Steps for Buying a House: Negotiating House Prices

Negotiation is an ongoing process — a series of steps without a neatly defined beginning and end. Think of water flowing as you approach the process for negotiating house prices.

Each step in the negotiating process begins by gathering information. Once you understand the various aspects of buying a home, then you can translate your information into action that generates more information that in turn leads to further action. And so it goes, until you’re the proud owner of your dream home.

One way to begin the first action phase is to get your finances in order, get preapproved for a loan, and select an agent to work with you through the next information-gathering phase. You and your agent then investigate various neighborhoods and tour houses so you know what’s on the market. You also figure out the difference between asking prices and fair market values.

After you know what houses are really worth, you’re ready to focus on the specific neighborhood you want to live in and begin seriously searching for your dream home.

Making an offer to purchase a home

After you find your dream home, you’re ready for the next action step in the negotiating process: making an offer to purchase. No standard, universally accepted real estate purchase contract is used throughout the country. On the contrary, purchase contracts vary in length and terms from state to state and, within a state, from one locality to another.

When you’re ready to write an offer, your real estate agent or lawyer should provide a suitable contract for your area.

Real estate contracts are revised quite often because of such things as changes in real estate law and mandated seller disclosure requirements. A good agent or lawyer will use the most current version of the contract. Check the contract’s revision date (usually noted in the bottom-left or bottom-right corner of each page) to make sure you’re not using a form just slightly newer than the Declaration of Independence.

A carelessly worded, poorly thought-out offer can turn what should be a productive negotiation into an adversarial struggle between you and the sellers. Instead of working together to solve your common problem (that is, you want to buy, and they want to sell — how can you both get what you want?), you get sidetracked by issues that can’t be resolved so early in the negotiating process.

Although buying a home can be a highly emotional experience, good offers defuse this potentially explosive situation by replacing emotion with facts. Buyers and sellers have feelings that can be hurt. Facts don’t. That’s why facts are the basis of successful negotiations.

All good offers have three things in common:

• Good offers are based on the sellers’ most important concern: a realistic offering price. You shouldn’t pull the offering price out of thin air. Instead, base your offering price on houses (comparable to the seller’s house in age, size, condition, and location) that have sold within the past six months. Focus on facts.
• Good offers have realistic financing terms. Your mortgage’s interest rate, loan origination fee, and time allowed to obtain financing must be based on current lending conditions. Some offers get blown out of the water because a buyer’s loan terms are unrealistic. Focus on facts. If you’ve been prequalified or, better yet, preapproved for a loan, you or your agent should stress that advantage when you present your offer. This proves to the sellers that you’re a creditworthy buyer who’s ready, willing, and financially able to purchase their house.
• Good offers don’t expect a blank check from the sellers. Unless property defects are glaringly obvious, neither you nor the sellers will know whether any corrective work is needed at the time that your offer is initially submitted. Under these circumstances, it’s smart to use property-inspection clauses that enable you to reopen negotiations regarding any necessary corrective work after you’ve received the inspection reports.

  Remember that negotiation is an ongoing process. After the action of having your offer accepted, your property inspectors gather information. After they’ve determined what’s actually required in the way of corrective work, you and the sellers can renew your negotiations (action) armed with hard facts (information). This sequence beats wasting time and energy by arguing with the sellers about the cost to complete corrective work before any of you know the precise number of dollars needed to do the repairs. Focus on facts.

If the sellers agree with the price and terms contained in your offer, they’ll sign it. Their agent should give you a signed copy of the offer immediately. When you actually receive a copy of the offer signed by the sellers, you have what’s called a ratified offer (that is, a signed or accepted offer). This doesn’t mean you own the house or it has been sold. All you can say for now is that a sale is pending.

Leaving an escape hatch in the house negotiating process: contingencies

Even though the sellers have accepted your offer, it should contain extremely important escape clauses known as contingencies, which you cleverly built into the contract to protect yourself. A contingency is some specific future event that must be satisfied in order for the sale to go through. It gives you the right to pull out of the deal if that event fails to happen. If you don’t remove a contingency, the sale falls apart, and your deposit money is usually returned.

These two contingencies appear in nearly every offer:

• Financing: You can pull out of the deal if the loan specified in your contract isn’t approved. Some contracts also have separate property appraisal contingencies that allow you to cancel the deal if a qualified appraiser does not think the home is worth what you’ve agreed to pay.
• Property inspections: You can pull out of the deal if you don’t approve the inspection reports or can’t reach an agreement with the sellers about how to handle any necessary repairs.

Other standard contingencies give you the right to review and approve such things as a condominium’s master deed, bylaws, and budget, as well as a property’s title report. You can, if you want, make the deal contingent on events such as your lawyer’s approval of the contract, or your parents’ inspection of the house. As a rule, no reasonable contingency will be refused by the seller.

