First time home buyer. How to negotiate price?

Question

I am a first time home buyer and am getting ready to make an offer on a house. The house is listed at $88,500 and has been on the market for 3-6 months. When I asked my realtor for his advice on what my initial offer should be he said:

If you want to negotiate you can offer $70k and we can go from there. If you want to play ball offer them $80k.

Is it reasonable to offer so much less than the listed price? I initially thought that an offer at $85k was reasonable while my better half suggested $78k. Also, from what I've read it seems that sellers will cover closing costs a lot of the time. Is this normal? Is this something to ask for initially or later on? How would I go about it?

Answer 1

Well it all kind of depends.

The Realtor is your pro, and you should communicate further with him. Is this a neighborhood on the decline? Is there a good reason to make such a low offer? Are you totally off base when you think 85K is fair, and if so why? Is he just working his tail off for you (a great thing)?

One thing that is a key to this negotiation is financing. What does your financing status look like? A reasonable cash offer with no contingencies and a quick close might be less than 70K. A person with strong financing can get a better discount then a person that is questionable.

It could be that the Realtor is testing the waters to find the bottom price. The home selling season is closed (typically the summer), and the home has been on the market for a bit. Offering 70K might mean a counter at 82K, so you can work on an offer between 80 and 82.

To me, it sounds like this guy is working for you. You should thank him. It is pretty hard to find a realtor that is willing to negotiate his pay down in order to save you money.

Also he can answer the closing cost question better than us as he is more familiar with your particular market.

Answer 2

In this case, trust the real estate agent; negotiating experience is one of the things you selected them for. Especially if they're suggesting a lower number than you expected, since they get paid on commission and so may be biased the other way.

Part of their job is to look for hints about how motivated this seller is and what price they might accept, as opposed to what price they hope to get.

And remember that the default assumption is that the two parties will meet in the middle somewhere, which means it's customary to offer 10% less to signal that you could probably be talked into it if they drop the price about 5%.

This is like bridge-hand bidding: it's a semi-formalized system of hints about levels of interest, except with fewer conventions and less rationality.

As far as the seller paying the closing costs: that's really part of the same negotiation, and doing it that way makes the discussion more complicated for the seller since they need to figure out how much more to charge you to cover this cost. If they offer, great, factor that into what you are willing to pay... but I wouldn't assume it or ask for it.

Edit: Yes, unless you have engaged a Buyer's Agent (which I recommend for first-time buyers and maybe all huyers), their fiduciary duty is to the seller. But part of that duty is to make the sale happen. If the price goes too high and you walk away, neither the agent nor the seller make money.

A bad agent can be as bad as a bad car salesman, sure. But if you don't like and mostly trust your agent, you are working with the wrong agent. That doesn't mean you give them every bit of information the seller might want, but it does mean you probably want to listen to their input and understand their rationalle before deciding what your own strategy will be.

Answer 3

As far as the specific price - it depends so much on the area and the house and other things. 70k could be a perfectly reasonable offer, or it could be an insulting lowball. If they just lowered it from 95 to 85 for example, 70 is pretty low to start off. But who knows.

To answer the closing costs side of things, though, the reason those are sometimes paid by seller (rather than just dropping the sales price some) is that it makes it easier for the buyer if the buyer doesn't have much cash on hand. From the seller's point of view it's all the same money - giving you a discount on the sale price vs. covering closing costs - except for the small difference of the realtor's commission (which would be slightly lower in the lower-sales-price example, but usually that's not a significant factor in total cost). IE:

House sale price: 80k
Closing costs: 4k
Total cost to buyer: 84k
Buyer cash on hand: 16k down payment + 4k closing costs = 20k

vs

House sale price: 85k
Closing costs: 4k, paid by seller
Total cost to buyer: 85k
Buyer cash on hand: 17k down payment

How much having the 3k less on hand (and instead in your mortgage) is worth to you as a buyer is, of course, up to you. If you have plenty of cash on hand for the down payment and closing costs, then paying closing costs yourself is probably in your best interest as the seller typically assumes buyers value reduced/zero closing costs at more than 100% face value.

Answer 4

No offer is too low. You can always offer more but you can't offer less once you have made your first offer.

