The most stressful part of any real estate deal is the setting of the starting offer price. This is THE crucial decision. From here on out, everything depends on this decision. The price has a direct effect on how the negotiations are handled. Most Real Estate Investing courses will tell you that the offer should start at 50% of the Asking price. In a Buyers market, that might work. From experience in different market conditions, this does not work as well as they say.
I have a simple system. My respected agent tells me what a house like that, in perfect condition, is going to sell for historically. Then we discuss what repairs, renovations etc the property needs to get to that condition. I subtract the contractor cost of those repairs/renovations then I subtract 10% of that number. That is my starting number. Yes the system has some flexibility. It has too. For example. The property is listed at $200,000, We estimate that the contractor cost of the repairs/renovations to get it to that value are $25,000. That means the price is $175,000 I subtract 10% of that. ($17,500) This is my negotiation option. So my opening offer is $157,500.00.
I have had agents tell me they could not present an offer that low. If that happens fire that agent. I have presented offers where the agent was asked to leave and there were no negotiations. Until a few days later. In that case, you as a buyer know your in the drivers seat. If your first offer is accepted, you definately offered too much. Your first offer should always get a no.
You need to remember that the negotiations are really a tennis match. The price will fall somewhere between your first offer and the listing price. If you make that difference big, then the middle is lower. In the above example the middle would be $178,750. If our first offer was 170,000 then the middle would be $185,000.
The setting of the initial offer price is very emotional. The Buyer is emotional about getting the house they want. The Agents are emotional because they are about to get paid. The Seller is emotional because they now get the opportunity to satisfy the reason or need for selling. Everyone is heavily emotionally involved. The problem is that the initial offer is about money. Money has no emotion. So how do we put the emotions and the money into perspective?
The basic motivation of each person is very simple. The Buyer wants to pay the least they have to, and, actually get the house. The Seller wants to get the most money for the house, but still sell it. Then you have the Agents, who want a SALE, so they get paid, and secondly they would like to see the highest possible price, because that is the basis on which they are paid. The Sale happens only when we satisfy everybody to some degree. The major decision makers are the Buyer and the Seller. The Agents are the influencers. Let’s look at how all of these interact.
The process starts at one end with the Seller making the decision to Sell the house. WHY THE SELLER IS SELLING is absolutely the key thing the buyer needs to know. The reason for this is, that once that reason, is satisfied, the Seller will sell. There is a huge difference between if the Seller just WANTS to sell, and if they NEED to sell. The Seller has called an Agent, discussed the selling price of the house with the agent, and established a listing price.
The selling Agent has influenced that listing price, in many ways. There has been some negotiation as to listing price, because no Agent wants a listing with a price so high they know it will not sell. During the listing process one of three things happened. The listing price was either equal to what the seller expected, was more than what the Seller expected, or was less than the Seller expected. All three have a major impact on the final selling price and the Sellers emotions during the Buy/Sell negotiations.
The ideal combination for the Buyer, is a Seller, who has a listing price higher than expected, and NEEDS to sell.
At the other end of the deal, the Buyer has followed the steps in the Buying prosess in order, and has found a house that matches all of their needs, has most of their wants, and looks like it has a negotiable price. They have made a second visit and are ready to make an offer. As with the Seller, the Buyer will feel that the listing price of the house is either higher than the perceived value, equal to the perceived value, or lower than the perceived value. The Buyers Agent has influenced the perceived value of the property by having shown the Buyer several houses in the same price range.
The ideal combination for the Seller, is a Buyer who has already emotionally taken ownership of the home, and feels that the Asking price is lower than the perceived value.
There are 9 possible combinations of the three states of each Buyer and Seller. I’m not going to do all of them. Since This is an Investing website, we will cover the easiest and hardest conditions for the Buyer to get the lowest price.
The easiest scenario for the Buyer to get a low price, is where the Seller feels the Listing price is higher than expected, and “NEEDS” to sell; and the Buyer wants the house, but doesn’t need to have it. In this scenario, the Buyer can get a very good deal. The Seller’s NEED to sell, means that they have a higher Fear of loss. In this case the D.O.M. or Days On Market, is a key fact to know, as well as if there have been other offers that have not closed. The greater the need to sell, and the longer the DOM, the more negotiable the price becomes. If a deal has fallen through as well, then this is a perfect storm for the Buyer. If the Buyer is confident in his finances (having seen the mortgage broker first) he is dealing from a position of strength.
Under these conditions a very low starting price is highly recommended. Even if the Seller is “insulted” by the price, at least they have an offer to work with. This should be the attitude the Buyer’s Agent puts forward to help ease the “insult”. Remember, the Seller is getting nervous about the ability of the house to sell. The need to sell may be increasing as well. The Listing Agent has spent money on advertising they need to get back, the listing agreement might be running out, so the Listing Agent too, has a high Fear of Loss. The Buyer’s Agent wants a Sale, so they get paid. All the right emotions to save money. This is normally a very good scenario for the Buyer as long as his Agent believes that any Sale is better than no Sale. It is in this scenario, where walking away can be a very useful strategy.
The worst scenario for a Buyer getting a good deal is, if the Buyer is in the emotional state of “I MUST HAVE THAT HOUSE”, the Seller has a listing price lower than they really want, and the Seller does not need to sell. The “Fear of Loss” is very high on the part of the Buyer, and any offer (even full price) will be less than the Seller really thinks the house is worth. Also both Agents know that this is the best case for them to get the maximum commission. In this scenario the best a Buyer can hope for is getting something non monetary through the use of conditions.
Getting the lowest price for a house is a combination of emotion and circumstances. The more that a Buyer can control their emotions the better the deal they will make. I have always made the best deals on the properties I really didn’t care if I got, or not. I have never made a good deal on a property I just had to have.
Just for information, let’s look at the real impact of some of the numbers: For every $1000.00 you save on the purchase price, you save $7605.00 over the life of the mortgage*. (*Based on 25 yrs @5%) Every $1000.00 is worth $50.00 in commissions to the Agents, either made or lost. (Based on 5% commission rate) An extra $1000.00 on the mortgage, costs or saves roughly $5.85 per month. (Based on 25 yrs @5%) So becareful about getting hung up over $1000.00.