Negotiating a real estate deal really can be an art form, especially if it’s an investment property. There’s often a very fine line between an offer that will be accepted and one that will be rejected, and one might be surprised at the little things that can make the difference, too – price is the largest part of it, but not the end of the matter. Let’s look at some of the factors involved in an acceptable offer.

Price

The price on the offer is not the last thing that a seller will look at, but it is certainly the first.

When you’re making an offer and determining the price, there is a lot to consider. First, you need to have your own goals and needs clearly defined, so you don’t waste your time looking at and making offers on properties that don’t match your investment plans. This is true, regardless of whether you’re buying a property for rental cash flow or to fix and flip. You need to determine your own threshold on any given property, based on your particular investment plan. At the very least, have a good idea of your estimated “break even” point.

Next, when you are making an offer on a suitable property, you need to evaluate how important this particular purchase is to you. Are you willing to lose it if the negotiation doesn’t work to your satisfaction? If not, that will certainly change the offer you make, because you won’t want to risk losing the deal. As an example, if you’re working on slowly buying several properties in a row so you can redevelop the land, your choices are limited and you don’t want to miss the deal. I’ve seen people pay far more than a fair market value for a property in this kind of a situation. On the other hand, if you’re in a position where you’d be just as happy to walk away and find another property, you’ll feel better about making a lower offer and standing your ground.

Finally, you’ll have to make some educated guesses about the seller, their motivations and their needs. If your guesses are correct, this can help you to give them a lower offer that saves you some money, but you need to give them something to make the offer attractive. For example, if it’s the estate of a deceased person, a fast sale may be important to the family to get quick closure. In this situation, you may be able to make a lower offer, if you can close faster.

Once the offer is made, submitted to the seller, and negotiations begin, don’t give ground too quickly on the price, unless you’re fairly certain the offer will be accepted and the price is within your comfort level for profitability. The last thing you want to do is go too far, and then pull back on the price. Even if you are coming back with a new offer after some time away, the tactic of lowering your offer below your previous offer is more likely to backfire than anything else. Regardless of the situation, the seller will often be insulted. Only when they are in a very difficult situation and under great pressure will they accept a “backward” offer. Otherwise, they’re quite likely to ignore your offer and look for someone with a better one, and they might never consider you as a serious buyer again.

Finally, if you are going to “lowball” on the price and you’re serious about making the deal work, you better consider some ways of sweetening the deal with some of the other factors in the offer, as we discuss below.

Conditions

Typically, when buying a personal home you’ll have plenty of conditions, such as for arranging a mortgage, a home inspection, and insurance. Of course, you want to protect yourself, and the price is typically not as heavily negotiated, so sellers generally expect and accept conditions in such situations.

With investment real estate, however, a deal on the price is more important, and you’re going to have to play “give and take”. A firm offer is riskier but often better for negotiating power in price. As a simple example, if I offered you a $100 bill conditional on me getting it from the bank, or $80 with no conditions, which would you choose? The $80 sure thing, because you have no idea whether I can get the $100 from the bank? Maybe. Every person will have a different answer, and it’s the same with negotiating a real estate deal. A firm offer, with a guaranteed sale, will be worth more to one seller than to another. You don’t know how much it’s worth to them until you try.

However, if you’re going to make firm offers, you really need to have things sorted out. If you’re not going to include a condition on arranging a mortgage, you better have the cash to pay for it or a very sure method of financing the deal. Likewise, if you’re not going to include a condition on a home inspection, you need to understand the risks involved. It’s also better if you or one of your investment partners is a handyman or has some form of construction knowledge with which to judge the condition of the property and potential costs for needed repairs. It can even be as simple as having a friend or relative experienced in renovations or contracting take a walk through the property.

Remember, while a firm offer is very useful in negotiations, you can’t make a firm offer and then walk away from the deal without consequences. This can be very expensive, since you’ll either have to close with a high-interest mortgage, take on major repairs you didn’t expect, or walk away and risk being sued. Incorporation and offers in trust are one method of protecting yourself, and you might want to discuss this with your lawyer. In the end, as with any form of investment, you need to understand the potential risks in every deal.