Don’t go overboard with contingencies if you’re competing for the property with several other buyers. Sellers, especially in strong real estate markets, don’t like offers with lots of contingencies. From their perspective, the more contingencies in an offer, the more likely the deal is to fall apart.

You must delicately balance the need to protect yourself with the compelling need to have your offer accepted. Keep your contingency time frames realistic but short. Resolve as many simple questions as possible before submitting the offer. For instance, if your parents insist on seeing the property you want to buy before they’ll loan you money for a down payment, take them through the home before making your offer to eliminate that contingency.

If you’re considering making your offer subject to the sale of another house (such as the one you’re living in now), don’t do so if you’re in a bidding war with other buyers. Here’s a typical loan contingency:

Conditioned (the magic word) upon buyer getting a 30-year, fixed-rate mortgage secured by the property in the amount of 80 percent of the purchase price. Said loan’s interest rate shall not exceed 5.0 percent. Loan fees/points shall not exceed 2 percent of loan amount. If buyer can’t obtain such financing within 30 days from acceptance of this offer, buyer must notify seller in writing of buyer’s election to cancel this contract and have buyer’s deposits returned.

The purchase agreement you sign is meant to be a legally binding contract. It’s wise to put a lawyer on your team immediately if you have any concerns about the legality of your contract. Even if you don’t have a lawyer when you sign the contract, including this clause in your offer may be prudent if you have legal questions: "Conditioned upon my lawyer’s review and approval of this contract within five days from acceptance."

Using this clause doesn’t mean you actually have to hire a lawyer. It does, however, give you the option of having the contract reviewed later by a lawyer if you want. By the way, good contracts provide space to write in additional terms and conditions.

Include a provision in your contract that specifically states that contingencies must be removed in writing. Doing so should eliminate confusion between you and the sellers regarding whether a contingency has been satisfied.

What good is a ratified offer filled with escape clauses? Well, a ratified offer (riddled with escape clauses or not) ties up the property. You don’t have to worry about the owners selling the property to someone else while you’re spending time and money inspecting it.

First get an agreement on the price and terms of sale — then get answers to all of your other questions.

Getting a counteroffer on a home

It’s highly unlikely that the sellers will accept your offer as it’s originally written. Even if they love your offering price, they’ll probably tweak your offer here and there to make it acceptable to them. Sellers use counteroffers to fine-tune the price, terms, and conditions of offers they receive.

You’ll be relieved to know that counteroffer forms are far less complicated than offer forms. Take a look at the Buyer Counteoffer below, for example, and you’ll see that it’s only a one-page form. Here’s a counteroffer form.

Suppose you offer $275,000 for a home you like, and you ask to close escrow 30 days after the sellers accept your offer. Because they had the house listed at $289,500, the sellers think that your offering price is a mite low. Furthermore, they need six weeks to relocate.

Instead of rewriting your entire offer, they give you a counteroffer. It states that they’re willing to accept all the terms and conditions of your offer except that they want $285,000 and six weeks after acceptance to close escrow.

The ball’s in your court once again. You don’t mind a six-week close of escrow, but you don’t want to pay more than $280,000, so you give the sellers a counter-counteroffer to that effect.

Now only one bone of contention remains: the price. The sellers come back to you with a firm $284,000. You grudgingly respond at $281,000 and instruct your agent to make it clear to the sellers that you won’t go any higher. Two can play the firm game. Negotiations now resemble the trench warfare of World War I.

If you really want the home, this phase of the game can be nerve-racking. You worry about another buyer making the sellers a better offer and stealing the house away while you’re trying to get the price down that last $3,000. The sellers are equally concerned that they’ll lose you by pushing too hard for the final $3,000. You don’t want to pay a penny more than you have to. The sellers don’t want to leave any money on the table.

You and the sellers are tantalizingly close to agreement on price. Your offering price and the sellers’ asking price are both factually based on recent sales of comparable houses in the neighborhood. So why the deadlock? Because sometimes the same facts can lead to different conclusions.

An equitable way to resolve this type of impasse is to split the difference fifty-fifty. If the sellers in our example use this technique, they’ll come back to you with a $282,500 offer — down $1,500 from their firm asking price of $284,000 and up $1,500 from your firm offering price of $281,000. The mutual $1,500 concession equals less than 1 percent of the home’s fair market value based on a $282,500 sale price. That’s pinpoint accuracy in a real estate transaction.

Splitting the difference won’t work in all situations. It is, however, a fair way to quickly resolve relatively small differences of opinion (a few percent or less of the home’s price) so you can make a deal and get on with your life.

Want to prepare for other possibilities? Here are ten questions home buyers may ask.