And there is always another great deal just around the corner. The more enthusiastic you are about buying this property the less your negotiating power will be. The pproperty has already been on the market for a long while, so the vendor may be getting desperate to sell, so their negotiating power is already lessened.

Know what the market is in the the area and offer at least 10% below the market. If it is a weak market then offer at least 20% below market. (Note: the list price is usually more than the market price).

So offer as low as possible and you can always offer more if you think it is still a good price. Treat it like a game and have some fun, don't stress out if you miss out, there will always be a better deal just around the corner.

Answer 5

Do some homework to determine what is really a fair price for the house. Zillow helps. County tax records help, including last sale price and mortgage, if any (yes, it's public). Start at the low end of fair.

Don't rely on the Realtor. He gets paid only if a sale occurs, and he's already coaxing you closer to a paycheck. He might be right with the numbers, though, so check for yourself.

When you get within a thousand or two of acceptance, "shut up". I don't mean that in a rude way. A negotiating class I took taught me how effective silence can be, at the right time. The other side knows you're close and the highest you've offered. If they would be willing to find a way to come down to that, this is the time. The awkward silence is surprisingly effective.

Answer 6

Often, if your realtor and the selling realtor know each other, your realtor will "discover" what price the seller really wants. (Don't worry about how this is done. There will be no evidence it occurred!) Your realtor will then drop hints that you should aim for that price to ensure the deal goes smoothly. That sounds like what your realtor is doing when he says "If you want to play ball offer them $80k." He won't stop you from bidding lower, but he knows where you'll end up.

Price is just one part of the transaction, however. You can offer $80K, to meet their price, but also request that the seller make recommended repairs or credit you the cost. You can request that the seller cover closing costs or transfer taxes or any other costs. In short, offering the seller X doesn't mean you will pay X. I personally try to avoid credits, because although they make your effective price lower, the actual purchase price still drives things such as your loan, and in many places, your property taxes and other taxes. I would rather reduce the price than get credits. But you do what you have to do if you want the deal.

You can also request that certain appliances be included, such as a refrigerator or a washing machine and dryer. You can ask for furniture, or statues in the backyard, or anything else you liked when you saw the house. In short, you offer X for the house, but you also get a bunch of other stuff that you need or want.

Answer 7

Whether applying for a job or buying a house, Offer a more specific price like $72,500, which tells them you thought hard about the price. $70K is too 'round' of a number.

Additionally, your financial ability/condition can be a factor too. If you have 20% down, and your Realtor assures the seller that your transaction will go down without a hitch, and you'll be approved for a mortgage, they may accept your offer of $72,500 over the other guys $78K offer if [s]he has less desirable finances.

Good Luck!

Answer 8

Advice from a long-time flipper

You negotiate price based on four factors and none of these are set in stone:

1. How much you love the house. Is this house a 100 out of 100 for you or a 85 or a 75. How much have you compromised.

2. What is the likelihood that you will find a house that will make you just as happy or at least close. You might have a house that is a 95 out of 100 but there are five other houses that you rated between 93-95.

3. What is your timeframe. Know that playing hardball takes longer and can knock you out of the game sometimes and takes a little while to find a new game.

4. What is the relative housing market. Zillow and other such sites are crap. Yes the give you a generalized feel for a community but their estimates are off sometimes by 30-40%. Other factors like street/noise/updates to house/ and so on are huge factors. You will have to really navigate the area and look for very comparable houses that have recently sold. Then use average housing movements to extrapolate your future houses cost.

As a buyer you have two jobs. Buy the house you want and manage your agent. Your agent wants you to buy a house as soon as possible and to increase their reputation. Those are their only two factors of working.

By you offering closer to the asking price they are able to get their sales as quick as possible. Also other agents will love working with them. In fact your agent is selling you on the home and the price. Agents hardly worry about you paying too much - as most buyers oversell the deal they get on their home. Admitting that you paid too much for your house is more of an admission of ignorance of yourself, compared to agent incompetency.

If you decide to low-ball the owner, your agent spends more time with you and possibly reduces their reputation with the selling agent. So it is common for agents to tell you that you should not offer a low price as you will insult the owner.

