Negotiation Dos and Don’ts

By Dr. Alex Karrass, world-renowned authority on the subject.

Don’ts

1. Don’t set the initial demands near your final objective.  Gordon Wade Rule, a former top Navy negotiator once said, “In every negotiation, it must be assumed that unless you are dealing with juveniles, that your opponent is always going to table his maximum position first.  Equally important, it must be assumed unless you are dealing with fools that your opponent has not disclosed his minimum position in any manner”.
2. Don’t accept the first offer.  Many people do if the offer is as good as they expected or hoped to get.  There are two reason not to.  First, the opponent is probably willing to make some concessions.  Second, the opponent will be left with the feeling that he was a bit foolish for starting too high.  In either case, the negotiator who takes the first offer too fast makes a mistake.
3. Do not go into a negotiation without listing every issue before hand.  Establish an aspiration level, a minimum and an initial asking price for each issue. 
4. Do not dissipate your bank account of flexibility.  Flexibility is like money in the checking account.  Every concession should bring you closer to some goal.  If all concessions have been used up then deadlock is harder to avoid.  That just makes common sense.
5. Do not telegraph your concession pattern too clearly.  Each concession should point to a possible settlement.  However, an opponent should not be certain as to whom or whether it will or will not occur. 
6. Don’t concede on a quid quo pro basis.  Concessions do not have to be matched in kind.  Exchange little for much, later for now, little issues for big issues, obscure items for clear items, and immeasurable issues for measurable issues.

There are concessions that give nothing tangible away but contribute greatly to the satisfaction of the other party.  Here are a few that are sure to make him/her happier.

1. Give them the best explanation you can.
2. Treat them nicely.
3. Give them knowledge of a product on the marketplace.  He wants to know what he is dealing with.
4. Listen attentively to what the other man has to say.
5. Assure him that others are being treated no better than he.
6. Let him check some things that you say for himself.

Shakespeare once said, “He is well paid who is well satisfied”.  Each of the concessions above contributes to the other man’s satisfaction. Can anyone afford not to make them?

SHOWING

Once the phone starts ringing, you should be fully prepared.  As a side note, make sure that your phone is always answered when you’re trying to sell your home.  Answering services and machines are inexpensive and are necessary. The message on a machine should go something like this “ You have reached 555-5555.  I’m sorry we’re not available to take your call.  If you are calling about the house for sale, please leave your name and number and we will call you back. Thank you”.  Do not have children on the answering machine; this is only cute to parents and grandparents.

When buyers ask to see the home, make sure you get their name and phone number.  If some emergency should arise that would prohibit you from keeping the appointment, be courteous and call them.  This also allows you to keep a list of people who have toured the home and a way to contact them should you need or want to later.  While you have them on the phone, find out how they knew your house is available and ask them a few questions.  Find out if they’re local or from out of town; do they have a home to sell before they can buy a new one; have they pre-qualified with a lender.  There are ways to ask these questions and not be intrusive and you should practice how you’re going to do it.  Finally, be prepared for the ultimate question from a buyer “Why are you moving?”  Chances are you’re moving for the same reasons they’re moving.  You’ve outgrown the house, the house is too big since the children grew up, the drive to work is too far, etc.  Your response to the question should not be negative.  It should be simply that the house is great but for whatever reason, your needs have changed.

Assuming your home is in a “state of readiness”, you can begin to set appointments and show your home.  Make sure you set the right atmosphere for the showing, calm and relaxed.  Some home sellers will bake bread or cookies while buyers are viewing the home because the aroma is warm and comforting.  Fresh flowers, if possible, are a nice touch.  The house should be well-lit, no dark halls or rooms.  Children, when possible should go to a friends house, or visit a neighbor.  If the children are in their room watching television, then your buyer may feel intrusive and that’s not what you want.  Also if your prospect has children with them, they will feel that they’re invading on another child’s territory.  Pets should be confined and for the most part, out of sight because they can be distracting.

Many sellers will let buyers simply roam the house, but most prefer a guided tour.  This provides the seller an opportunity to point out the many qualities of the home.  Try to remember what first attracted you and convey that to your prospects.  Talk about what has been updated or recently replaced, emphasize how well you’ve maintained the home.  Discuss the advantages of the location, the neighborhood, close proximity to schools, churches, parks and shopping, etc.  You want your prospect to envision living in the home and whatever you can say or do to make this happen, you should.

Hopefully, you’ll hear back from buyers who have toured your home but don’t always count on it and don’t be discouraged when you don’t hear from them.  If you haven’t heard from them, you may want to wait a couple of days and give them a call.  Simply ask if they’ve decided on a home yet and if not, is yours one they’re considering.  This gives the buyer the opportunity to tell you why your home will or will not work for them, i.e. too big, too small, etc.

NEGOTIATION

A deal is successful when both you and the buyer are happy with the terms.  The negotiation process should be friendly and non-confrontational.  After all, you’re both winners... they're getting a new home and you're able to move on. 

Presentation of an offer

The presentation of an offer/contract can be handled several ways.  It’s preferable that you contact a real estate attorney to help you review, prepare and negotiate the offer.  Many real estate attorneys will assist you with this task at no additional cost if they are the attorney used for the closing. You and the buyer can meet and discuss the offer face-to-face before it’s in writing.  Simply discuss each of your needs and come to an understanding.  Then contact a real estate attorney to prepare the contract based on what you and the buyer have discussed.  If an offer has been prepared and presented to you, then you can either review it alone and make the decision, or contact a real estate attorney to assist.  If your prospective buyer is working with a real estate agent and you have agreed in advance to pay a commission, the agent will present the offer to you and you negotiate with the buyer’s agent.  If your prospective purchaser is working a buyer’s agent or an attorney, keep in mind they are working for the purchaser and not you.  Best advice - hire a real estate contract attorney to handle the negotiations on your behalf.

Once an offer is presented, you can (preferably with the assistance of your real estate attorney):

Accept the offer as is, sign it and it becomes a binding contract.

Counter-offer back to the buyer by making changes in the offer and initialing the changes.  The buyer has the option of walking away if the changes are unacceptable but negotiations have been re-opened.

Decline the offer – this should not be an option.  You should at least make a counter-offer.

Many issues can arise during the negotiation but it’s worthy to discuss a few that you should understand and be prepared to handle.  If you’re wise you will have the consult of a real estate attorney but ultimately the decision is yours.

 Buyer offers a low price

If the offer is low or not within the range at all, counter offer a little below your asking price.  Be prepared to go through several counter offers.  You may ask the buyer how they arrived at their offer.  It’s possible that the buyer may have done more research than you and have good evidence that your price is high.  If this happens then you’ll eventually have to drop your price - no matter who buys the property.  If the buyer tells you this is all they can afford, then very likely they are not really qualified to buy your home so don’t spend a lot of time negotiating.

 Buyer has a house to sell before they can buy yours

Accepting this contingency has many pitfalls and if possible you should try to avoid accepting an offer with this contingency.  Your first response should be to suggest to the buyers that they get a bridge loan or swing loan.  They will need to qualify to carry both houses at the same time.  If they can qualify, you can extend the closing date on your house to give them the time to sell their house.  That way, they have the time they need and you have a guarantee that they will close on your house regardless if they sell their current home.  If they can’t qualify but it seems reasonable to you that their house will sell and these buyers seem like good prospects, you might consider taking the offer, but including a "kick-out clause".  A “kick-out clause” means that you continue to market your house, and if you get another offer, the first buyers will have 24-48 hours to prove that they can perform on their contract without selling their current home, or they get "kicked out".  They will get a return of their earnest money deposit.  You are then free to negotiate with the new purchasers. Anytime you accept a contract with a contingency, it should include a time frame for the satisfaction of the contingency, even if you have a “kick-out clause”.  In other words you could allow the buyers 45 days to get a firm contract on their house and 45 more day to close.  We strongly recommend that you hire a real estate attorney when you are dealing with complicated situations such as this because if you exercise the kick-out clause, you must make an agreement with the newest purchasers that their contract is contingent on the first buyers being released.

Buyer wants to do a lease-purchase, also known as a lease-option

This means the buyer wants to rent the property for a period of time and then purchase it during or at the end of the rental period, which is when you get your money.  A lease purchase is often used to sell less desirable properties or to sell properties in a slow market.  It is also used in lieu of other contingencies.  If a buyer has a house to sell and can’t qualify for a bridge or swing loan, a lease-purchase can be a good solution.  Do not attempt this transaction on your own, hire a real estate contract attorney to prepare the forms and manage the closing.

 The offer is contingent upon the buyer obtaining financing

This is very standard, most people do not pay for a house with cash.  But there are certain elements that sellers should avoid.  Generally, you should not enter into a contract that is contingent on the buyer receiving a certain interest rate and points.  Let the buyer know that it is fine for them to shop around to get the best mortgage terms, but that the contract must say that that they will take "market" terms.  This means that the buyer can’t get out of your contract just because interest rates go up - unless they no longer qualify for the loan.

 Buyer has too many personal property items in the contract

If it’s not nailed, fastened or attached to the house, it is not included in the sale unless the buyer has made special provisions for it in the contract.  Buyers and sellers must be careful because if there are too many valuable personal items in the contract, the mortgage lender may deduct the value of these items for the purpose of the mortgage.

Sale is contingent on the house passing inspection

A home inspection is not an appraisal and it is becoming common practice to see this contingency in contracts.  The purpose of the home inspection is to disclose the condition of the property to the buyer.  In many states, disclosure by the seller is required by law.  Sellers may opt to have an inspection before the home goes on the market.  This conveys to the buyer that you are selling a structurally and mechanically sound house.  Regardless, a prudent buyer will require an inspection and you should expect it.

Selling a House on Your Own:
For Sale by Owner

With the potential rewards that can be gained--saving $4000, $8,000, $12,000 or more (minus your expenses) by not having to pay a Brokerage commission, many people wonder why less than 20% of home sellers undertake the task of selling their houses on their own. Possibly it has something to do with expertise. Many home owners who consider a self sale of their house back off when they see the level of knowledge and commitment that is needed to do an effective job. If you decide, however, that self selling is the best option for you, you will find the vast majority of the information on this Web Site to be of value. Most of what you will find here will be geared to either doing the job yourself or monitoring the job that your Agent is doing. The most successful home sellers are those who take an active role in the process, whether it is as a sale by owner or a sale by an Agent. If you feel that the best route is to sell your home yourself, then having as much information at hand is crucial. You will find many helpful hints on this web site, but an excellent source of additional information is Kevin Wood's newly revised Real Estate Secrets. Kevin was a top producing real estate broker and owned two real estate companies. He has a strong opinion that the public is not getting their money's worth from the real estate industry. You can get more information on his Secrets Course here.

This document contains information on:

• negotiating the purchase price
• contingency clauses
• items to be included in the sales contract
• terms you are likely to come across during the process of negotiating on a house.

Negotiating for Your House

You have found the house you want! Now what do you do?

If you have done your homework, you will be familiar with the location, know whether the floor plan will work for your family, and have a list of repairs or improvements that may need to be made. Now you should be able to determine how much you are willing to offer for the house. You need to set a limit and stick with it.

The purchase process begins when you complete a form called an "offer to purchase." The offer to purchase lists things like the price you are willing to pay and other conditions of the sale. The offer to purchase is presented to the seller by your real estate agent.

Take this form very seriously because its conditions are legally binding! You can withdraw your offer only if the seller has not already signed it. If the seller accepts your conditions and signs the offer to purchase, the form becomes a sales contract. You cannot change any of the conditions of the sales contract without additional negotiations and possibly loss of money.

