Once you make an offer on a piece of property, it probably will not be accepted on the first go-round. It may be, but the Seller will probably counter. Before I get too far into this subject, it would probably be helpful to have a brief discussion of when we do and don't negotiate.
Many gurus and real estate course teachers are always arguing that we should negotiate at every turn. They would tell us to squeeze every last dime of profit out of the deal. This is where they suggest that your offer include the seller's 1974 Ford Pinto. Go for the furniture, they say. Go for the mower…
I disagree. If the deal is a good one, why would you want to complicate matters by trying to get an old junky car and some worn out smelly recliners? If you want those things, make your money on the deal and go buy them for $300. What we want to do if the deal is good (that means at least $25,000 of profit in my book), is go ahead and do the deal. Remember, it isn't worth losing a $25,000 profit over $2,000 of negotiation. I'll cover this area more in a subsequent article on writing offers that get accepted.
If you make an offer that is on a “hot” property, i.e. one that you know will sell quickly because of it's price, you may want to accept the counter and move on. This assumes that the counter offer leaves you sufficient profit.
I recently landed a deal because another investor did not heed this advice. The investor had negotiated a sales price with a seller, but had not signed a written contract. The investor then decided to try to negotiate a lower sales price because he determined that a $1,000 electrical repair was needed. The price he negotiated would have made him $40,000 in profit, but he went back to the well one too many times. The seller became enraged, and decided that she did not want to deal with the investor anymore. The seller received my name from one of my subs who was an acquaintance of hers, and we were under contract the following day. If you have an agreement that gives you sufficient profit, leave the deal alone and sign the contract.
Nickel and Dime
When you are negotiating to get to a price you can both agree on, adopt the nickel to dime negotiation strategy. You want the seller to come down a dime on price for every nickel you move up.
You will need to work the agents and the owner, and never let the agent know what you are doing, or what your strategy is. Usually when you make an offer, some response comes back fairly quickly. If the asking price was $130,000, and I offer $100,000, I may get a counter of $125,000 from the seller.
What most people do, I have noticed, is keep splitting the difference. In other words, most people in my position would find the midway point between the $125,000 counter offer and my original offer of $100,000, which is $112,500. The seller would then counter with a number between their last counter ($125,000) and my counter ($112,500), or $118,750. Typically, this is where the action would stop. Most Sellers have the capacity to do two counter offers or perhaps three, but usually no more. I don't know why that is, but that is what my experience has shown me.
I would raise my initial price by $3,000. Each subsequent counter would find me giving less each time. This tells the seller that I'm getting close to the highest price I'm willing to pay. This will help to stop things.
Thus with two counter offers, my final sales price might be $105,000 vs. the $118,750 above. I saved $13,000. To play this whole thing through, I offer $100,000. The seller counters with $125,000. I counter with $103,000. Seller counters with perhaps $118,000. I counter at $105,000. The seller will be worn down at this point. He will be satisfied that he has negotiated hard, and gotten his best price from me.
What if your seller won't even give you a counter offer, and/or if they don't feel that your initial offer is worth countering? If the sales price is too high to make any money on the deal, you may have to walk away. If they won't drop their price, it's not for you. If it could be a good deal, I might wait four or five days and make a second higher offer or ask the agent if the seller might be interested in making any type of counter-offer. They often will counter verbally, which can start the proceedings.
There are timing considerations here. If you counter immediately upon hearing back from the Seller on each of his counter-offers, he is in control. He has all the incentive in the world to keep dealing, because the negotiation is not producing any stress for him.
What type of anxiety do we want our seller to feel? That he will lose the deal if he keeps monkeying around. If you believe that the property probably will not be sold out from underneath you, take your time getting back to the seller, at least 6 hours. Tell the agent that you are really having to think about this long and hard. Tell the agent that it will be hard for you or any other investor to go as high as he is asking. Tell the agent you want to start looking for other properties, and ask the agent to fax you a list of other properties currently available in the neighborhood. Tell the agent that you would still like to complete the deal if the seller could just bend a little. The seller and agents should all be scared that the deal is going up in smoke, and hopefully bend.
Remember that regardless of who the agent is working for legally, they know on a subconscious level that they are really working for themselves. If they feel that the seller is more likely to cave in than you, they will push on the seller to consider and hopefully accept your offer. They want to get paid. An $8,000 difference on the sales price is big to the seller or you, but not to the agent, as they are really just getting a percentage of the difference in the form of their commission (several hundred dollars). We are pushing on the agent and the seller with these tactics.
If you made the offer with an inspection contingency, meaning that you will have the right to inspect the property, and ask the seller to make repairs, sweeten this on a counter offer by saying that you'll take it “as is.” However, keep your right to inspect and turn down the deal if you find something terribly wrong with the house. The goal is to give a little where you can.
When all else fails — if the property is vacant, and there is a low mortgage or no mortgage, tell the seller that you'll take his price if the closing can be delayed for three months, and if you can have access to the property during this period. (You want the right of possession – this means the key!) If the property is still under market value even with his sales price, you might be able to sell it to someone else in three months, and not have to deal with a loan.
If the seller won't negotiate any more with you, and his price is still too high for you to finalize, tell the agent that you'd like to resubmit the offer in a week. Do so every week. Add $100 each time. You may provoke another round of negotiation.
And always remember that you can walk away and come back later. If you have the strength to do that, the Seller may agree to your terms immediately. (This is a little like walking out of a car dealership and having the salesman follow you into the parking lot begging you to stop.)
Thus in summary, if the deal is excellent on its face, don't mess with negotiation at all, and make it happen NOW! If the deal is not as good, or if you don't anticipate any other suitors coming along, you may want to get into some serious negotiation. You can literally make thousands of dollars per MINUTE negotiating. The nickel and dine strategy has worked wonders for me, and I'm sure it will for you as well. Remember that in the end, we will walk away from more deals than sign up. This is normal, and means that you are probably using good judgment. You never want to be so eager to do a deal that you do a bad one.