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Negotiating an Offer

Negotiating An Offer

Basic Rules of Negotiating

If you follow these basic negotiating guidelines, your deal will practically take care of itself:

Get everything in writing

Written contracts evolved from the muck and mire of legal quicksand because people have lousy memories. If you want your deal to be enforceable in a court of law, put all the terms in writing. Make a habit of writing short, dated MFRs (Memos For Record) of important conversations (such as, "June 2—buyers' agent said that they'll have loan approval by Friday," "June 12—buyers asked to extend closing one week," and so on).

Make sure that deadlines are met

Real estate contracts are filled with deadlines for everything from contingency removals and deposit increases to the ultimate deadline, your closing. Failure to meet each and every deadline can have dreadful consequences. Your deal may fall apart—you may even end up in a lawsuit. However, most deadlines are remarkably flexible. They can usually be lengthened or shortened by negotiation if the need for revision is properly explained and handled promptly with adequate lead time.

Mastering Your Feelings

House sales are usually emotional roller-coaster rides for everyone involved, and you probably still bear the emotional scars from the turmoil you endured as a home buyer. Now, as a house seller, you're about to sit on the other side of the table. Consider the powerful emotions acting on you when you sell your house:

Big needs

Shelter is one of the basic necessities of life, and you and the buyers will do verbal battle over a place to live.

Big egos

The house you're about to sell is your castle. If buyers or their agents attempt to justify a low offering price for your house by citing its real and imagined flaws, your blood may boil.

Big money

Whether this is the first house you sell or the last, the money you have in it probably represents one of your largest investments.

Big changes

Selling a house would be stressful enough if you only had to deal with the first two forces. Throw in a life change, such as job relocation, marriage,divorce, birth, death, or retirement, and the result is an emotional minefield.

Putting emotions in their place

Because you can never eliminate emotions from the process of selling your house, the next best option is to control your emotions. Folks who do the best job of this usually end up getting the best deals. Here are time-tested tactics to control your emotions:

Keep your sale in perspective

Which would you rather have fail—your house sale or your open-heart surgery? No matter how bad circumstances are with the sale, keep reminding yourself that this isn't a life-or-death situation. Life goes on. If worse comes to worst, the deal will die—but you'll survive to find another buyer.

Make time your ally

Even if you must sell because of some momentous life change—such as getting married or divorced, having a baby, or retiring—you probably have advance notice before the big event occurs. Don't put yourself under needless pressure by procrastinating. Give yourself enough time to sell your house.

Maintain an emotional arm's length

Be prepared to walk away from a sale if you and the buyer can't reach a satisfactory agreement on price and terms. Mentally condition yourself to the possibility that the deal may fall through; keep other options open. Buyers are like buses—if you miss one, another one comes along in a little while.

Get the facts

Use a comparable market analysis to factually establish the fair market value of your house. A good real estate agent can help in this area. If you're like most people, having someone to buffer you from your unavoidable emotional involvement helps. Make sure that you work with patient, not pushy, professionals who are committed to getting you the best deal.

Accept the unknown

You always have more questions than answers at the beginning of a deal. Don't worry; you'll be fine as long as you know what you need to find out and you get answers in a timely manner during your transaction.

Gaining detachment through an agent

Unlike you and the buyers, good real estate agents don't take things personally. For example, your agent won't be offended if the buyers say that they hate the red-flocked wallpaper that you feel adds "just the right touch" to your den. The buyers' agent, by the same token, won't be upset if your agent says that the buyers' offer for your exquisite house is ridiculously low.

Objectivity is easier for agents. After all, they're not the ones who spent three months looking for appropriate wallpaper to put in the den. Nor is their life's savings on the negotiating table. Agents must listen to what the market says that a house is worth. If they don't, the property won't sell, and they won't get paid. Agents don't allow distracting details to confuse negotiations.

Receiving an Offer to Purchase

After your house goes on the market, you're ready to begin the formal part of the negotiating process—receiving an offer to purchase. Unfortunately, no standard, universally accepted real estate purchase contract is used throughout the country. On the contrary, purchase contracts vary in length and terms from one locality to another. The contract you get reflects what, as a general rule, the buyer's agent or lawyer considers to be appropriate for your area.

When you evaluate the offers you receive, check for the following characteristics of a good offer:

If you agree with the price and terms of the buyer's offer, all you have to do to indicate your approval is sign the offer. Your signature turns the offer into a ratified contract-- a signed or accepted offer. However, signing an offer does not mean that you've sold your house. Due to the various contingencies contained in most contracts, ratified offers remain highly conditional until all contingencies are removed.

Dealing with Contingencies

Any offer you receive will probably contain some buyer escape clauses known as contingencies. A contingency gives buyers the right to pull out of the deal if some specific future event, such as getting a mortgage, fails to materialize.

Contingencies create uncertainty for you as a seller. The more contingencies buyers put in a contract, the more ways they have either to get out of the deal or to reopen negotiations for better terms. Unless you have people falling all over themselves to buy your house, most offers contain contingencies.

The most common contingencies are:

Property inspection contingencies

Your house's physical condition greatly affects its value. Smart purchasers insist on finding out exactly what shape your house is in before they buy it. If they don't approve the inspection reports or can't reach an agreement with you about handling corrective work for problems uncovered during the inspections, these contingencies let the buyers bail out of the transaction.

Financing contingencies

The buyers can withdraw from the contract if the mortgage specified in their contract isn't approved. That provision is usually fine. If the buyers can't get the loan they need to buy your house, why go any further. Here's a typical loan contingency:

"Conditioned 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 7.5 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."

