Negotiation Skills

The Art of Negotiation when Buying and Selling Real Estate in the San Luis Obispo Area

Many real estate agents and clients think of negotiation as simply how they price their listing or their offer to buy. Maybe they include the concept of a counter offer in their bag of negotiation tools. The truth is that proper negotiation is much more than simply the price on a home or earnest deposit used in the offer. I’ve written a paragraph on a few of the most common opportunities and mistakes that I see in real estate transactions in San Luis Obispo County. My goal is to get you thinking about how many different ways there are to improve the outcome of your transaction. Once you put this foremost in your mind, you will begin to identify other opportunities unique to your particular transaction.

Negotiation is Really an Art in Real Estate

Never take an adversarial or even aggressive posture in ANY of your interactions with real estate agents, buyers, or sellers. Actually, just the opposite, you must be easy to get along with and easy to talk to. BUT NEVER FORGET that you are there for one reason; to solve your real estate needs whether you are buying or selling. This means that while you are negotiating the deal, every piece of information that you provide to “the other side” should be carefully released at just the right time, spoken in just the right way, and designed to improve your position in the transaction.

Experience has shown that the “art of negotiation” is not just a simple isolated exchange, but rather a continuing effort of the many aspects in the transaction. You must remember every action that you take during the entire transaction beginning with submittal of your offer to close of escrow is part of this negotiation. There are countless real estate transactions where the Buyer or Seller got past the “Offer and Acceptance” phase and then acted like the deal was done.  Don’t give up your position too early, don’t make unnecessary concessions, and don’t compromise without gain.

Structure the Offer for Acceptance

A good buyer’s agent will coach their clients about the best ways to position themselves and their offer to increase the likelihood of the Seller’s acceptance. This is true even in a strong buyer’s market; because if you want to pay the lowest price for piece of property, you then have to be sure that all the other components to your offer, other than price, are as attractive as possible.

This includes a conditional loan-approval from a reputable lender, timeframe for close of escrow, use of qualified inspectors, amount and type of earnest deposit, contingencies and how they are structured, comparative analysis of the property, and the professionalism and attention to detail in the offer. I highly recommend writing a personal letter about yourself and why you want to buy this home.  Sellers are people who can be touched by a personal note.

Remember that while price is very important to the Seller, so are other aspects of the deal. The Seller only wants to go through the escrow process ONE TIME, so if all the components of your offer must say “I can CLOSE”, your lower-price offer may be preferable to a higher offer that has contingencies. A good Listing Agent will ask the Buyer’s Agent about their client.

The Home Inspection is a Frequent Negotiation Tool

Negotiation is just as critical on the seller side of the transaction. For example, many buyer-agents will advise their clients to demand hefty price reductions from the seller for relatively minor repairs that are discovered during the Buyer’s home inspection. Most Buyers believe that if the cost of the repair is $1,000, they should get a $2,000-$4,000 reduction in the asking price. To some extent this is justifiable because you often don’t know the exact cost until the repair is done. Furthermore, if the Buyer has to coordinate the repair, they should be reimbursed for their time and effort.

However, there are agents that actually advise buyers to go ahead and make an offer close to the full list price on the home, knowing very well that there will be “something” on the inspection report they can use to get price reductions. When these items are discovered, the Buyer then demands unreasonable price reductions to the point that the Seller would never have entered the escrow had they known the price the Buyer really wanted to pay. The Buyer is effectively negotiating the price of the home “after the fact”.

By the time some Sellers get to this point in the transaction, all they want is for the home to close escrow. They are tired of the process and often willing to reduce the price just to keep things moving along. A good listing agent should advise that the Seller get a home inspection before they even list the property, and then fix the items discovered in the inspection. This approach completely removes the home inspection as a bargaining tool from the buyer’s side of the transaction. Even if you don’t want to invest the money to repair the items, you can still give the list of needed repairs to a potential buyer before they offer, stating that their offer needs to reflect acceptance of these items. Then you know the price reduction they expect BEFORE you get into a lengthy escrow.

Don’t Insult the Other Side of Your Transaction
This is perhaps the first place many negotiations fail. There is an art to creating an offer to buy a home at the best price. There are many points on the California Residential Purchase Agreement that should be understood by all parties so specific points can be addressed at the proper time.

Crazy Low-Ball Offers don’t Work

A crazy low-ball offer is another common way to insult the Seller. If you really don’t care whether you buy the property because you are just bottom-fishing anyway, then perhaps this works for you. However, for most buyers who are serious about finding a home that truly meets their needs, this is a mistake. Buyers spend a lot of time searching for the right home. Sometimes once they find a great home and start writing an offer, their priority suddenly changes from “find the perfect home”, to “Win this negotiation and get the house below fair value”.

