Negotiating

What are some of the basic rules of negotiation?

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.

What can I do to control my emotions better during a negotiation?

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.

Is there a standard real estate purchase contract used throughout the country?

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.

What should I look for when evaluating offers I receive?

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

- It is based on the market value of your house as established by comparable property sales: Smart buyers don't pull offering prices out of thin air. Instead, they base their offering price on properties comparable to your house in age, size, condition, and location and that have sold within the past six months. Many house sellers' asking prices are sheer fantasy. Sale prices of comparable houses are facts.

- It has realistic loan terms: The buyers' proposed mortgage interest rate, loan origination fee, and time allowed to obtain financing should be based on current lending conditions in your area. Ideally, the buyers are also pre-approved for a mortgage, indicating that they're ready, willing, and financially able to purchase your house.

- Doesn't ask for a blank check: Unless property defects are glaringly obvious, or you already have inspection reports on your property, neither you nor the buyers know whether the house needs corrective work when the offer is submitted. Under these circumstances, consider using property-inspection clauses that allow you and the buyer to reopen negotiations for any necessary corrective work after the buyers get their inspection reports.

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.

How can I determine fake buyers from real buyers?

All buyers start out thinking that they're sincere. As their quest for a house continues, however, circumstances ultimately prove that some are phony. Fake buyers usually mimic genuine buyers very cleverly (so cleverly, in fact, they often fool themselves for quite some time). Like real buyers, counterfeit buyers may have agents, read ads about houses for sale, and go to Sunday open houses.

If you and your listing agent don't know how to detect fake buyers, you end up wasting time, energy, and money fruitlessly negotiating to sell your house to less-than-genuine prospects. Identifying bogus buyers is easy if you know how. The following sections include five tests that you can use to spot the fakes.

- Are the buyers creditworthy? Real buyers are ready, willing, and financially able to purchase. If your so-called buyers don't satisfy all three criteria, they're phonies, whether they realize it or not. Genuine buyers want you to know that they're creditworthy. That's why they're willing to share important aspects of their financial situation at the time they present you with their offer, and even get preapproved or prequalified for a loan. In a strong local real estate market, smart, serious buyers seek preapproval or prequalification before making an offer.

People who make the offer to purchase your house subject to their selling their present home, which they haven't even put on the market yet, are fakes.

- Are the buyers realistic? Real buyers familiarize themselves with property values and market conditions before making an offer to purchase. They, and their agents, use sale prices of houses comparable to yours in price, age, size, condition, and location to establish the fair market value of your house. They know the difference between fairly priced properties and overpriced turkeys.

Real buyers may offer less than your asking price because they expect to negotiate the price and terms of sale. However, legitimate buyers who are willing to pay you the amount your house is worth don't make a ludicrously low offer on your house if it's priced to sell. Genuine buyers understand the concept of fair market value.

- Are the buyers motivated? Establish the buyers' motivation when you receive their offer. Buyers are often motivated by a life change, such as wedding bells, a job transfer, family expansion, retirement, or a death in the family. Lack of motivation is almost always a red flag. If the buyers tell you that they're just testing the market, run as fast as you can in the opposite direction.

- Do the buyers have a time frame? Buyer deadlines are established by such factors as when the twins are due, when school starts, when they have to begin new jobs in another city, when they are due to close on the house that they're selling, and so on. Bona fide buyers almost always have a time frame within which they must act.

Time is a powerful negotiating tool. If you're under pressure to sell and the buyers don't have a deadline to purchase, time is your enemy and their pal. Conversely, if they sold their previous house at a profit and must pay a big capital-gains tax unless they quickly close on a new home, the watch is on the other wrist. Don't let time bully you -- and keep your deadlines to yourself.

- Are the buyers cooperative? Real buyers look for ways to make deals go smoothly. They work with you to solve problems instead of creating problems and finding excuses to make the transaction more difficult. Genuine buyers have a let's-make-it-happen attitude.

Inconsistent behavior is a red flag. If buyers suddenly start missing contract deadlines or become strangely uncooperative, they may have lost their motivation. People can and do switch from being real buyers to fakes in midtransaction. Find out why the buyers are acting strangely as soon as you notice the change, and you may be able to head off the problem.

What is a lowball offer?

A lowball offer is one that's far below a property's true fair market value. For example, if someone offers you $150,000 for your house when recent comparable sales data show that it's worth every penny of $300,000, that's a lowball offer. Lowball offers are typically made by unmotivated buyers trying to get a deal, by people who think that you are desperate and willing to negotiate, or by buyers who think that your property is overpriced.

