While I spent well over three decades writing books and teaching the subject of negotiations, some of the best lessons I learned on the subject came from luck.
Many investment pundits recommend taking full advantage of the current buyer's market in real estate. Lenders are foreclosing on many properties, often selling them at a loss. At the same time, many private sellers are listing their property on the market well below what they paid for it. This presents wonderful buying opportunities for those who can take advantage of them. If you are going to buy property, you want the best price you can get.Miller Family on the Move
In the late 1970s, we moved our family from Chicago to Atlanta. Two of our three children were in high school, so the timing was not ideal. To help sell the kids on the idea, we made a family pact to vote on our new house. We'd continue to look until we had a unanimous "yes."
After a couple of days of traipsing around the school district we wanted to live in, we had narrowed it down to two homes, each with all five "yes" votes. The asking prices were about $2,000 apart, and we really could not decide.
The next morning we met the realtor and told her about our strategy. We would put in an offer on both houses at 50% of the asking price. I asked her to tell each of the sellers that we loved their home, were prequalified, and knew that the ultra-low offer would not be accepted. She would then explain that we really wanted them to make a counteroffer. Then we would buy one of the houses; there would be no further negotiations.
The realtor asked, "What if they both accept the offer?" I cocked my head, looked at her, and then she grinned and said, "I guess both of us would make some money then." She got it.
She told us to keep our expectations in check, as the average listing in the area sold at 97.5% of the listing price. We were prepared to pay that; it was really just an easier way for us to decide which house to buy.
So off she went with our offers. When she returned to our motel, she showed us the first counteroffer, a 2% price reduction.
Then, grinning from ear to ear, she showed us the second counteroffer. The seller reduced the price by 18%. We were shocked. My first question was why the huge drop in price, fearing there was something wrong with the house that I was unaware of. Fortunately, the realtor had known the seller's family for three generations. The current owner was a very wealthy member of the medical profession. He was living in the house with his new (much younger) wife. Their new home on the lake was under construction and would be completed in 30 days. There was nothing wrong with the house; they were simply eager to sell.
What I really did was put the sellers in a competitive bidding situation - but I must confess, I did so without realizing it.Understanding the Strategy
In any real-estate transaction, there are only two relevant numbers: the buyer's high and the seller's low. If the buyer's high is less than the seller's low, the transaction will not take place.
At the same time, as buyers we do not want to pay any more than the seller's low if we can avoid it. On the other hand, the seller wants to sell at the buyer's high.
The challenge for the buyer is learning what the seller's low really is. Neither the realtor nor the buyer will tell you. It has to be discovered, and there are several tips to working the strategy successfully.
First and foremost, remember that realtors are paid a commission based on the selling price of homes. They have an economic interest in keeping prices high. If you really have the hots for a piece of property, keep it to yourself.
Many states have changed their laws to help buyers. There is now such a thing as a "buyer's agent." The agent who listed the property for sale is representing the seller. If you are using a different agent to look over various properties, in many states they are buyer's agents, and the parties will sign legal forms indicating they understand the situation. In most cases the buyer's agent splits the agreed-upon commission with the seller's agent, so it does not add to the cost.
The first time we worked with a true buyer's agent, she gave us some good tips:
- If you need a mortgage, get preapproved. Remove as many financial barriers as possible.
- Be very flexible on the closing date.
This tells the seller that you have the money and are easy to work with.Presenting the Offer
The realtor's sincerity is key when presenting the offer. In some cases, both realtors go to the seller and present the offer. Most of the time, however, the buyer's agent presents the offer to the seller's agent, who in turn presents it to the seller.
The only time our system failed was when the listing realtor would not allow our realtor to accompany her to present the offer to the seller. The seller did not make a counteroffer, and their realtor said they were totally insulted.After the Signature
Our excellent buyer's agent did not stop helping us when the offer was accepted. Shortly after the ink had dried on the sales contract, she escorted us to the house for an in-depth look at what we bought. She introduced us to the sellers, and instructed us to smile and thank them for allowing us to see their property on short notice.
Our goal was to have the seller feel that we were "really nice people." I'd like to think that meant just being ourselves.
All of the negotiations might not have been complete. We always hire a home inspector, particularly in areas where termites can be a problem. Should issues come up, better to start negotiations from an amiable position than a defensive posture. Her suggestions made perfect sense. We had a smooth closing and move.Some Final Tips
Life is full of good deals, but you can't get emotional about them. Do your due diligence, negotiate with an even temper, and don't take anything personally. Business is business.
One final note. Given the current market, you may be wondering how to negotiate in a foreclosure sale. Foreclosures are a complicated topic, so we're going to save that topic for another day. You'll just have to keep reading my regular weekly column!Tapping into Real Estate Without Buying or Selling
You may not be interested in buying a new house or in selling your current home, but you still may wonder how you can take advantage of real estate. Many seniors have turned to reverse mortgages to cash out on the equity of their home. For some people this makes sense in very specific circumstances. You've built up equity in your home over years, possibly decades, and unless you're ready to sell and downsize or take out a large equity loan that has to be repaid anyway, you can't really tap into that equity. So a reverse mortgage might be for you. But many seniors are taking on reverse mortgages solely to pay off debts they've incurred, not as a source of income during retirement. And they're doing this without fully understanding the commitment they're making nor the amount of cash they'll actually receive.
With that in mind we've recently released a new special report called "The Reverse Mortgage Guide." It's an unbiased, independent, extensive look at exactly how reverse mortgages work, how to figure out if one is right for you, and which ones you should consider. I stress unbiased and independent because so much of what is passed off as reverse mortgage research is really nothing more than slick sales brochures put out by the same companies that happen to sell reverse mortgages. You can probably guess what they'll recommend.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.