A Realtor Reveals: How to Buy a Home at the Best Price
Friday, September 11, 2009 | Ethan Roberts
Editor's note: Today marks the 8th anniversary of the 9/11 tragedy that killed over 3,000 individuals. Please take a moment today to remember those who gave their lives, and all others who suffered losses of friends, families and colleagues on that day.
Tycoon readers,
People often ask me what their initial offer should be on a home, but as a transaction agent (which practically all agents are these days in Florida), I am not permitted to tell a buyer what they should offer on a home. I can offer some general guidelines, but the final decision on price must be made by the buyer.
The funny thing is that even after I explain all of the nuances that go into making an offer, they still say, "OK, but what would YOU offer?" I just laugh, and say, "Sorry, it has to be your decision."
Even if it were permissible to mandate a price, the realtor is in a no-win situation. Suggest a price that is too high, and the buyers will be angry at you for making them pay too much. Suggest a price that is too low and, if they don't get the house, they will resent you for telling them to bid too low.
With so many homes available on the market, and with many buyers looking to get a bargain, today I am going to share with you some strategies for how to buy a home for the best-possible price.
So, here are five factors to consider when making an offer:
Type of Property
Is it a regular seller-owned sale, a short sale or a foreclosure? Private owners are much more likely to be insulted by a low offer than will a bank, but that doesn't mean you can just offer any old price to the bank and they will take it.
Often, the bank foreclosure is already priced at least 15%-20% below other homes in the same area. So, even at full asking price, you are still getting a deal.
If you are working with a realtor, ask them what the average list-to-sold price ratio is for that location. In my area, a foreclosure will typically sell for about 8% below the asking price, whereas a regular re-sale will most likely sell for about 5% below the ask price.
Property Condition
A home that needs little to no work will obviously command a higher offer price than one that needs extensive work. So when considering a home, you must factor that into your decision.
If you are not sure about a home's condition, a good home inspector will help you determine how much work may be necessary. It would be foolish to buy a "handyman special" that is $15,000 below current market pricing, if you have to sink $25,000 into it to get it up to par with other homes in the area.
The owner said, 'Just a little TLC, and this home will be like new!'
Days on the Market
You should always ask, "How many days has this property been on the market?" Many people know to do that much, but there is a trick in the real estate business that I am going to share with you now.
Say that a property is listed for 120 days and then, if it's not sold, the listing expires. If the property is then re-listed -- even with the same company -- instead of the listing sheet showing 121 days on the market, the listing can be recreated as "new," so that the days on the market clock begins again as day No. 1!
Fortunately, a number of multiple listing services have gotten wise to this practice, and are now putting "Days on Market" and "Cumulative Days on Market" on the listing sheets. So when you ask about days on the market, remember to ask, "How many cumulative days has this property been listed?" and not just for the current listing.
Number of Other Offers
Obviously, the best situation is when your offer is the only one the seller has. But often, especially with foreclosures or short sales, you can expect there will also be other offers besides yours.
Banks may ask for all offers to be "highest and best," meaning everyone needs to submit their top price, and then the bank will consider which offer to take. When your offer is the only one, that is the easiest time for the bank to consider a lower price.
Unfortunately, when there are other offers, if you really want the property, you are going to have to make a strong offer. And remember, under most circumstances, the listing agent is not permitted to tell you or your agent what the other offers are. So you could have the highest offer, and then wind up increasing your offer above that!
Some people just decide to withdraw their offer, once they hear there are multiple ones, and that is always an option to consider if you are looking to save money.
On the other hand, sometimes a foreclosure may be priced so low that, even with multiple offers on it, making an offer ABOVE THE ASKING PRICE may be warranted.
If the true market value of a home was $200,000 and the list price was $130,000, but in order to win the bid you had to raise your bid up to $140,000, would you do it?
For an immediate $60,000 equity, I certainly would!
Type of Offer
A cash offer is always stronger than one that is contingent upon the buyer getting a mortgage. If you are offering cash, you can sometimes beat out other offers that have contingencies, even if you offer a little bit less than the others.
Also, if you have no other home to sell, this puts you in a stronger position than someone else who must sell their home in order to be able to buy the next one. Banks will typically not take contracts from buyers who need to sell another home first.
When comparing the various types of loans, a conventional mortgage is almost always stronger than an FHA or VA loan. For a conventional loan, one needs higher credit scores and more money down, and the appraisals are not as strict as they are for FHA and VA.
For example, the roof must have five or more years of life remaining in order for the VA to approve a loan. That is not a requirement on a conventional loan.
In addition, VA loans mandate that sellers must pay several closing costs that would normally be paid by the buyer on conventional or FHA loans. Private sellers are often turned off by that, unless they have no offers and the home is on the market for a while.
As for foreclosures, many banks won't even accept VA or FHA loans, especially if the home needs a great deal of work.
All right, let's assume the best for the moment. You have found a home that you like, it's been on the market for quite a while, there are no other offers, and you are paying cash.
What's next?
It's All About the Negotiations
Think about a labor dispute for a moment. What happens when one side makes ridiculous demands and very few concessions?
Right -- the other party gets upset, and often makes demands that are just as extreme or unreasonable. Ultimately, no progress is made at all in the negotiations, and a stalemate occurs.
