successfully, both sides must find a common ground along with understanding what the other side wants. Once you understand the desire of the other side you can begin to work toward reaching a reasonable solution that both sides can live with – the “win-win” approach. In residential real estate, the common ground involves a person who wants to sell their home and another person who wants to buy the home. The problem – the seller normally wants the best price the market will allow and a buyer normally wants to pay as low a price as possible. All too often, sellers and buyers tend to only focus on their own personal wants and needs. And as Stephen King explains, “I believe the road to hell is paved with adverbs, and I will shout it from the rooftops.” Obviously Mr. King is speaking about using too many adverbs in writing, however, in our case, one adverb, “only,” can derail the sales process and make everybody’s life a living hell. How do we prevent that? Understanding what is reasonable and unreasonable to a seller or buyer in any given situation will go a long way to solving the dilemma! There are typically two main items that come up in any real estate negotiation. The first involves getting a home under contract and the second, and often most difficult, is resolving the option period during which most buyers will inspect the property and look for repairs to be made.
The First Real Estate Negotiation
There is an old saying, “the buyer gets two bites of the apple.” The first bite (negotiation) in a real estate transaction involves a buyer and seller arriving at a reasonable sales price based on the location of the home, the condition of the home from a visual inspection, and a review of the Seller’s Disclosure Notice (before an inspector looks at the home); and the terms involved. The written agreement based on these four real estate fundamentals (price, location, condition, and terms) is what we call an executed contract. But is the contract reasonable? Well, it’s reasonable to believe that homes in popular locations, with high quality amenities, and are not in need of any major repairs normally sell for a higher price than similar homes in the same or less popular areas, with standard amenities, or that require some major repair work. It’s also reasonable to believe that terms of a sale like cash and a quick close, where the buyer is not asking for assistance with closing costs, can generally bring a lower sales price. Just as it’s reasonable for a seller to ask for a higher sales price when the buyer is financing the sale with an extended closing date and has requested seller paid closing costs. In the former example, the buyer using cash and a quick close is providing favorable advantages to a seller. Consequently, a seller may be more inclined to give the buyer a more advantageous sales price. In the later example, the seller is assuming some risk by taking his home off the market for an extended period of time while the buyer completes his financing requirements and in addition, they’re also helping with the buyer’s closing costs. Therefore, it’s reasonable for the seller to normally want a higher sales price based on the risk and the seller paid closing costs involved.
Let’s take a look at a basic scenario. If a seller has priced his home in line with the market for $300,000, it’s probably unreasonable for a buyer to expect the seller to accept a sales price of $290,000 based on the buyer being approved for a loan coupled with a request for $8,000 in closing cost assistance. In essence, the buyer is asking the seller to sell his home for $18,000 below market price. That is not a win-win solution. There are many other factors that come into play that may assist the buyer and seller in this example to reach an agreement. If the buyer absolutely needs the closing cost assistance than he should be prepared to go up on sales price. Other terms could be adjusted also. For example, the buyer could pay the seller’s title policy or allow a seller who needs more time to move to remain in the home on a seller’s leaseback. Every situation is different and one size does not fit all. However, these are examples of each side “giving something to get something.” Too often negotiations break down over minor details because one side or both are looking for an “I win – they lose” solution. Just think, how many times have we seen a difference of several thousand dollars lead to a transaction’s failure? As a general rule of thumb, when a buyer is financing a purchase, each $1,000 financed will cost a buyer $6 toward his monthly mortgage payment. So a $2,000 difference in sales prices is around a $12 a month on a monthly mortgage payment. Now let’s jump forward and look at how we resolve the option period and repair negotiations. This is usually referred to as the second bite (negotiation). And it’s usually the more contested of the two negotiations for myriad of reasons.
The Second Real Estate Negotiation
The general purpose of the option period is for the buyer to have the home inspected and, if required, have the seller and buyer renegotiate the price and/or repairs. Remember, initially the buyer and seller based the price of the home on the condition known from a visual inspection and review of the Seller’s Disclosure Notice and any other information delivered by the seller. Therefore, once an inspection has taken place, latent defects not known or disclosed can impact the price. If a buyer is going to have to replace a roof because the current one is not functioning as intended (not known at the time of executing the contract), then the buyer has a reasonable right to come back and ask the seller to remedy the situation. A prudent seller will figure out how best to resolve the roof issue in order to keep the transaction on track to close. Unreasonable sellers fail to consider that if they let the current buyers walk away, the next reasonable buyer will probably ask for the same or similar repairs or resolutions. Tree damaged roof shingles, leaking air conditioner coils, a faulty septic system, a rusted air conditioner drain pan, plumbing leaks, and other items are not going to disappear upon the next buyer’s inspection. It’s very reasonable for a buyer to ask a seller to resolve safety issues as they have a high probability of causing injury. Or to correct water penetration issues that could lead to mold problems. And correct material defects that severely degrade the performance of major systems such as the foundation, roof, heating and cooling system, electrical system, plumbing system, appliances, pools, septic systems, or wells. On the flip side, it’s unreasonable to expect sellers to cure code items in older homes, when those items were not required at the time the home was built. For example don’t send the seller a laundry list of requested repairs for a home built in the 1970s which essentially represents a remodel and code upgrade of the entire home to present day standards. When a buyer chooses to buy an older home, he should know and accept this. Also, if the seller holds out for at or above full price on the sale at the beginning, it’s reasonable for a buyer to expect a seller to be a bit more flexible on the repairs. The buyer will want the full price home to be in “full price condition,” which means no major problems. Accordingly, if the buyer has absolutely beat the seller up on price right at the outset, you can’t usually expect to beat the seller up again on repairs and expect the deal to proceed smoothly.
Focus on what is reasonable. Clearly understand what the other side wants and articulate what it is you want. This will most likely lead toward a win-win solution when reasonable people are involved. And above all, remember real estate negotiation isn’t about egos – they only tend to get in the way of the solutions. It’s about finding the best alternative for all involved. There will be times when you simply can’t reach an agreement, but more often than not, you will.
image courtesy of US Mission Geneva