Checklist for Negotiating the House Price
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When buying a home, there's a good chance you will have to negotiate with the homeowner at some point. Your real estate agent can help with this process. But the final decision is yours to make. So you need to understand the steps to negotiating the price of a house. In this article, you will learn how to make an offer based on market research -- and how to negotiate accordingly.
Step 1 - Review comparable sales.
When you find a house that meets your needs, the next logical step is to make an offer on it. But there's an intermediate step here that's just as important as the offer itself. You need to review comparable sales in the area to determine the validity of the asking price. In other words, you need to make sure the asking price is reasonable based on current market conditions.
You'll probably hear your real estate agent use the term "comps" a lot. This is short for comparable sales. These are homes that have sold recently in the area where you want to buy. More specifically, they are similar homes that have sold recently. By looking at these sales prices, you can find out what people have been willing to pay for similar properties.
You need to do this kind of market research every time you submit an offer. If you end up buying the first house you make an offer on, you'll only have to go through the process once. Otherwise, you should be reviewing comparable sales for each home you're considering.
Key lesson: Comparable sales are your best tool when negotiating the price of a house. This is the best way to determine the current market value of a house.
Step 2 - Compare the comps to the target house.
When I refer to the "target" house in this article, I'm talking about the one you are thinking about buying. So the next step in the process is to compare the comps to the home you're about to make an offer on. You are looking for similarities and differences, and how they might affect the value of the target house.
If all of the homes are fairly similar, then you could probably offer the average of the comparable sales. But if the target house has certain unique features that would increase its value, you may have to offer more than the comps (see step 3 below).
Obviously, you will have to visit the house before you can make this kind of comparison. It would also help to visit the homes you are using as comps. You won't be able to go inside those homes, since they will have new residents living in them. But you can at least look at the outside of the property. You can probably find some pictures of the interior as well, if the home was listed recently. This will help you compare the comp houses to the target house.
Key lesson: You have to know how the home you are considering stacks up to other homes sold recently. This will help you when shaping your offer, and also when negotiating the house price (if it comes to that).
Step 3 - Add or subtract value as needed.
At this point, you have several pieces of the pricing puzzle. You know what similar homes have sold for recently. You have a pretty good idea what those comps have going for them. You've evaluated the target house inside and out. And you know what the seller is asking for the house. Now it's just a matter of comparing apples to apples.
Were all of the homes fairly similar in their features? Or does the target house have certain qualities that set it apart? Has the home been renovated recently? Does it have a swimming pool where the others do not? Does it have a corner lot, a larger lot, or a better view?
These are the kinds of things that could add value to the home you're considering. If the comparable sales lack these features, the homeowner could justify a higher asking price. The key is to try to put a value on each of the unique features. This is something you real estate agent can help you with.
Step 4 - Make your offer and include the comps.
You are now one step closer to negotiating the house price with the seller. But you won't have anything to negotiate until you submit your offer. So that's what we're going to talk about next.
You will probably hear your real estate agent use the terms "purchase agreement" and "contract." These terms are somewhat interchangeable. The purchase agreement is basically your offer on paper. When the document is signed by both parties, it becomes the real estate contract.
Your offer will include the amount you're willing to pay for the house, your earnest money deposit, your proposed closing date, and possibly the details of your financing. These documents are fairly standard. So you can simply fill in the blanks with the key items I just mentioned.
It's also a good idea to include the comparable sales data with your offer. This will help you in several ways:
- First, it will show the seller and the listing agent that you have thoroughly researched home prices in the area. You don't want them to think you pulled a number out of thin air. And if the comps support your offer amount, the seller will be less likely to reject it.
- It also helps you later on, when you're negotiating the price with the homeowner. You will be able to refer back to the comparable sales to justify your offer amount.
If you're lucky, there won't be any negotiating at all. The seller might just accept your offer the first time around. It can happen. If your offer is reasonable, and you back it up with sales data and other explanatory notes, the seller might just take it. That's the point of doing this research in the first place. It increases the chance of having your offer accepted, and it helps you when negotiating the house price.
5. Be prepared for three possible outcomes.
When you make an offer to buy a house, one of three things will happen next:
- The homeowner will accept your offer as outlined in the purchase agreement.
- The homeowner will counter your offer by making changes to the purchase agreement.
- The homeowner will reject the offer outright without a counterproposal.
You must be prepared for each of these scenarios. The first one is easy. If the seller accepts your initial offer as outlined in the purchase agreement, you've obviously done something right. If the seller rejects your offer without countering in some way, there's not much you can do but make a second higher offer. If the seller comes back to you with a counter-offer, the negotiating has begun.
How you respond to the seller's counter-offer will depend on several factors. And that's what we're going to talk about next...
6. Have a maximum amount in mind.
When negotiating the price of a house, you must have a maximum amount you are willing to spend. This will partly be based on your pre-approval. If the mortgage lender has pre-approved you for $275,000, then you shouldn't be negotiating a $300,000 sale price.
Your spending limit should also be based on those comparable sales we talked about earlier. You don't want to offer more for the home than it's currently worth. If you do this, you may have problems when it comes time for the lender's appraisal. You could also have negative equity from day one.
7. Don't nickel and dime the seller.
Let's say you have found the house you want to buy, and it's listed for $285,000. You look at some comparable sales and find that the average of those sales is closer to $275,000. The homes are fairly similar. The target house does not seem to offer any unique features that would justify the higher asking price. So you make an offer of $275,000.
The seller comes back with a counter offer of $279,000. They have lowered the asking price by $6,000. At this point, you need to ask yourself how badly you want this house. If you're in a market with a high level of buying activity, you probably don't want to nickel and dime the seller at this point. If you try to whittle the sale price down again, you could end up losing the home to another buyer.
So ask yourself, is this home worth close to $279,000? Does that amount fall within my budget? Is there a high likelihood the home will appraise for $279,000? And how badly do I want this house?
8. Understand the type of market you're in.
I touched on this topic already. When negotiating the home price, you need to consider the type of real estate market you are in. Are you in a buyers' market where homes are selling slowly? If so, you have more leverage when it comes to negotiating the price.
But if you're in a market where homes are selling quickly, you should be very careful with the seller's counteroffer. If they come back with a reasonable price based on comparable sales, it's probably best to take it. You can go back and forth with a seller in a buyers' market. But if you try that in a sellers' market, the home could slip right through your fingers.
9. Don't let your ego get in the way.
This is a common mistake among first-time buyers. They start negotiating the house price with the seller, and then they start taking things personally.
"They're just trying to get the last word in. They can't stand the idea of moving forward with the price I'm offering. They're being stubborn."
Again, you need to think about what you stand to lose here. A real estate transaction should be treated like a business transaction. You need to weigh the asking price against current market conditions. You need to keep a cool head and support your offer with hard data. If you start taking things personally, you are more likely to make a bad decision.
Do you really want to lose what might be the ideal house for you, just because you feel the seller is being unfair?
10. Know when to walk away.
There's a good chance you will encounter a seller who is not willing to negotiate. What you do next will come down to the asking price.
- If the seller refuses to budge because the home is currently priced realistically, then you might want to pay the full asking price.
- On the contrary, if the home is overpriced and the seller refuses to lower it, it might be time to walk away.
Some homeowners are delusional or in denial about the true market value of their homes. If you encounter one of these sellers, you might not be able to find common ground. Negotiating the price of a house is only possible when both sides are being realistic.