Very rarely do you find “below market value” and “perfect home” in the same transaction. This whole concept defies logic; how many times have you shopped for a product and been willing to pay a premium for a particular product because it has all the features you highly desire? We all do this almost everyday. Now, how many times have you found yourself thinking;“I really like this product BETTER than the others, therefore I should be able to pay LESS for it”?

The point is that just attempting this tactic often kills the deal and the Buyer usually ends-up at square- one again. Is THAT your goal in shopping for a home? Spend your time at square-one? Stay focused on your true goals and negotiate accordingly.

Negotiate with DATA, not Opinion

I am not suggesting that price negotiations shouldn’t occur. Of course they should. The challenge is to identify a very good price that is justified by market comparables, but yet the offer is submitted in such a fashion that it does not insult the seller. The use of current market data to prepare and then support your offer is by far the most effective tool in a price negotiation. Showing a seller market data is way more persuasive than simply saying “I just feel like you are over-priced”. Another reason market data helps is because many real estate agents barely know how to perform a competent market analysis (CMA). They don’t really KNOW what the property is worth. If the Buyer-agent produces data that supports their client’s offer, many times the seller’s agent will be swayed by the data and will recommend that their seller-client accept the offer.

The mirror image of this (Seller prices high to allow room to negotiate) has the same effect on insulting the Buyer and forcing a lost negotiation.  A good listing agent will help the Seller create a package that shows the value of the home using market data. Again, this is way more persuasive than opinion.

Ask Inappropriate Questions Before You Offer

Before submitting an offer on a property, I always make a phone call to the listing agent to talk about the property and what the Seller is looking for in the way of an offer. Most of the conversation and questions are pretty obvious, however, I always include a few questions which I don’t really expect to be answered, but hey, you just never know. The fact is, I am frequently amazed at the kind of information other agents willingly share with me about the property or their clients position. In their defense, there really is a feeling of “fraternity” amongst agents and typically, real estate agents will provide way more information to another real estate agent than they would ever provide directly to a buyer or seller.

To some degree this is justified because licensed real estate agents (at least theoretically) have a much greater understanding of the laws, risks, and “normal” problems that occur in a California real estate transaction. They are therefore less likely to “do something stupid” with the information. The point is to ask as many questions as you can before you write your offer to buy. Do not be shy about the kind of questions you ask, just be smooth. The same is true on the Buyer’s side. As a listing agent, I will talk to the Buyer-agent and ask the same questions about the Buyer’s needs and expectations before I help my client prepare a counter-offer.

Always Create a Counter Offer

I have mentioned above that sometimes a Seller will get offended by a low-ball offer and refuse to make a counter offer. In my opinion, for a Seller, it is “almost” always worth a shot to counter back to a buyer with a reasonable price, even if they submitted a low offer. As a Listing Agent, I will counsel my client (very early) that sellers who can disengage their emotions about the home and view the sale as a business transaction, tend to do better than sellers making emotional decisions during the sale. I am not saying this is easy, but a good agent can really help by talking you through this process and making it easier.

Some real estate listing agents won’t spend the time required to type-up a counter offer unless the original offer is “in the ballpark”. They therefore might counsel their seller clients to wait for another, “more legitimate” offer. Honestly it really doesn’t take that much time to draft-up a counter offer. You just never know. I do not recommend endless back and forth offers if there is no significant movement towards common ground, but I do suggest that in most cases, at least one volley back across the fence is worth the effort.

Incentives Can be Offered by Sellers Too
There are many different kinds of incentives that a seller can offer, or a buyer can request in the transaction, and they are all part of the negotiation.

Reduce the price.
Help with closing cost
Offering a home warranty
Pay future HOA fees or landscaping and pool maintenance

The list is as long as your agent is creative, and often finding some little thing you can request or offer can make a deal work. Be sure to spend the time working on these possibilities and putting them in your arsenal of negotiation tactics.

There is so much more.
I have touched on many points of Negotiating a Transaction.  Each one is different and has it’s own special points to consider.  There is an art to negotiating, and I simply enjoy it as my goal is to end up in a Win-Win situation for all parties.  It is wonderful when the Seller and Buyer both mutually respect each other. I creatively help my clients prepare for and execute their best deal in any real estate transaction. Call me and I’d be happy to do this for you as well.