Other common contingencies

give buyers the right to review and approve your property's title report and, if you're selling a condominium, the condo's master deed, bylaws, and budget. Buyers can make their contract contingent upon many other reasonable events, such as having their lawyer review and approve the contract or having their parents inspect the house.

What good, you may wonder, is a ratified offer riddled with escape clauses? We're glad you asked.

From the buyers' viewpoint, a contingency-filled offer still shows your intention to sell them the property. The buyers don't have to worry that you'll sell the house tosomeone else while they're spending time and money inspecting it.

From your perspective, a contingency-filled ratified offer ties up the buyers. If the buyers deposit earnest money to prove that they aren't toying with your affections and then spend hundreds of dollars more for inspections, they're serious buyers. There isn't a standard "earnest money" deposit. The actual dollar amount varies from area to area, depending on local custom and practice.

Selecting the Best Offer

If you have multiple offers on your hands, you earn the right to dictate favorable terms and conditions of sale for yourself. Buyers know that you have a hot property, and the pressure is on them to please you. Whether you have 3 offers or 33 lying on the kitchen table, you face the same dilemma: selecting the best offer.

Price isn't the sole criteria. The highest offer is far from best if it's riddled with dubious escape clauses, totally out of synch with your time frames, or made by someone who's a week or two away from declaring bankruptcy.

Pitting buyers against each other is a two-edged sword. On the plus side, a bidding war can catapult the ultimate sale price over your asking price. You may, however, make a major mess of things, if you're not careful. You may scare off all the buyers by making absurdly high counter offers. Worse yet, you may convert multiple offers into multiple lawsuits by inadvertently ratifying more than one offer.

As a seller in a sellers' market, follow these tips to avoid snatching defeat from the jaws of victory:

Think like a lender

In a strong sellers' market, spirited buyer competition often pushes prices to new heights. Lenders usually support higher prices when they reflect an overall market trend and when the mortgage isn't an excessively high percentage of the purchase price. You determine that percentage, called the loan-to-value ratio, by dividing the loan amount by the purchase price. From a lender's perspective, the higher the loan-to-value ratio, the greater the risk that a buyer will default on the loan. So, as a rule, the lower the loan-to-value ratio, the better the chances of getting loan approval.

Don't issue more than one counter offer at a time

When faced with multiple offers, you have four options—accept one, counter one, counter more than one, or reject all offers. If you counter several offers, you may inadvertently end up in contract to sell your house to several different buyers. The one sure way to avoid this scenario is to follow this rule: Counter only one offer at a time. Qualify buyers carefully. When you question agents about their buyers, scrutinize each purchaser's creditworthiness, motivation to purchase, and deadline for when they must complete the transaction.

When in doubt, get more information

If you have any doubts about the buyers' financial qualifications, get their permission to contact the lender directly to resolve your questions before accepting or countering their offer. Buyers who have been pre-approved for a loan by a reputable lender have a "Good Borrower Seal of Approval"—as long as the mortgage they need to buy your house doesn't exceed their pre-approved loan amount.

Pay as much attention to terms and conditions as you do to price

Sometimes, a lower price beats a higher one. For example, when you evaluate offers, seek terms that fatten your bottom line. If a buyer offers to purchase your house "as is," you don't have to pay for corrective work or worry about getting stuck reducing your sale price because of a bad inspection report.

If you need a quick sale, the best buyer is the one who can close fastest

Then again, the best buyer may be the one who'll let you rent your house back after the sale if you need a place to stay until the sale of your new home closes. Remember: Price isn't everything if you have other, more compelling needs.

Avoid conflicts of interest resulting from dual agency

Dual agency occurs when the same agent or real estate broker represents both buyer and seller. If your listing agent also represents one of the people making an offer to buy your house, that agent has a conflict of interest, plain and simple. Most real estate firms have procedures to handle dual agency according to state real estate laws.

Making a Counter Offer

Counter-offer forms are far less complicated than purchase-offer forms, because you use them to fine-tune the terms and conditions of offers you get from prospective buyers. If an offer contains unreasonable contingencies, use a counter offer to propose that the buyer remove them.

Suppose that the buyers offer $175,000 for your house and want you to close 30 days after accepting their offer. Because you're asking $189,500, you think that their offering price is low. Furthermore, you need six weeks to relocate.

If everything else in the buyers' offer is fine with you, don't rewrite the entire offer. Instead, give the buyers a counter offer stating that you'll accept all their terms and conditions except that you want $185,000 for your house, and you need six weeks after the offer is accepted to close.

Define time frames with counter offers

Suppose a case in which a loan contingency gives the buyer 30 days to get approved for a mortgage. If the prospective buyers can't get a loan within 30 days, you have the choice of either giving them a few more days to get financing or putting the house back on the market. Either way, you're in control of the situation.

Good contingencies always have precisely defined time frames within which buyers must complete a specified action or drop out of the contract. Never accept an open-ended contingency. For example, if buyers want their parents to inspect your house but don't specify when that inspection will take place, counter them with "parental visit shall take place not more than 3 days after offer is accepted." Be realistic but brisk when you set time frames. You don't want your house off the market any longer than is absolutely necessary.

Sale before purchase contingencies

Think twice before accepting an offer that's subject to the buyers selling their present house before buying yours. This is the ultimate open-ended contingency. It stigmatizes your house by driving away other prospective purchasers who can't put their lives on indefinite hold while they wait to see whether or not the buyers sell their house.

If you accept a "subject to sale of buyer's property" contingency, counter it with a release clause giving you the right to accept a better offer if one comes along.

Pick your counter offer battles selectively

A counter offer is like a stick of dynamite, and if you're not careful, it can blow up your deal. Making counter offers is a great idea if you have a hot property. But if you haven't had bunches of buyers banging on your front door, think carefully. You need to sell your house and get on with your life. Follow these tips: