Tips & Traps for Negotiating Real Estate, Third Edition (Tips and Traps)

Tips & Traps for Negotiating Real Estate, Third Edition (Tips and Traps)

by Robert Irwin

ISBN: 9780071750400

Publisher McGraw-Hill Education

Published in Business & Investing/Real Estate

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Sample Chapter

Chapter One

Be a Winning Negotiator

I was recently talking with a Realtor® friend of mine about a listing she was trying to sell when she said, "Those darn buyers—I know they want the property, but they refuse to negotiate!"

"Refuse, how?" I asked.

"They offered low and they won't come up a dime on the price. They, in effect, are telling my sellers, take our lowball offer or forget the deal!"

"Hmm," I observed. "Sounds like they're negotiating very well."

She looked at me in puzzlement. "What do you mean? They're going to ruin the deal."

"Maybe," I said. "And then again, maybe not. When you're in a strong position, as many buyers are in this difficult market, telling the sellers to 'take it or leave it' can be a very effective negotiating tactic for getting a low price. Provided, of course, the buyer is willing to risk losing the deal."

"So," she replied, "It's just a ploy? You think they will pop for a higher price?"

"Your sellers will never know unless they turn it back on the buyers. They can simply say, 'No.' Then they'll quickly learn how much the buyers really want the property. Either the buyers will leave, or they'll come back with a higher offer."

"That's gutsy," my friend said. "The trouble is, it's the first offer the sellers have had in months and they're desperate to sell. They don't want to lose the deal."

"Then they've already lost the negotiations," I replied. "If they're unwilling to risk the deal to get a better price, they've already capitulated to the buyer's lowball offer. Might as well just sign the papers and be done with it."

She nodded and said, "I'll put it in that light to the sellers. See what they have to say."

I later learned that the sellers did turn down the lowball offer and the buyers had indeed come up on the price. The deal was made.

Of course, that doesn't mean that this "tough" approach will work all the time—or even most of the time—but it is a good model for one type of negotiating strategy.

You Can Negotiate Anything

If there's nothing else you take away from this book, I hope it's the knowledge that anything can be negotiated. That doesn't mean you'll always be successful in getting all that you want. You may be outclassed by the negotiator for the other side or defeated by the circumstances of the deal. But if you know and abide by the basic rules of negotiating (and we'll see them all), you should be able to hold your own with the best of them. You'll learn to do just that from this book.

When There's Apparently No Negotiating Room

A buyer I was talking with not long ago had a different problem. He wanted to buy an REO (real estate owned, a property owned by a bank) that the bank had taken back through foreclosure. He had offered less than the bank/owner was asking and was turned down.

He said, "I really want the house. But I can't afford the price the lender is asking and still have enough money to fix up the property—it's in terrible shape. And I was told the bank won't negotiate. So I guess there's just no way to make the deal."

"Who told you the bank won't negotiate?" I asked.

"The real estate agent representing the lender," he replied. "She said the bank wouldn't drop below the asking price no matter what because of the amount they have into the property."

"Have you tried offering full price," I suggested, "and asking for money back for fix-up work?"

He looked bewildered, so I explained. "It sounds like you don't mind the price so much. You just can't pay it and have funds left to do the fix-up work. So have the bank pay for fixing it up.

"You can ask to have a certain amount of money held in escrow to be paid back to you once you've completed the work. The bank gets full price, so the deal looks good on its books. And you get the money to fix it up."

"Will that work?" he asked.

"You won't know until you try," I replied.

He did. And it did.

Everything Else Is Negotiable, Too!

Get the idea? Everything in real estate is negotiable. Sometimes you just have to think outside the box to see how. Here are just a few of the things that you can negotiate in real estate:

* The price paid.

* The terms everyone agrees to.

* Whether personal property is included, such as chandeliers and/or the refrigerator.

* Time when things will happen, for example, when the seller will move out or how long the buyer has to get financing or an inspection.

* Who pays the closing costs. (Does the seller pay for the buyer or is it going to be the other way round?)

* The seller's willingness to carry back a mortgage (to help the buyer with financing).

* The interest rate a lender will charge (to get a lower monthly payment).

* The escrow and title insurance rate charged (in some states).

* The size of the agent's commission paid (fully negotiable in every state).

* And a whole lot more ...

It all comes down to how hard you negotiate.

Is It Hard to Learn to Be a Good Negotiator?

You may be saying, "I'm not a negotiator. I don't know how!"

Actually, you can't be alive and not be a negotiator. All of us negotiate all sorts of things all the time. We learn as children to negotiate with our parents over TV time, when we'll go to sleep, what we'll have for breakfast, whether we can skip school—and a hundred other things.

Husbands and wives negotiate over sex, what to spend their money on, when and where to buy a house and how much to pay for it, where to go on vacation, whose relatives to visit—and many, many more things.

So does everyone else. We all negotiate all the time. It just comes with living with and among other people.

Many of us, however, freeze up when it comes time to negotiate in a formal setting, such as buying a house, getting a mortgage, paying an agent a commission, and so on. We somehow think we are unqualified to handle such big negotiations. Sometimes we delegate negotiations to another person such as an agent or an attorney. Sometimes we don't negotiate at all; we just pay what the other party is asking. In essence, sometimes we just give up.

Not handling negotiations yourself is really a shame, because chances are you'll never get what you really want unless you yourself negotiate hard for it. You'll have to be satisfied with less, eternally kicking yourself in the you-know-where for being such a wuss.

What's important to understand here is that you, Mr., Mrs. or Ms. Negotiator, can get what you want even in the most formal of settings with contracts flying back and forth and attorneys and agents whispering in your ear. You can learn the techniques that will empower you and bring to the fore those native skills that everyone possesses. It is possible to learn to negotiate successfully. And in so doing, you'll gain the confidence to do it to your advantage.

Is It Really Worth the Effort to Negotiate in Real Estate?

How can anyone really ask? Is it worth getting a home for tens of thousands less—or getting tens of thousands more, if you're the seller?

Is it worth getting a mortgage at 4 percent interest instead of 5? That can mean a difference of hundreds of dollars a month on the payments.

Is it worth getting a lender to agree to a short sale so you don't lose all your credit?

Is it worth saving your money on closing costs?

It is worth paying a 4 percent commission instead of 6 percent? That alone can mean saving thousands of dollars.

Yes. Negotiating in real estate is definitely worthwhile. If you don't believe that and don't negotiate strongly, you are selling yourself short, leaving money on the table, taking less than your fair share.

Negotiate. Negotiate. Negotiate!

Chapter Two

Knowledge Gains You the Upper Hand

It wasn't that many years ago that when homes were sold, the operating principle was caveat emptor, an expression taken from ancient Roman bazaars that means, "Let the buyer beware." It suggests that the buyer has no recourse against a seller if she later discovers that there are serious defects in the property, even when it dramatically reduces the property's value. The sole exception was when the seller actively concealed defects so there was no way the buyer could have discovered them. That, of course, was fraud.

In the past, however, even the threat of a fraud charge didn't stop many real estate sellers from unscrupulous acts. They risked dire consequences by doing "minor" cover-ups of defects. For example, they would caulk foundation cracks to make them seem shallower and less serious. Or they would paint over water stains that would have revealed roof leaks. Or they would temporarily plug leaking pipes to suggest the home's plumbing was fine. Or they would disconnect a light switch to make it seem that it alone was broken, when the home's entire circuitry might be defective—and dangerous. And so on.

For years, until about the middle of the last century, a cat-and-mouse game was played between sellers who tried to hide their property's defects and buyers who had to guess at what might actually be wrong. In effect, it was a game of who had the knowledge. Whoever did was in a position of power. The one lacking the knowledge was going to lose.

Who Has the Knowledge?

That all changed when disgruntled buyers discovered they often had little recourse against sellers for hidden defects. Sometimes enraged because they had, in effect, been cheated, they looked for another culprit and sued the real estate agent, claiming that he should have known about the problem and informed them.

Agents fell back upon the often-true fact that, in many cases, they had been duped as well. However, even if they prevailed (and many times they didn't because they were professionals and were supposed to know such things), they still had the ramifications of having someone denounce their professionalism, not to mention sometimes the costs of mounting a defense.

As noted, of course, it was all a matter of knowledge. If the sellers had knowledge of a defect and successfully concealed it, they might negotiate a higher price. If the buyers (and their agents) learned of the defect before the sale, they had the leverage to negotiate a lower price.

So, pushed by agents, the rules of the game were changed. Starting in the 1960s and continuing today, in most states, caveat emptor was dismissed as a guiding principle, and in its place came two new principles: the first, "implied warranty of fitness," applies to brand-new homes. If there is a defect in a new home, in many cases, it's up to the builder to fix it, even if the buyer discovers it long after the purchase.

For existing homes (resales), the principle has been changed to caveat venditor, or let the seller beware. Sellers are now responsible for making clear to buyers any defects that exist that might affect the value of the property. If they fail to do this, the buyer might successfully demand the sellers fix it even after the sale, claim damages, or even get rescission (forcing the seller to take back the home).

As a result, sellers in almost all states now regularly fill out disclosures, a home assessment listing any defects they know about in the property, and present it to buyers. In most areas, real estate agents do likewise. And sellers are cautioned not to cover up any cracks or paint over any revealing water stains or do any temporary fixes to the plumbing, electrical, heating or other systems that would conceal problems. And so on.

Further, agents and sellers encourage buyers in almost all transactions to conduct their own professional home inspection. And most buyers do that. They hire a professional home inspector to go through the property looking for defects that could affect the price. (For more on professional home inspections, see Chapter 18.)

All of this is done for one reason and one reason only, to gain knowledge about the property being sold. Once you have the knowledge, you can negotiate from a position of power.

Knowledge Is Power

What can a buyer now do with knowledge of a defect in a piece of property?

We saw what sellers could do, if they chose to be unscrupulous. They could cover up the defect to get a higher price. But what about buyers?