Standard forms make the process of preparing an offer easy and almost risk free. The standard form provides much of the legal language your offer should contain and identifies many of the items you will want to include. However, you must make many important decisions. If you have questions, consult a real estate attorney. It is easier and safer to consult an attorney while you are completing the offer to purchase than to try to correct mistakes after the sales contract has been drawn up and accepted.

NEGOTIATING POINTS

Purchase Price

The value of every house is assessed by local governments for tax purposes. This assessed value can give you an idea of the market value of the house you are considering. Consider the cost of necessary repairs. You can use these to justify offering a lower price. A seller with a house that has been on the market for a long time may be willing to accept a lower price. If houses are not selling in a community, the seller may be more willing to compromise in order to sell. Sellers generally set asking prices so that they have room to negotiate. Your offering price opens these negotiations.

Contingency Clauses

Contingency clauses (sometimes called "jump out" contingencies) can protect you from possible problems or events. Listed below are three of the many contingency clauses. The more experienced your real estate attorney or agent, the greater protection he or she can build into the offer to purchase.

The subject-to-financing clause allows you to safely make an offer to purchase before you know what financing terms you can obtain. If you cannot secure the loan, mortgage terms, and maximum interest rate you are willing to pay, you can legally withdraw your offer.

The subject-to-inspection clause allows you to modify your offer to purchase if you are not pleased with the results of a professional inspection of the home. Two out of five houses for sale have at least one serious defect that could cost at least $500 to repair. The inspection may be of the entire house or just a part, such as a septic system. You will probably be required to arrange for and to pay for the inspection, but if repairs are needed the costs can be covered when the offer is modified.

A house sale contingency clause permits trade-up home buyers time to sell their present house to finance a new one. Many sellers object to this qualification, but when real estate is moving slowly and the seller needs to get a commitment from a buyer, it is sometimes accepted.

The following six clauses are usually included in standardized offer-to-purchase forms.

1. The property is not subject to any public improvements, such as major highway construction, that will significantly reduce the property's value.
2. The property is not subject to any administrative or legal orders to correct faults, such as a building inspector ordering changes in an out-of-date plumbing system.
3. The owner is not aware that the property has mechanical or structural defects, such as a faulty air conditioning system or leaky roof.
4. The seller guarantees the property is not in a flood plain.
5. The seller agrees to repair any property damage that occurs between the date of the accepted offer and date of sale.
6. The seller guarantees that the property title is free and clear of any title defects that have not already been mentioned by providing a warranty deed. A warranty deed does not guarantee the soundness of the structure or mechanical systems.

ITEMS TO INCLUDE IN The SALES CONTRACT

Non-fixture Items-- List the items you want to be included in the house's sale. These non-fixtures may include curtains, appliances, and workbenches. Items that are physically and permanently attached usually are automatically included in the houseþs sale except when the seller specifically indicates these exclusions in the sales contract. It is best to specify any items you want included so there will be no misunderstanding.

Closing Date-- Your offer to purchase should also include your proposed closing date. On this date you will meet with the seller and formally purchase and pay for the house.

Life of the Offer-- The standard form includes a provision for you to specify how long the seller may take to respond to your offer. This prevents the seller from keeping you in suspense while waiting for a better offer.

Earnest Money-- In most cases, you will be expected to provide a deposit or earnest money payment with the offer. Five percent of the house's purchase price is an average amount for earnest money, though it could range from $500 to several thousand dollars. The check should be made to the real estate agent, who will keep the money in escrow until the negotiations are complete. Always get a signed receipt. Be sure your contract indicates that you, the buyer, will receive the interest on the downpayment. And be sure that you will get your money back if the sale is not completed due to the seller or certain contingencies that you have written into the contract. If you decide to back out of the contract, you will probably forfeit the deposit to the seller.