This is exactly how it is when negotiations take place on a property. Some people think that if a bank is asking $150,000 for a home in a $200,000 neighborhood, that it's perfectly all right to offer $100,000, "just to see what happens."
Their illogical thinking is that, if the bank rejects that offer, they can always come up on the next offer. And as I have heard people say at least 500 times, "You never know; the bank just might say yes."
Well, here on Planet Earth, this almost never happens. In fact, 99% of the time, the bank thumbs its nose at the buyer's low-ball offer, usually by countering back at the full ask price, or perhaps just $500 below ask price.
Sometimes, making a low-ball offer infuriates the seller so much, they don't even want to continue negotiations with the buyer! Then the buyer has lost out on a potentially great deal.
'Here's what I think of your stinkin' offer, Mr. Buyer!'
How to Make an Offer That's Hard to Refuse
The far-better way is to make an offer within a three-step process.
Step 1 is to make a first offer that, even if it's substantially lower than the ask price, is not insulting to the seller. The offer has to be high enough to at least keep them interested.
Our objective 97% of the time is to secure a counter-offer from the seller. Approximately 3% of the time, we may even be lucky enough that the seller accepts our first offer.
If the seller does counter our first offer, then ...
Step 2 is to raise our offer for the first time. Having already decided in advance what our maximum offer will be, the new offer should be stronger than the original one, but still slightly below our maximum limit.
We want to show the seller that we are serious in our negotiation, but without reaching our limit. Sometimes the seller may accept that offer but, more often, our new offer will be the catalyst for the seller to counter with another price reduction.
Step 3 is when we raise our offer for the second time, but this time, the offer is followed by those five magical words: "This is our final offer."
Do NOT use the words, "Take it or leave it," as this statement usually turns the seller off.
Emotions Can Make or Break a Deal
Now, the sellers will be feeling enormous emotional pressure. Your Step 3 offer may not be exactly the price they wanted for the home, but it's probably the best offer they've had in a pretty lousy market.
You can almost imagine the husband and wife at home that night, yelling at each other:
"Gladys, leave me alone; I'm not taking that &#%$$%# offer!"
"Sidney, don't be a 'shlemiel' (translation: a dope or fool); take the &#%$$%# offer! Nobody else is even looking at our house! You tell them 'no,' they're gonna walk away, and we'll be stuck here for another year!"
Gladys and Sidney calmly discuss the buyer's third and final offer...
Caution: The words "final offer" cannot be a bluff. You must stick to your guns, or else you will lose all credibility ... and pay too much. A large majority of the time, the seller will accept your "final offer." However, there are times that the seller will reject it as being too low.
If that happens, do not get emotional or up your price!
Simply tell the seller (or, more likely, the seller's realtor), "We wish you all the best in selling your home. But if some time passes and you still do not have it sold, feel free to call me back should you wish to accept OUR offer."
Now that the seller sees you are serious, you will be amazed at how quickly the seller's realtor will call back to accept the offer within the next few days. After three days of Gladys needling Sidney with "I told you they would walk," Sidney is ready to either accept your price ... or to jump off a cliff!
Get Your Dream Home, But Not at a Nightmarish Price
Just remember, if your best offer is refused, there will always be another good deal down the road next week or next month. In real estate negotiations, patience is a must!
To give you an example of how the three step offer is made, let's say that a buyer wants to purchase a home that is listed at $180,000, but wishes to spend no more than about $168,000:
Buyer's offer Seller's counter
| 1st: $160,000 | $175,000 |
| 2nd: $165,000 | $172,000 |
| 3rd: $167,500 | $167,500 |
Notice that the first time the buyer raises the offer (from $160,000 to $165,000), is the more-substantial bump-up of the two.
A mistake that many buyers make is to continue negotiating until both sides meet in the middle. Doing so in the previous example would probably have led to a sale at $170,000 instead of $167,500. I have seen deals fall apart because the buyer and seller were $2,000 apart and neither was willing to give, as each tried to get the better of the other.
Negotiate for More than Just Price
Sometimes, other terms of the contract are just as important to one or both parties as the price. For example, does the seller need a quick closing, or would they like to close several months down the road?
Once in a while, a seller may even want to rent the house back from the buyer for a few months. While few buyers may be able to do this, those who can may find the seller willing to drop the price further, in exchange for that particular term.
Banks are often willing to sell a foreclosure for less money if the buyer pays cash and can close in 10-14 days. Holding the house is costing them money for taxes, insurance and maintenance anyway, and they'd just as soon sell for less and be done.
Remember the Latin term, "Quid Pro Quo" (literally "something for something," or an equal exchange) when negotiating. Both sides must feel like they are getting something, or else the likelihood of creating a successful deal is reduced.
Nobody likes to feel they are being taken advantage of, so as a buyer, your goal is not to win at the seller's expense, but rather to determine what both parties need ... and come to a reasonable contract in which both parties feel like they have gained something.
Folks, follow these guidelines, and you are sure to make a great deal on your next real estate purchase!
Sidney inks the deal with the new buyer...
Tycoon readers: Got any stories about negotiating a great deal you want to share? Bring them on!
See you next week!
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Ethan Roberts
Chief Investment Officer
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