How do I deal with lowball offers?

Suppose that you just put your house up for sale. You priced it as close as possible to its fair market value. Two days after your house hits the market, you get an absurdly low offer. Either the buyers haven't done their homework regarding comparable home sales, or they think that you don't know your house's real value and are trying to exploit your ignorance.

As a seller, you can handle people who lowball your well-priced house in one of two ways. You can let the buyers know that their offer is totally unacceptable by having your agent return the offer unsigned. Why waste time making a counter offer to people who are either idiots or scoundrels? Or you can make a full-price counter offer. Show your contempt by hardballing the buyers on each and every term and condition in their offer. (Although emotionally satisfying, this reponse is lose-lose negotiating. We don't recommend this approach.)

People who lowball a well-priced property destroy any chance of developing the mutual trust and sense of fair play upon which cooperative negotiation is based. Real buyers know the difference between an offering price that gives them room to negotiate and a preposterous lowball offer.

What is the best way to handle the presentation process for offers?

You or your agent should tell interested parties that the following guidelines are in effect to ensure that presentations are handled fairly for each and every prospective buyer:

- Offers will be presented in the order in which you or your agent was notified that offers were pending. As buyers or their agents announce that they have an offer to present, put their names on a list.

- Neither you nor your agent will accept offers before the designated formal presentation period.

- Some sellers review multiple offers without allowing for agent presentations. This approach speeds up the process because it keeps the sellers from having to listen to how wonderful the buyers are, how much they love the house, and so on. Unfortunately, this practice enrages the losers because they all know they'd have won if only their offer had been presented properly. Upsetting potential buyers isn't wise. You may need them later if the offer you initially accept falls through.

- Tell prospective buyers in advance that you'll either accept or counter the best offer you receive. Getting multiple offers doesn't guarantee that any of the offers will be over full asking price. However, if you announce in advance that you won't counter every offer, smart buyers make the best offer they can right off the bat. They know you don't intend to give them a second chance if they submit a "let's leave room to negotiate" type of offer.

Do I need to be present for property inspections?

This is the moment of truth in most house sales. Buyers don't want to pay for corrective work; neither do sellers. Your deal will fall through if you and the buyers can't resolve this impasse.

- Determining who pays for corrective work is the other time when you must know comparable sales data. If you hire an agent who knows neighborhood property values, your agent can forcefully present facts regarding the physical condition and terms of sale of other, supposedly comparable, properties during corrective work negotiations with the buyers and their agent.

- If there is major corrective work, it is critically important that you accept the fact that your house's value has just been slashed by the cost required to repair it. Don't go into denial. You must face the facts. Remember: Good negotiators are realistic.

- You have other options for resolving the impasse. For example, you can refuse to pay for repairs found by the buyers' inspectors. You have the right to question the impartiality of their inspectors and the validity of inspection reports for which they paid. If these issues concern you, consider getting your own inspections to refute theirs. Realize, though, that a good inspection will probably set you back several hundred dollars, and your inspectors may end up verifying the buyers' inspectors results or discovering additional corrective work.

- As a last resort, you can threaten to pull out of the deal if the buyers don't back off on their demands. In a strong market, this strategy may work. However, sellers who kill the messenger often regret their decision. Like it or not, you're stuck with the damage.

- Even if you drive away the buyers who discover damage to your house, you may still have a legal obligation to tell other buyers everything you learn about the required corrective work. Any such disclosure will probably lower the price that a future buyer will offer for your house. All things considered, working things out with the buyers who uncover the damage is certainly much faster and probably no more expensive than waiting for another buyer.

- Lenders also participate in corrective work problems. They get copies of inspection reports if borrowers tell them that a serious repair problem exists, if their appraisal indicates a property obviously needs major repairs, or if the contract contains a credit for extensive repairs.

What is a lease-option?

A lease-option is exactly what the name implies: a rental agreement to lease your house, but with an option to buy the house in the future. Lease-option offers are triggered by high mortgage rates or are made by folks who have good incomes but haven't managed to save enough cash yet to make a down payment.

If you must sell your house immediately to get the cash you need to buy a new home, read no further. The house may or may not sell sometime during the lease's term, depending on whether or not the renters elect to exercise their option to purchase.

Sometimes, however, a lease-option is the smart way to go. For example, suppose that high mortgage rates or a sluggish local real estate market make selling your house tough. If you don't need to sell right away and you must move soon, doing a lease-option helps you cover the house's monthly ownership expenses until mortgage rates or the local market improves enough for you to sell.

Is a 'nothing down' deal something I should consider?