My advice. Unless the home is truly one of a kind for the market offering anything within 20% of the asking price is DEFINITELY within range. I have offered 40% less. If a house is asking too much and has been on the market for 8 months there is no way I am going in with an offer of even 15% lower. That leaves you no room.

What you do?

First think about how much you think this house could sell for in the next 3 months. In your example let's say 80K based on conservative comps. Then take the most you would actually pay for it. Let's say 75K. 70K is about as high of an opening offer I would go.

Do NOT tell your agent your true breaking points. If you tell your agent that you would go to 75K on the house. Then that is what their negotiations will start at. Remember they want the sale to happen as soon as possible. Very likely the other agent - especially if they know each other - will ask if how flexible you are going to be. Then next thing you know your agent calls you back and says would you be willing to go 77K or the owner is firm at 80K.

Do not give up your position. You should never forecast to your agent what your next bid or offer would be for the house. Never get into scenarios or future counters.

So you offer 70K. If your agent asks you how firm that is? "Very firm". If your agent doesn't want to take the offer to them, "Thank you for being my agent, but I am going to be working with someone that represents what I want."

If the owner says "You are done too me cheapskate." Well that's how it goes. If the owner stays firm at asking or lowers - then you can come up if you feel comfortable doing so. But understand what your goal is. Is it to get a house or to get a good deal on a house? Mine was always to get a good deal on a house. So I might offer 72K next. If they didn't budge, I am out. If they moved down I went from there.

Easy Summary

The fact is if they aren't willing to negotiate with you enough it always ends the same. You give them your take-it-or-leave-it offer. You tell your agent that if he/she comes back with one penny over it comes from their commission (god I have said this 100 times in my life and it is the best negotiation tactic you have with your agent). The owner says yes or no and it is over.

Answer 9

First of all, never ask a realtor for advice. The realtor represents the SELLER.

Blankip's advice above is by far the most accurate of the previous answers.

The first step is to estimate the market. Look at past sales in the neighborhood over time, and from them estimate the prospects for the house at different time durations. Based on other sales, how fast do you think the house will sell at a given price? 60 days, 90 days, a year? If a house is high priced, that means the seller is prepared to wait. He is saying "I am happy to wait a year to find somebody who will pay this."

Next, who is the owner? Young professional? Retiring couple? Landlord? Flipper? Who is it? The more you know about the owner, the better. Everybody has a time table, you need to find out what that is.

Next, what is YOUR timetable? You need the house by the end of the month, or by the end of the year, or never, which is it?

Objectively rate the house. Plusses and minuses. Good houses are those which everybody else hates and you love. You will get the best price there.

(Assuming you need to find a house in 90 days) Based on these considerations determine the lowest price you think the owner will accept in a 30-day time frame. Make a written offer with an address and email, no phone number. If he comes back with a counter offer, ignore it. If for some reason a realtor has your number and calls you, tell them "My written offer speaks for itself. I have nothing further to say."

It is very important not to entertain haggling or counter offers. Don't even pick up the phone. He has your WRITTEN offer. He can email or write you: I accept.

If the 30-days elapse, move onto your #2 choice and make a more aggressive offer. If that doesn't work, go to choice #3 and accept the listed price.

This strategy may seem counter-intuitive because the natural tendency for people is to want to communicate. Trust me: the way to succeed in a negotiation is to NOT communicate. Make your offer and that is that. That is the pro way to do it, and will produce the best result for a short-term situtation.

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Long term situation

If you are an investor ("flipper"), or have a lot of time to wait/spend, you can use a different strategy which involves pressuring the seller. What you do here is find a property you want in which the owner is vulnerable. That means someone who is old, bankrupt, out of work, indicted and on their way to prison or already in prison, etc. Bank owned properties fall into this category.

In this case you figure out the 6-month price or however long you are willing to work on it. Then you pester the person. Become their buddy. Visit them in prison. Take the bank officer to lunch. Show up on holidays. Invite them to Thanksgiving. Start a relationship. Every two weeks you pester them. Want to sell yet? Want to sell yet? You basically harass them until they capitulate. Maybe it takes 6 months. Maybe it takes 2 years. Eventually they will give in. By this means you can get a much better deal than in strategy 1 above, but it takes a lot more time and effort and is appropriate more for an investor.