Negotiating the Real Estate Contract

Negotiation is the process of communication back and forth in order to reach a joint agreement. There is no “one size fits all” strategy of negotiating a real estate contract. Many of our clients have been very experienced negotiators, and we have learned a great deal from them, as well as from books on the subject. We would like to share some of our thoughts on negotiating with you:

What do we want to achieve in a negotiation?

The best negotiators bring an attitude of high expectations to the table. They are hard on the problem and soft on the people. Letting the seller know what you need, in a clear and reasoned way, is the first step toward getting it. We try to keep all of these goals in mind:

Enable you to move into your new home.

Obtain the lowest possible price for the property.

Close within an acceptable time frame.

Solve any repair issues fairly.

Have no title, survey or loan problems, or solve any that do arise.

Develop a good working relationship with the seller.

Have no future problems after closing.

Is a cooperative or combative approach more effective?

Our experience shows that the cooperative style is the most effective and efficient way to complete a transaction. Professional negotiators usually try to preserve the relationship between the parties, and work together to resolve problems. The goal is not to reach an impasse in which neither the seller’s nor the buyer’s needs are met. Buyers sometimes submit a letter to the seller describing why their house is not worth what they are asking, pointing out deficiencies, etc. This almost always backfires, and starts the negotiation off with a defensive seller. It is best to anchor your price to the marketplace, while remaining very complimentary of their home.

How do you work with a combative strategy by a seller or agent?

The combative style is sometimes encountered. This strategy includes: negative comments, emotional statements, table pounding, threats to walk out, ego involvement, and stated positioning. Creative solutions and trade offs are not as likely to be found in this environment. Working with a combative style negotiator requires a considered approach:

Do not respond emotionally. An angry or defensive response will escalate the negotiation into a no-win battle.

Do not argue. Arguing usually positions them more strongly and drags the negotiation process off course.

Do not ignore their arguments or statements. Listen carefully, but do not accept or reject.

Firmly anchor pricing and other terms to outside data. Show that the price has not been chosen arbitrarily.

Reduce misunderstanding by following up with written summaries of discussions.

Do not allow hazy or unclear proposals to stand.

Offer some “wins” on some of the terms. Face saving is very important.

Look for ways to meet their underlying interests.

Remember that they may have a beautiful home that satisfies the buyer’s goals.

Is every point in the contact negotiable?

Yes. However, one of the most effective means of coming to an agreement is to rely on consistent standards or norms when possible. For example, it is common practice for the seller to pay for the title policy and for the buyer to pay survey cost. Using accepted standards prevents buyer and seller from haggling over every point. Working within the accepted “norms” for our area helps to legitimize offers, and focus the negotiation on just a few points. On the other hand, all the points in an offer can be used to help structure the deal. They offer trade-off opportunities for both parties to get what they want from the negotiation.

The value of trust in a negotiation cannot be overstated. Most people are fair minded and reasonable. They respond well to respectful treatment and to having their concerns heard. If the seller feels that the buyer and agent are acting with integrity, their attitude will be much more cooperative. Contract negotiation is a sensitive area, and anxiety can be high. The buyers may have had an unpleasant past experience with buying a home. The seller may be under pressure, with future plans at stake Acting with integrity does not mean that all “cards have to be put on the table.” It is not proper to discuss personal issues that affect the buyer, such as your financial ability or urgency to move in. It is valuable to develop rapport because trust increases your leverage. Here are ways:

Listen and understand what the seller has to say.

Express appreciation for the seller’s home, gardens, decorating.

Respond within a reasonable time to counter offers.

Reassure the seller of your ability to close.

Reveal some personal information about yourselves.

Finding common ground with the seller can be a very powerful tool in the event of multiple offers. I can think of several instances in which sellers selected their contract for very personal reasons. (The family reminded them of themselves when they moved in with young children years before. Or, they were both of the same religion. Or, the new owners would care for their gardens.)

Understand your leverage.

The more we can find out about the seller’s needs, the better chance we have to find solutions to negotiation hurdles. We will be able to offer information or concessions that appeal to the seller’s deepest concerns. Obviously, if the house has been on the market for 300 days, you have a lot more leverage than you would with a brand new listing. If their time frame is immediate, and you can meet it, you have some leverage. If they have multiple offers, you have very little leverage!

How much under list price should you offer?

Buyers usually offer less than list price, unless it is a strong sellers market. There is no standard percentage “under list price” that can be used. A market analysis will show recent sales for the neighborhood, which is the best way to establish the offer price.

It is usually counter-productive to offer so low that the seller will automatically reject the offer. This will set a negative tone, and may result in an emotional response from the seller.

What if we have a multiple offer situation?

Occasionally the seller receives more than one offer on their property. The Austin Board of REALTORS┬« has a policy that allows two options: disclosure to all parties that multiple offers have been received, or disclosure to no one that there are multiple offers. We prefer disclosure to all parties. However, the listing agent and seller will make the decision as to how they will handle offers. By simply disclosing that there are multiple offers, they are not “shopping” your contract. Shopping occurs when the seller discloses the terms of an offer to induce a buyer to submit a better offer. This can result in major distrust of the process by the parties, and the likelihood of loss of the buyers.