PRESENTING The CONTRACT

Once you have completed and double-checked the contract, it is presented to the seller. If the seller accepts everything in the contract, including the price and all of the contingencies, the offer becomes binding on both the buyer and seller subject to the contingencies. If the seller wishes to negotiate, a counteroffer is made with either a new contract or with notations and substitutions made on the original document. You then receive the revised contract and can either sign it, if acceptable, or reject it and make a second offer. Most agreements are reached after several rounds of offers and counteroffers.

ADDITIONAL NEGOTIATING TIPS

Watch what you say within earshot of either a real estate agent or a seller. Everything you say can, and will, be used in the bargaining process. For example, if you submit a contract with a figure lower than the asking price, don't let the seller's real estate agent know that you are willing to pay more. Never confide your negotiating strategy. A real estate agent is legally bound to the seller. The alternative is to use a buyer's broker or agent who will represent you, the buyer.

Don't respond to any suggestions or counteroffers unless they are presented in writing. For example, if a seller or his agent tells you that your offer is too low, insist on a written counter-proposal indicating the price (or other changes) that would make your offer acceptable. Don't feel pressured into raising your price on the spot.

If the seller agrees to make repairs (based on negotiations following a home inspection report), insist that they be done by contractors that you, the buyer, select and under your supervision. Otherwise the work could be poorly done with incompetent labor and/or inferior materials.

Never submit a contract to a buy a house after seeing it only once! Return for another look the following day or weekend, and again, if necessary. Visit the house immediately after a rain or heavy snow, if the weather cooperates, to see if there are visible water problems. Don't be embarrassed to revisit the houses you like most. Remember, you don't really "see" a house on the first visit but find yourself focusing on features like wallpaper, a great master bathroom, or garage space. You may have little or no memory or even an inaccurate impression of the rest of the house. Returning to the house several times will also give you an opportunity to engage the sellers in conversation about the neighborhood.

Try to get the seller to take over as many of the purchase and sale expenses as possible. Do not let tradition or custom get in your way. The fact that the "buyer always pays for the survey" does not mean the seller cannot pay for it. Keep in mind that Federal Housing Administration (FHA) and Veterans Administration (VA) loans do not allow the financing of points. Any points in financing these loans must be paid in cash by you or by the seller. A seller's willingness to negotiate may depend on the market and how anxious he or she is to sell. In a tight market or if the seller has to move, he or she may be willing to pay points.

Shop around for the best mortgage terms. The lender with the lowest interest rates may also have the highest closing costs. You may be able to negotiate with your lender to waive or reduce certain fees if the competition among lenders is strong.

Negotiate with attorneys on their fees. Most attorneys base their fees on a percentage of the price of the house. You may be able to negotiate an hourly rate with your attorney.

SUMMARY

Negotiating to buy a house is the process of telling sellers and their real estate agent at what price and on what terms you are interested in their property. Expect to haggle by insisting on the price and conditions that you desire. Many buyers don't realize they are allowed to bargain on any feature of the deal, and traditional real estate professionals don't always tell them. This is where the services of a buyer's broker or agent can be valuable.

Expect to make compromises. Read books and articles, consult friends, and hire professional advisors when needed. Do not be afraid to ask questions. Doing your homework will help you buy a house with the confidence and knowledge that you have made the best decisions.

For more information, see Inspecting a House, or House Purchase Contracts, or Choosing the Best Mortgage.

Adapted from:

Shelby, Wanda W. and Eleanor J. Walls. 1991. Negotiating for Your Home. Arkansas Cooperative Extension Service, Little Rock, AR.

Merrill, John. 1990. Buying a Home: The First Time Around. University of Wisconsin-Extension, Madison, WI.

Peart, Virginia Peart. Negotiating for Your Home. University of Florida Cooperative Extension Service, Gainesville, FL.

Fannie Mae. 1991. A Guide to Homeownership. Washington, DC.

Real Estate
A Seller's Checklist

NO SOONER did you purchase your home than you probably started wondering what it would be like to try and sell it someday. Now that you are planning to put it on the market, you've probably already moved out emotionally and just want to get started on finding your next home. But you'll have a lot of work to do if you want to fetch top dollar on the sale. Luckily, you don't need to spend a lot of money prepping, just some time and effort.