Closing Date

Another important factor in making a successful deal is the closing date, when you actually take possession of the property and give the seller their money. Some of the situations where the closing date is important are: estate sales; a Power of Attorney selling for an ill or dying person; an owner in financial distress and facing loss of the property to the bank; or if it’s a bank or mortgage company selling the house under power of sale.

Contrary to popular belief, most banks and mortgage companies hate taking a property away from the owner. It’s a expensive nuisance, with lawyers involved, and it means that their money is tied up in a property but not making any interest. When a bank or mortgage company takes possession, they have to sell it to get their money back so they can invest in other mortgages and start making profit on it again. This means a fast sale is important to them. However, because the old owner will get any excess proceeds from the sale, they can’t just list the property for just enough to cover their mortgage. They have to show that they have at least tried to market the property for full value, or the owner they took it from can take them to court and sue them for what they should have got – which is one more expensive nuisance. Unfortunately, this means that the price will trump closing date almost every time. As we will discuss below, though, this can be a deciding factor if there are competing offers.

With an estate sale or a Power of Attorney situation, the value of a quick closing all depends on the family or whoever is making the decisions in settling the estate. If the house has been occupied by the same owner for a long time it probably doesn’t have a mortgage, or at least it will be very small. This is an important consideration in terms of how much room there is for negotiation, so ask your real estate agent when the property was purchased by the current owners. Just as certain money is better than uncertain money, as mentioned above, quick money is also better than slow money. If there’s plenty of equity, they may accept a slightly lower offer if you can close it quickly and get them the pay out. As with conditions, every person will respond differently to quick-closing offers, and you never know until you try. Some will get their eyes stuck on the dollar signs at the bottom line, and others will prefer a little less money if it comes faster – whether it’s due to their own financial needs or just for quicker emotional closure.

Another thing to look at is how long the property has been listed and when it’s set to expire. If the property has been listed for a longer-than-average time, this could also make the closing date an important part of the negotiations. Often when a seller lists a property, they have some time frame in mind. At the beginning of the listing, if the seller feels they really need to sell the property in three months, they’ll be hesitant to list if for longer than that. So if they are getting close to the end of the listing, they may be starting to feel more pressure, depending on their personal situation. This can give you a benefit in negotiating the price, if you’re willing and able to close more quickly. This is especially true in cases of divorce or financial distress where the seller faces the possibility of losing the house and equity if they don’t settle for a little less.

Competing Offers

From the seller’s point of view, a competing offers situation is fantastic. From the buyers’ perspective, it’s a pain in the backside. Buyers can get emotional and will do stupid things in competition, and this is dangerous when you’re purchasing the property as an investment. The key to competition is to keep the emotion out of it, and make the best offer you can, both in the price and other terms of the deal. Don’t be complacent or nonchalant, but don’t be pressured into doing something stupid either.

This is where the secondary factors of closing date and firm offers become more important, and are sometimes the deciding factor. I have had investment clients make an offer on a power-of-sale property and lose to a competing offer at the same price but with a fast closing date. I have seen clients win a bidding war with a slightly lower offer that was firm.

Your Agent’s Advice

Your real estate agent can be a very valuable resource in negotiating a real estate deal. They do this every day of their professional life, and the experience can be quite valuable.

So choose your real estate agent carefully. As with any profession, there are the good, the bad, and the ugly. This can be especially true with any form of salesperson, hence the jokes. You want someone who is ethical, obviously, but you also want someone who will not pressure you into a sale. Sadly, buyers’ agents can contribute to the emotional escalation in a competition situation, whether consciously or not. You need to make your investment decisions with a cool head.

Ultimately, in investment real estate, you want someone who can get you the information you need to make vital decisions, understands your values and investment plans, and who can be honest and emotionally detached enough to give you good advice. If you’re thinking about investing in real estate, I look forward to meeting with you to discuss your plans, and determine whether we would make a good team.

Either way, I hope all your investments work out and you make a ton of money. See you in the market!