How to negotiate a home purchase in a seller’s market
Negotiating is a muscle most of us don’t exercise. Almost all transactions in our daily lives are straightforward; nobody’s haggling over a loaf of bread or an Uber ride.
But when it comes to making the single biggest purchase of our lives (our homes), we’re expected to know what to do. But that’s easier said than done. Buyers often make the same common mistakes in negotiating a home sale, says David Greene, co-host of the BiggerPockets Real Estate Podcast.
These false steps include focusing solely on the listing price and making the transaction one-sided. By taking the emotion out of the transaction, buyers have a better chance of working out a deal that benefits everyone.
That said, negotiating is not always a viable tool. In a market where there are multiple bids on a single home, the seller is less likely to make concessions since they’re holding a royal flush. In this situation, the seller usually goes with the best offer.
Here we’ll look at a couple of negotiation strategies as well as when to walk away from a deal and when to stay.
What today’s market looks like
The current housing market seems to be stuck in amber, caught before COVID-19 swept the world. The same driving forces that were present before the pandemic are still here: low inventory and high prices.
Fewer homes on the market mean one house in some areas can get multiple bids, giving sellers the advantage. What’s changed is that credit availability has shrunk, which affects the number of buyers on the market. In other words, this is still a seller’s market but, since fewer buyers qualify for a mortgage, the competition might have waned a bit.
Although home sales fell 21.8 percent in April, according to the National Association of Realtors, they have slowly picked up steam over the last five weeks, a positive sign for recovery. This has kept prices up at pre-pandemic levels in most of the country. Not only is this because of low inventory, but many homeowners are waiting to sell until the economy stabilizes and the country reopens. Some experts forecast a rise in home prices in 2020.
“Given the surprising resiliency of the housing market in the midst of the pandemic, the outlook for the remainder of the year has been upgraded for both home sales and prices, with home sales to decline by only 11 percent in 2020 with the median home price projected to increase by 4 percent,” said Lawrence Yun, NAR’s chief economist, in a statement. “In the prior forecast, sales were expected to fall by 15 percent and there was no increase in home price.”
There are instances, even in a seller’s market, where the buyer has room to play, here are a few things to look out for.
How long has the house been on the market?
The longer a house has been listed, the better your chances of striking a deal. If it’s only been on the market for two weeks, sellers are expecting a clean, competitive offer.
For homes that have languished on the vine longer, the seller’s greed might turn into fear, Greene says. This is where having a knowledgeable real estate agent can be instrumental. They can advise you on the first offer to start negotiations. The general wisdom is to offer between 5 to 10 percent below asking.
“If a house has been sitting on the market for weeks or months, it gets a stink. At that point, your lower-than-asking-price offer will feel like a victory for them,” Greene says.
Some buyers will only look at older listings, to give them more negotiating power.
Look at the after-repair value of the home
One way to score a deal in this market is to shop around for fixer-uppers, says Lloyd Segal, president of the Los Angeles Real Estate Investors Club. If you plan on repairing the home, you should consider the after-repair value (ARV) by looking at similar homes in the area that are in good shape.
“For investors, you have to buy 65 percent less than the ARV because you have to renovate the house, pay realtors, escrow, and interest on the loan,” Segal says.
However, in this market, the ARV is a moving target. Although many experts predict a strong rebound, Segal points out that historically home prices have dropped after massive health-related threats.
“Stand back and wait until the dust settles. If you look at how the market plays out after every pandemic — SARS, Ebola, there’s always a dip in market prices of homes within months,” Segal says.
Find out what the seller wants
A vital aspect of negotiating is understanding what the seller wants. It’s key for buyers to get out of their heads and learn what the sellers’ needs are; this can provide helpful information for negotiating. One tactic is to let the seller do the talking.
“Buyers usually ask ‘how do I make sellers give me what I want?’ Instead you need to listen to what they’re saying. And the secret is to give them something they want — that doesn’t matter to you — to get something that does,” Greene says.
One example of this is agreeing to rent the seller the house for 30 days after purchase, so they have time to look for a house, in exchange for a discounted price.
Don’t let your ego get in the way of your dream home
In a tight market like this one, knowing exactly how much a house is worth to you (not necessarily what the asking price is) is crucial.
Often buyers get caught up in the numbers without thinking about the value of a home. This is especially true in bidding wars. Greene advises buyers to think about the absolute maximum amount they would be willing to spend without regretting the purchase.
“The truth is agents are successful about 20 percent of the time when there are multiple offers. In this scenario, the person who wants the house the most gets it,” Greene says.
Ask yourself if you would feel good about losing a house that goes for $5,000 over asking price. What about $10,000? Keep going down that path until you get to the number that no longer makes sense, that’s when you know how much the house is worth to you.
In all of these situations, a good real estate agent can be your best friend. They know the market well, so they can advise you on inventory, home prices, and what you can expect in terms of best offers. Let them know what your goals are, how long you plan on staying in the home, and what features are important to you. By homing in on what you want, your agent can help navigate you toward a house that ticks the important boxes.
Featured image by FG Trade of Getty Images.
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