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How to Negotiate the House Price With a Seller
By Brandon Cornett
© 2011 All rights reservedReader Question: "We have been looking at home prices in our area using the Internet. It seems there's a lot of difference in pricing, even among houses that are similar to each other. I can only imagine this means some people are overpricing. What's the best way to negotiate the house price with the seller? It seems like a likely scenario."
So you've noticed the wild fluctuations in terms of pricing. This is a common scenario when home prices have fallen recently. I'll explain how to negotiate the asking price in a moment. But first, I want to explain why you're seeing such a broad range of listing prices.
Factors That Drive Up the Listing Price
There are two things that account for the big price differences you are seeing among homes that appear similar.
Reason #1 is that the higher-priced homes have something unique about them that adds value. Even if two houses look similar on the outside, there could be other key differences. Let's say you have a couple of two-story colonials with 2,000 square feet. One is priced at $215,000, and the other is listed for $245,000. What gives? These two homes look almost identical. Why is the other one so much higher?
But then you look beyond the surface and start to notice some differences:
- House #2 is on a corner lot that backs up to a greenbelt space.
- House #2 has a saltwater pool with a solar heater, and an outdoor cooking island.
- House #2 has an upgraded kitchen that outshines the "builder grade" kitchens in the rest of the neighborhood.
Based on these three factors alone, the homeowners with the higher listing can easily justify a higher asking price. That doesn't mean you can't negotiate the house price down closer to the other one. It just means their home offers more value than the lower listing, so they have set their asking price accordingly.
Reason #2 could be wishful thinking. Maybe there aren't many differences between the two homes. Maybe the owners of house #2 are upside down in their mortgage loan (they owe more than the home is worth), and they've priced the house based on what they need to get out of the deal. This might seem like a desperation move, but it's very common.
Nearly every homeowner in America had some degree of depreciation after the housing bust. So it's common for sellers to overprice their homes, based on what they were worth once upon a time.
See also: When to offer less than the asking price
Those are two scenarios that might account for a difference in prices between similar homes. But how do you know whether the asking price is based on true value or wishful thinking? You do this by looking at recent sales data and factoring in the upgrades.
Compare the House to Recent Sales
The best way to validate the seller's asking price is by looking at recent home sales in the area. Thus, it's also the best way to negotiate the house price during the offer stage. Your real estate agent should do much of this research for you. In fact, before you make an offer on the house, your agent should provide a list of comparable sales to help you determine your offer. This is one of their key duties as real estate agents.
The trick here is to find similar homes that have sold recently in the same local area where you're buying. Those are the three most important ingredients of a good comparable, or comp -- similar, recent and local. So you pull up this information, and then you compare the prices of homes that have sold recently to the seller's asking price.
If the prices fall within the same range, the seller has probably priced the home realistically. If the target house is priced above most of the comps, you would look for one of the two reasons we talked about earlier:
Possibility #1 - The home you're considering has unique features that justify a higher listing price. This might include a larger lot, an upgraded kitchen, a pool, etc.
Possibility #2 - The homeowner has overpriced the home for some reason. Maybe they don't realize the true value of the property. Or maybe they do realize it, but they're still in denial. In either case, they've probably set the price of the house based on their exiting mortgage obligation (i.e., flawed pricing strategy).
You might even have a situation where both of these factors are at work. Maybe the house has enough unique features to justify a $20,000 markup over the comps. But the seller has priced it $50,000 over the comps. This would require some interpretation on your part, and on your agent's part. You would basically have to put a price tag on the unique features of the home, and then add it to the comps that lacked those features.
Example Offer:
- The comparable sales were priced around $225,000.
- The target house is priced at $255,000.
- The only difference is that the target house has a renovated kitchen.
- The kitchen upgrades are estimated to be about $9,000 - $11,000.
- You could offer the seller around $234,000 and tell them why.
The thing you need to take away from this is that you can't negotiate a house price until you know what the market supports. If the market supports the asking price, the seller will eventually get it. If the market does not support the price, the home will probably stay on the market for a long time. You have more room to negotiate in the latter scenario.
It's perfectly acceptable to tell the homeowner why you are offering a certain amount. Your agent can communicate this reason to the homeowners themselves, or to their listing agent if they have one. Some buyers feel it's better to be "secretive" about the reasons for their offer price. I find this ridiculous. If you provide reasonable justification with your offer, it's more likely to be accepted. If you just throw out a number with no reasoning behind it, its more likely to rejected or countered.
If You Can't Negotiate, What Then?
Let's say you've made a reasonable offer for a house, based on comparable sales data and a thorough review of the home in question. But the seller turns down your first offer. What happens next? Most of the time, the seller won't just turn you down cold. They'll make a counteroffer of some kind. The exception to this is when a buyer makes a ridiculously low offer, thereby insulting the seller. You could end up with a "no thanks" type of response if you do this.
If the seller makes a counteroffer, it shows they are willing to negotiate the house price with you. Here again, you should communicate your reasons for making the offer. For example:
We have made an offer of $234,000 because we feel it reflects the current state of the market. We used several comparable sales to determine our offer amount. We then increased the offer to reflect the kitchen upgrades that have been done. We are offering approximately $9,000 more than the average of the three comps listed below.
This is the kind of thing your agent should be communicating to the seller and/or the listing agent. It will only improve your chances of getting the house. It also supports your efforts to negotiate the house price down from the listing amount.
If the seller comes back with a reasonable counteroffer (let's say $237,000), and you really like the house -- it's probably a good idea to accept their counter.
But if they only lower their price by a couple of thousand dollars, you need to ask yourself some tough questions. Your research suggests the home is overpriced. Are you prepared to pay more for a house than you think it's worth? And what happens if your mortgage lender's appraisal comes back lower than the purchase price? This could derail your financing. In this scenario, it might be time to walk away and revisit your second favorite home.
This article explains how to negotiate the price of a house during a real estate transaction. If you would like to learn more about this topic, be sure to use the search tool at the top of this website. It will give you access to a huge library of articles and tutorials. Good luck.
