When negotiating to purchase a home, understanding what your ‘levers’ are can be a significant advantage to winning a the deal.
Most people believe that price is the only bargaining chip when purchasing a home. Although this may be true in most cases, it does not hold true for every case. There are “levers” that you can adjust in order to make the best and most attractive offer to the seller. In a seller’s market you often hear the expression “Highest and Best” when there’s a bidding war on a home. The truth is that most people only pay attention to the first part, and disregard the second. Sellers want the Highest and Best offer, not necessarily the highest offer. For example, if the asking price for a home is $500,000 and the seller receives 2 offers. Offer 1 is $490,000 with 5% down payment and 95% mortgaged to close in 90 days. Offer 2 is $480,000 with 50% down payment and 50% mortgaged to close in 30 days. And lets assume (which I hate to do) the house was vacant because the seller had already moved to their new home and was carrying 2 mortgages. Which offer sounds the “Highest & Best”?
Well, I hope you picked the 2nd offer! Why? Because selling a home is about probability. The probability that the home is priced aggressively enough to attract at least one offer. The probability that the home home shows well enough. The probability that once an offer has been accepted, that the buyer can close. The probability that the home inspector does not find something wrong with the home. The probability that the attorneys involved will not break the deal. The probability that the buyers will close in said time. The probability that the 2 real estate agents know what they’re doing, or at least one of them does. I could keep going. I’m as optimistic as the next Tony Robbins, but there are so many variables involved in a real estate transaction that you need to anticipate and plan for the unexpected.
Back to the offers! I would advise my clients to take the 2nd offer because the probability of the deal actually closing is higher. All variables being equal, buyers number 2 seem to have a better package than buyers number 1 even though their offer is $10,000 less. Will the seller risk losing the opportunity to sell his house over $10,000? If he takes offer number 1, and the deal falls apart, will offer number 2 wait around? If offer number 2 is planning to close in 90 days, that means that the seller will have to carry 2 mortgages for an additional 3 months, versus 1 month with offer number 1. Will the difference in closing time compensate for the difference in offer amounts?
Here’s the big issue with this scenario if you’re one of the buyers: You may know that there’s a second offer, but you don’t know what the offer is for! Then what?
ADJUST THE LEVERS! Among the other terms you can offer, the three major bargaining chips that you have at your disposal as a buyer are:
Price: Purchase price of home compare to the asking price.
Time: How soon or late can you close on the home? Some sellers may need to move quickly, others may need more time to relocate.
Down Payment: The higher the down payment the greater the probability of getting a mortgage. The bank wants to minimize it’s risk by lending a lower amount than the home is worth. LTV -loan to value.
Adjusting up or down 1 or all 3 of these variables will make your offer more or less attractive to the sellers. Use them wisely, it could be the difference between thousands of dollars or worse, losing the home.
These concepts at time can be confusing for some people. And I sometimes presume to think that everyone understands the message I’m trying to convey–which often is not the case. So please feel free to send me an email or call me if you have any questions on this and any other topic I discuss on my site.
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