Negotiating the Purchase of Your Home with the Seller
Once you have found the right property for you, it is time to begin negotiations on the purchase contract price and terms.
The typical purchase negotiation between a seller and prospective buyer will often follow these steps:
- You research the property
- You offer an initial purchase price
- The seller and you counter-offer until agreement
- You and seller negotiate terms
- You order a professional inspection of property
- Purchase contract is finalized by parties and attorneys
All of the above stages are discussed in more detail below. There are occasions when you and the seller are unable to come to an agreement. Such cases are not infrequent, as sometimes you are not willing to pay what the seller thinks the property is minimally worth — or a price acceptable to the seller.
Research the Property
Once you have found a promising home to purchase, your first negotiating step should be to research the property. The primary goal of this research is to determine its most probably fair market value.
This market value will eventually become the boundary line on your negotiation. You normally will not want to pay more than this market price, unless you are receiving something of value in return.
Also, part of your pre-negotiation research should be to obtain a gauge of the real estate market in that community and for that specific property.
For example, you should ask area real estate agents, attorneys or professionals what the marketing time and demand is for specific properties in that target area. If this is a seller’s market, then you will often find tough competition for those properties; in a buyer’s market, you will usually have the upper hand in most negotiations.
To determine the property’s market value, you will need to compare the sales price of similar properties in the neighborhood. You can obtain comparison data from your real estate agent. When analyzing comparison properties, pay special attention to distance from subject property, size comparison, date of sale and property types.
For negotiating purposes, you should formulate a fair market value range, rather than a specific amount. This is necessary for first-time homebuyers or shoppers unfamiliar with the specific market.
If you feel especially curious, you can go down to the county records office to find out for exactly how much and when the current seller originally purchased the property, and whether the necessary permits were granted for any additions.
Buyer Offers a Purchase Price
There are many schools of thought as to what your starting price should be. Your main guide should be the fair market value you have established for the property.
If the listing price matches the estimated market value, you can simply accept the list price. This also a recommended tactic when there are several prospective buyers interested in the property. However, it usually does not hurt to start a bit lower than the listed price when there is not much competition.
One rule of thumb used by many investors is to start negotiating at the low end of the price range of properties in that area.
Here’s another possible tactic. Tell the sellers that you want to avoid a lot of haggling, and just ask them what their absolute minimum price would be. From there, you can decide whether or not to accept it.
If the listing price is greater than the market value you have calculated, you will probably offer the market value price or lower. It does depend on the level of competition for the property.
To make an offer, you must put the offer in writing (usually with a standard contract form). An initial earnest money deposit check will often accompany the written purchase offer. The check is usually for $1,000 to 5% of the sales price, depending on the local custom and requirements of the seller. This amount will then be credited back to you at the closing.
If the seller accepts the offer, they will put the check into an escrow account with the seller’s real estate agent or attorney. By accepting the offer and the earnest money deposit, the seller agrees to take the property off the market. They can still accept and even solicit other offers, but your contract takes precedence over all other contracts relating to the property, which are completed after your contract offer and acceptance.
Seller and Buyer Counter-Offer
When the seller receives an offer, they have three basic options:
- Rejection. Most sellers will reject an offer only when they are willing to accept an offer from a different buyer or if the offer is unworkably low.
- Acceptance. If the offer is essentially what the seller was seeking, the seller can accept the offer and earnest money deposit. This is normally the case when you offer the list price.
- Counter-offer. If your offer is close to the seller’s target price and you seem genuine, the seller will usually counter-offer. The seller’s counter-offer is normally a lower price than the listed price, or perhaps offers other incentives such as closing cost subsidies.
There is no limit as to how many times the seller and buyer can make counter-offers to each other. Eventually, if they are both serious about coming to a negotiated transaction, they will arrive at a price that is acceptable to both parties.
This is an important benchmark for you: the final price (with other considerations) should be within the pre-established fair market value range.
Note: in most states, real estate transactions require written agreements and contracts. Oral agreements are often unenforceable, so a seller or buyer can pull out of an agreed sale if the contracts have not been signed.
Buyer and Seller Negotiate Terms
The purchase price is only the primary term or stipulation of the purchase contract. Once the basic price of the contract is determined, the other terms of the purchase must be negotiated — although this is usually done quickly, with local custom dictating much of the features.
The most important of these negotiated terms include the following:
- Appliances and fixtures that will be sold with the real estate
- Mortgage contingency date
- Seller subsidies toward closing costs
- Closing and possession date
- Repairs that the seller must perform
- Earnest money deposit requirements
- Prorations of taxes, utilities or assessments
In most cases, the real estate agents and/or attorneys will handle these negotiations for you and seller. But they will always keep the their client’s needs in mind.
Some terms of the purchase contract may be amended or revised after the attorney review and professional inspection periods. However, such revisions are solely at the discretion of the seller.
You Order a Professional Inspection of Property
As soon as the basic purchase contract is accepted by both parties, you should immediately order a property inspection report, produced by a professional inspector.
This inspection is optional, and you may simply wish to have it inspected by an experienced engineer or contractor, especially if it relatively low in price. However, this small investment can eventually save you much time, money and headaches by uncovering potential problems immediately.
The real estate agent that you employ normally will provide you with a list of recommended professional real estate inspectors.
If the property inspection reveals major defects and needed repairs, you can re-negotiate these items into the purchase contract. The typical arrangement is to have the seller ensure that the repairs are satisfactorily performed prior to the closing or set aside escrow funds at the closing specifically for these repairs.
If major defects have not already been factored into the sales price, then you can usually negotiate a reduction in the price. However, if the defects are already part of the price, then you usually will have little room to maneuver. Remember: if you are buying a $20,000 house, you should expect a $20,000 house.
The final decision for any such changes to the purchase contract is solely the seller’s choice. If the seller refuses to accept any proposed changes, you may or may not be able to back out of the deal.
Finalize Purchase Contract
The typical purchase contract will normally provide you with at least five business days to have the contract reviewed by an attorney. This period is the attorney review period, and it normally provides your attorney sufficient time to request specific revisions and amendments to the contract.
If you do not yet have a real estate attorney, then you should obtain one immediately. Again, the real estate agent will often provide you with a list of recommended real estate attorneys.
Typical fees for a real estate attorney averages between $350 to $750, depending on the locale, attorney and complexity of the transaction. High-priced attorneys are usually not necessary for simple residential loans. Since most transactions have become more standardized, real estate attorneys are increasingly only needed to examine elements that seem out of the ordinary.
But regardless of how simple the transaction may seem or how low the purchase price, a real estate attorney is still highly recommended — especially for first-time homebuyers.
As with the property inspector, a good real estate attorney can save you time and future dilemmas, as well as perhaps money.
Finalize Mortgage Loan
After the purchase contract is finalized and signed, the parties must wait and prepare for the closing. With most buyers, this wait involves their mortgage financing.
The pre-approved buyer should send a copy immediately to the mortgage lender, as soon as the basic purchase contract is signed. The lender will immediately begin processing the loan for a full approval and the closing. If you have not yet obtained a mortgage preapproval, it is imperative that you apply for a mortgage loan approval immediately.
You should also provide the lender with the name and phone number of the seller or seller’s real estate agent. The lender will immediately order an appraisal of the subject property; the appraiser must contact the seller or seller’s agent to schedule a review of the property.
Once the mortgage loan is fully approved, the two parties will close the transaction.