Here's a checklist to get you started:

Set your goals for the sale
Do you want a quick, hassle-free sale, and only want to get out of the home what you put into it? Or, are you willing to take more time and effort in order to get the highest possible price? Make sure you and your spouse have the same goal in mind. Also, do you have a plan for where you will go once you sell? In a hot housing market, some buyers will be looking to close in a matter of weeks. Decide if you would be willing to move out on a few weeks' notice and where you would go. If you plan to try and time the sale with the purchase of your next home you won't be able to be as flexible about the closing.

Decide whether or not to hire a real estate agent
Although we recommend that you at least try selling your home without a broker, going solo isn't for everybody. Learn more about both options by checking out Choosing a Broker and Selling Without a Broker.

Price the house
Evaluate the market in your area and set a realistic price on the house, either by checking the sale price of comparable homes in your town or hiring an appraiser. (You can get information and a referral from the Appraisal Institute.) It is critical to set the right asking price. You don't want to feel you sold for too little, but an overpriced home can languish on the market and go stale. Real estate agents will recommend a price, but you should probably do some homework yourself since some brokers will set a high price to get your listing, only to recommend that you lower it later.

Identify your home's flaws or problems
Sellers are obligated to disclose any major problems or flaws in the structure or property, including things like dry rot, termites, asbestos, septic problems, or a new highway slated to run nearby. The disclosure requirements vary by state, but if you fail to mention the leaky roof or flooding basement, you could be sued for fraud. There is really no upside to trying to hide problems anyway since most buyers will have the home inspected before closing.

If you are selling an older home that you have lived in for years, you may want to get it inspected yourself before you set the price. You can always sell the house "as is" if it’s a real fixer-upper. You also might want to shell out some cash to fix small things, like a broken dishwasher or cracked tiles, so they don't enter into negotiations.

Get the house in showing condition
While you probably won't want to have major repair work done before a sale, small cosmetic touches can increase your home's value by thousands. Improve "curb appeal" by adding a row of flowers to the walkway, trimming the shrubs and painting, even if it's just the side of the house that shows from the street or the front door. Consider painting inside as well (white is best). Clean the windows, polish fixtures, buy some plants. Also, get rid of clutter. Remove extra chairs and tables to make rooms look more spacious, and clear off kitchen counters.

When you actually start showing buyers around, there are a lot of small ways to make your home more appealing. Of course, keep rooms and the yard meticulously neat. Also, turn on all the lights, fluff up pillows, light a fire in the winter and play soft jazz. Keep any pets out of sight.

Decide what goes and what stays
Before you start showing your home, you need to decide what will be included in the sale. If you want to take your Miele washer and dryer and your Sub-Zero refrigerator with you, tell serious buyers before negotiations start. Leaving behind the custom cushions and drapes designed for a window seat could turn out to be an attractive selling point.

Figure out your own finances
Make sure you know exactly what you'll net from the sale. Add up the amount you'll owe the bank and the broker (a whopping 6% of the sale if you go full-service). The good news is that most home sales are now tax free. You may even get some cash back at closing for prepaid local taxes, home insurance or fuel.

Hire an attorney
Although an attorney won't really get involved until you draw up a contract of sale, it's good to get one on board early in the process. If you are selling the house on your own you may have questions about negotiating with buyers. If you use a real estate agent, you may want your lawyer to look at the listing agreement before you sign.

Start looking for a new home
Sellers are usually advised not to begin the search for a new home until a sales contract is signed since you don't want to be saddled with the costs of carrying two homes if the sale falls through. Plus, trying to perfectly time the two closings can make planning a move much more stressful. However, if you have to move quickly or you don't want to pass on your dream house, you have some options. A "bridge loan" will let you use the equity in your old house to buy a new one. You could also include a contingency clause stating that you will only buy the new home if the sale of your old home goes through.