No matter what you see on TV home buying shows, only rarely does a seller say yes to a first offer from a buyer. In most instances, you should expect a "counter offer." Then the negotiation starts.
If you are working with a buyer's agent, your agent will be the go between who actually presents your offer and handles the face-to-face (usually agent-to-agent) negotiation for you. If you are working with a dual agent, then remember that the agent is fundamentally a seller's agent who must represent the seller's fiduciary interest even if the agent is scrupulously fair and ethical with you. If you are dealing solo with a FSBO seller then you handle all the negotiations or you could hire an experienced real estate attorney to help you with these details.
What items are open for negotiation?
Typically, the main focus of negotiation is what you will pay for the house, but other factors also come into the negotiations, many of which can affect what you pay overall for the house. Here are some of the items that may be part of your negotiations.
- The price you will pay for the house. Typically the seller will counter your offer with a price lower than the original listing price but higher than what you've offered. You in turn may wish to counter the counter offer. Or you may wish to ask for other concessions, such as the seller paying all or part of your closing costs. All counter offers, yours and the seller's, should be made in writing. The recommended way is by amending and initialing the changes on the original contract form.
- The seller paying all or part of the closing costs. You may be willing to agree to a slightly higher price, for example, if the seller agrees to pay for your closing costs. For an explanation of various aspects and costs related to closing, see the Money Matters Mortgage Guide. Keep in mind that your lender may have limits on the amount that a seller can contribute towards closing costs on your behalf.
- What repairs are necessary and who will pay for them.
- Date of the closing and your taking possession of the house. For example, the seller might take a little less than he wants because he needs to get out of the house quickly and would be really happy if you could close in two weeks.
- Agreement on contingencies.
- What appliances remain with the house as part of the purchase. What personal property is included in the purchase. You might think that the stove and refrigerator stay with the home; ditto for the interior window shutters. Not so fast—sellers have been known to take even built-in appliances and fitted wall-to-wall carpet. Also maybe with your retro tastes, you wish to buy the custom horseshoe shaped, conversation "pit" sofa designed just for the great room. It's certainly a good idea to spell out in the contract what appliances are included in the purchase. It's a must for any personal property you wish to purchase from the seller.
Some tips on negotiating
Negotiations for a home—something you really care about and that you'll be borrowing a big chunk of change to purchase—often produce tension. But you can do your part to make them go well. These tips can help.
- Keep your emotions out of the mix. Even if you've fallen in love with the house, take your enthusiasm and your anxiety (will I get it? I've just got to have it!) out of the picture. Stay calm and noncommittal; don't give away your bargaining power. Stick to your budget. Remember, there are always more houses out there—you don't have to break your budget or give up important contingencies. Always be prepared to walk away.
- Set a time limit for a response to your offer and counter offers. Don't let the seller drag the process out; set a fair time limit for a response. Depending on the situation, that might be a couple of days or more or as you get further into the negotiations even a few hours.
- Be patient. Don't be badgered into making too quick a move or going beyond your budget.
- Be courteous. Even if you think the seller is nuts about the value of his house or has maintained it like a slob or has made a ridiculous counter-offer, don't say so. Keep the negotiations as cordial and neutral as possible.
When you and the seller have agreed, what size deposit—"earnest money"—should you give to "seal the bargain"?
To show that you're a serious buyer, you back up the contract with a "good faith deposit" or "earnest money." This deposit is usually in cash, is usually applied to your down payment, and should be held "in escrow" by the agent (who is legally required to keep the money in a special account separate from personal or agency funds) or by a neutral third-party escrow service. You should not give your deposit directly to the seller (if you're buying a FSBO home, use an escrow service).
How much should your good faith deposit be? You'll hear different recommendations from different sources and common practice may vary around the country. We recommend avoiding a large deposit (which could put your money at risk in a worst-case scenario)—usually a pre-approval letter from your lender will impress the seller more. On most homes a deposit of $1,000 to $5,000 is probably enough—generally speaking, keep the deposit as low as possible. Your offer to purchase details the conditions and terms under which your deposit is returned should the outcome of one of your contingencies cause you to withdraw your offer. Nevertheless, it's smart to put as little of your money at risk as possible.
©2010, FoolProof Financial Education Systems, Inc. All rights reserved.