"Creative financing" was born of dire necessity in the late 1970s and early 1980s, when interest rates were pushed to all-time highs. The worst financing is selling property to buyers who don't pay a down payment. Unfortunately, the nothing-down advocates didn't all go out of business when interest rates dropped back to normal. Some of these hucksters still peddle their seminars and "how to" books to desperate buyers and vultures.

If you make a nothing-down deal with unscrupulous, deadbeat "buyers," they may live in your house rent-free for months while thumbing their noses at you as you go through the expensive, time-consuming foreclosure process. If well-intentioned, but overextended nothing-down buyers fail to make their loan payments or pay the property taxes, you'll also be forced to foreclose. Nothing-down deals don't have an upside; they're financial suicide for sellers. Do not, under any circumstances, get into a nothing-down deal!

What are seller-paid financial concessions?

In a really rotten market, even putting a "let's sell it" price on your house may not be enough incentive to get the property sold. You may have to sweeten the deal by offering buyers money in the form of seller-paid financial concessions. The two most common financial concessions are for nonrecurring closing costs and corrective work.

- Nonrecurring closing costs are one-time charges that buyers incur for such expenses as the loan appraisal, loan points, credit report, title insurance, and property inspections. This amount can be major money. Closing costs can total 3 to 5 percent of the purchase price. Some sellers come right out and tell buyers that they'll pay a portion or even all of the nonrecurring closing costs to put a deal together. Sometimes paying a buyer's nonrecurring closing costs is more effective than reducing your asking price by the exact same amount of money.

- Even if you don't offer to pay their nonrecurring closing costs, some buyers may ask for this concession as one of the terms in their offer. Getting this request is highly unlikely in a sellers' market or if you're in a multiple-offer situation.

- As an alternative to paying closing costs for your buyers, ask the buyers to check with their mortgage lender to see whether the lender will cut or eliminate their loan origination fee (points) if they agree to pay a slightly higher interest rate. This approach may reduce the buyer's total closing costs enough to eliminate the need for a credit from you for nonrecurring closing costs.

- In many areas, the lower the purchase price is, the lower the annual property taxes are. For that reason, buyers with plenty of cash go for a price reduction instead of a credit. Some agents, however, may lobby for a credit because cutting the price also cuts their commission. That kind of thinking is bad for your bottom line.

When should I consider getting a back-up offer on my house?

If you suspect that the deal on your house may fall through, you are wise to protect yourself by obtaining a back-up offer. One situation that screams for a back-up offer is any contract that contains a "subject to sale of buyer's property" contingency. A back-up offer is also advisable if your buyer is obviously struggling to qualify for a loan or if you and the buyer hit a brick wall on some negotiable provision of the contract (such as the way to handle corrective work for problems discovered during property inspections).

- A good back-up offer clearly states that you've already accepted another offer on your property. It also stipulates that the back-up offer will not take effect until you give the back-up buyers formal written notice that your prior contract is canceled.

- In other words, the back-up offer is contingent on the deal in first position falling through. Motivated buyers generally don't stay in back-up position very long. They keep looking at other property after signing your back-up offer. If something better comes on the market while you've got them on hold, they are gone in a flash.

- Back-up buyers can usually bail out of a back-up offer anytime they want before you advise them that the offer in first position is dead.

What is a contingency?

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.

What are the most common 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 is a ratified offer riddled with escape clauses?

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 to someone 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.

What are counter-offers used for?

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.

Is it important to 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.

Should I accept an offer from buyers who need to sell their present house before buying mine?

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.

What can I do to avoid having a counter offer kill a deal?

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:

- Don't counter small stuff. Suppose that the price and terms are okay, but the buyers want to include your 10-year-old washer and dryer in the sale. You want to take the washer and dryer with you to your new home. You can always buy a new washer and dryer if the house sells. Buyers often act emotionally and then find reasons to justify their actions. If you accept the buyers' offer, they'll think how smart they were to have made it.

- Don't kill the messenger. If the offering price is way below your price, don't reflexively counter at full asking price. You and your agent may have overpriced the house initially, or market conditions may have worsened since you put the property up for sale. A low offering price from a prospective buyer may accurately reflect your property's current market value. Reanalyze your house's fair market value by examining up-to-date asking prices and sales of comparable properties. Don't blow away a realistic buyer with an unrealistic counter offer.

- Stay focused on your goals. Suppose that you want to move into a new school district before school starts. Although you don't want to give your house away, ask yourself whether delaying the sale is worth protracted haggling over who's going to pay for a couple of hundred dollars in repairs. Set your priorities and don't take your eyes off your goals.