Today, when you as a buyer make an offer on a home, chances are you will not yet have seen the seller's and the agent's disclosures about the property. (Sometimes, savvy agents will have these filled out in advance and present them to buyers at the time an offer is made—buyers still usually have several days to approve them.) You most likely won't have seen a professional inspection report, which is typically ordered after a deal has gone to contract.

Therefore, at the time you make your offer to purchase, your knowledge of the house is limited, as is your negotiating power. You make the assumption that it is in pristine condition, except for any obvious defects (such as if a window is broken, a fire has gutted the kitchen, the pool has a big crack, and so on that everyone can easily see) that might be noted in the purchase agreement. Your offer, in fact, usually presumes no hidden defects.

In other words, if the seller accepts, you have a deal based on a lack of knowledge about any defects.

Now you, the buyer, get the seller's disclosures. They reveal that there was a roof leak, now patched. You pay for a professional inspection report that reveals that the water from the roof leak ran down a wall and caused black mold in the crawl space under the house.

The situation has changed. From a weak position of ignorance, you are transformed into a strong position of power, by knowledge. You now know that because of the defects (roof leak and black mold), the house is not worth what the seller and you agreed upon. It's worth something less.

After all, patching a roof leak, which may have cost a few hundred dollars, may not cure the problem—perhaps only a new roof can, which can cost tens of thousands of dollars. And removing black mold and replacing water-damaged boards, drywall, insulation, and so forth can cost tens of thousands of dollars more.

Armed with this new knowledge, you go back to the sellers and say that you're not approving the inspection report. Indeed, before you go through with the purchase, you want a $50,000 price reduction because of the home's defects. Further, you tell the sellers that you're aware that they must show your inspection report to any subsequent buyers, lest they be accused of concealing a defect, so simply refusing to sell to you and hoping the next buyer to come along won't discover the problem won't change their situation. (Some sellers actually hide previous inspection reports, to their own peril.)

What can the poor sellers do? If they want to sell, they will be forced to reduce their price, right?

Your acquisition of knowledge weakened their position. However, to gain bargaining advantage, the sellers may increase their knowledge base. They can now call in a roofer and come up with an actual price of $12,000 to replace the roof. And they can bring in a mold mitigation company that tells them it can fix the black mold for $15,000. Their new knowledge lets them know that a $50,000 price reduction is uncalled for. The problem can actually be solved with a price reduction of $27,000, at which amount they counter.

This thrills you, the buyer, because you know you can live with the roof patch. And this means that even after the black mold is removed, you can pocket an extra $12,000!

The deal is finally done. A final price is determined by negotiation after everyone is fully informed of the defects and what it will take to fix them—and what the buyer and seller could live with.

Knowledge is king.

Knowledge Affects Negotiations in Every Aspect of a Real Estate Transaction

It's not just defects. Knowledge affects the negotiating power (who has it, who doesn't) in every aspect of every real estate transaction. Here are some other examples:

Buyer's/Seller's Motivation

Why are you selling? Why are you buying?

It makes a big difference. It makes an even bigger difference who knows why and who doesn't.

For example, you're selling your home because you've just landed a job a thousand miles away after being out of work for a year. You have to be on that new job in two weeks. That's how long you have to sell your home.

You know you're desperate to get out and that you'll take the first offer that comes along, even if it's a lowball. But buyers don't know that.

It just so happens that a buyer is in the woods. An offer comes in. It's not all you're asking for, but it's close. It's got some conditions you don't like, such as the buyer asking you to leave your refrigerator behind as well as your baby grand piano in the living room. But you need to go, so you immediately agree. You don't try to negotiate any changes. You accede to every condition the buyer has. You feel you really don't have any choice.

Now, the buyer becomes suspicious. She notes that you seem very anxious to sell. You agreed to her price without an argument. You agreed to give up the refrigerator, something she was planning to pay an extra $500 for, if only you'd asked. You even agreed to give up your baby grand piano, something she was fully prepared to take off the table and only submitted as a bargaining chip. Something's not right here. Something's going on that the buyer doesn't know about, but she wants to find out. She wants to learn more. She wants to increase her knowledge

The buyer goes down to the property and begins talking to a neighbor. She says she's buying the for-sale house next door and is curious about the seller's motivation for selling. The neighbor spills the beans about how desperate you are to get out, your motivation for selling. Knowledge changes hands.

Now the buyer knows you're desperate. She happens to be unscrupulous. So she disapproves of your disclosures, even though you didn't disclose anything particularly onerous. And she disapproves of the inspection report, even though it only found a couple of broken wall sockets. She does what it takes to get out of the deal.

Then she makes a counteroffer to you of $60,000 less. Yes, she'll go through with the transaction, but for less money than she originally offered, take it or leave it.

Because the buyer now has the knowledge that you, the seller, must take any quick offer, she puts on the pressure. And what can you do? She now knows you're over a barrel. She is negotiating from a position of power. You are forced to accept.

Knowledge makes the difference.


Excerpted from "Tips & Traps for Negotiating Real Estate, Third Edition (Tips and Traps)" by Robert Irwin. Copyright © 0 by Robert Irwin. Excerpted by permission. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher. Excerpts are provided solely for the personal use of visitors to this web site.
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