Usually the procedure is to notify each party that multiple offers have been received. Each party is then given the opportunity to raise or adjust his offer by a certain time. After that time, the seller is free to review all offers and choose one to work with. They are not obligated to choose the “first” offer that came in. The selected offer may be countered, or accepted as is.

Five Tips to Know When Presenting a Contract For a Wholesale Deal

1. Be aware of who will be looking at the contract. In general there should be 2 parties, the seller and the attorney. If they want to involve another party such as a realtor who is a friend, make sure you get their contact information before hand so you can establish rapport and answer any questions they may have directly. If the attorney is not familiar with real estate transactions, or wholesaling, just explain that it is all standard and that you will close quickly. Also note that if the contract will be seen by a realtor, having a $10 dollar deposit might not be enough and they will try to kill the deal (and get the business for themselves), which is why you want to speak with them before they see anything. As a wholesaler, it is very important that all parties who influence the seller are on the same page.

2. Understand your states standard board of contracts and what it states. If your wholesaling real estate and don’t have a contract, just go to your local real estate office and ask for a standard contract. When negotiating with a seller, you want to know all the points and be able to confidently summarize if for them. If you are using a contract from a course or guru, do the same thing. Read the contract over until you can recite the contents within each point.

3. Know the closing procedure. This is a doozy. Many wholesalers lose money because they do not understand the standard closing procedure and the inexperience will show and cost you rapport with the seller. For example, in Chicago it is standard that the closing be done by attorneys at a title company. Both the seller and buyer will have an attorney handling their closing. It is standard for the buyer to pay for closing costs as well. Learn the closing procedure in your area by asking a local wholesaler and get as much information as you can.

4. Practice presenting an agreement. As a wholesaler in Chicago, I always want to explain each point on the contract in as little of few words as possible. This is because the seller will have a lawyer review the contract anyways and any corrections or changes will be made by that attorney. My goal is to just give them the overview so they understand nothing fishy is going on. Also, you don’t want to sound too pushy or too weak. The only way to handle the situation is to practice! My advice is to grab a partner and practice negotiating a few times a week. Compile a list of the most common objectives and rehearse giving the answer. As a wholesaler, you want to be confident in every aspect of your communications, from answering the phone up to presenting a contract.

5. Be understanding of the person you are talking to.: In many cases, the seller is under some form of distress. They have invested time, energy and effort into the property and are not as passive as you may be. Always ask what they will be doing after the sell of the property and see if there is anything you can do to help them with that.

Real Estate Negotiation – How to Win More Times and With Better Outcomes

In commercial real estate sales or leasing just about everything you do involves negotiation. Sellers, buyers, landlords, and tenants, all have issues and priorities when it comes to negotiation outcomes. Many times they will not be open on what it is they really want. Here is a fundamental tool to use in the property negotiation process.

You have to prepare before you go into the negotiation battle. So what can you do to prepare? Before you start every negotiation you should have a personal process of what I call ‘negotiation vaccination’. This is a deliberate choice and effort of looking at what could go wrong before you start the negotiation. You have to ‘vaccinate’ yourself against what can go against you. You have your answers and processes ready.

When you ‘vaccinate’ yourself for the negotiation process, you have your responses and ideas ready on all the critical matters of the negotiation. Remember that the client or prospect has had days or even longer to prepare their thoughts and targets for the negotiation. They know you are coming today to see them and they have their ideas and targets ready. They may have even been ‘primed’ by another real estate agency with ideas to derail your intentions.

At the very least to ‘vaccinate’ yourself for the negotiation you should take 30 minutes or so in review all variations of the essential parts of the property negotiation before you arrive.

Consider a negotiation with a seller to list a commercial property. The key elements of the negotiation will be things like:

  • Price of the property
  • Method of sale to be used
  • Timing of sale
  • Marketing strategy that suits the property
  • Target market to be attracted in the marketing
  • Marketing funds to be paid by the seller
  • Contract methods and documentation for the sale process
  • Method of inspecting the property

When you look at the list and pick just one of the elements such as ‘Methods of Sale’, you can break it down into what I call the ‘vaccination’ list around which you will have to have your answers and targets. For example:

  1. Auction of the property
  2. Tender of the property
  3. Expressions of interest
  4. Sale at a price
  5. Sale with no publicised price
  6. Exchange
  7. Off market listing
  8. On market listing

Not all of these will be desirable methods of sale given the property, your current market and your location. To ‘vaccinate’ yourself against the client’s ideas in the listing negotiation, you have to be prepared. You have to know your targets and be prepared for what they may prefer. What will you say regards all of these methods of sale and what will be your counter proposal if the client chooses say the method of ‘Sale at a price’ when you know that the property should go to auction?

Be prepared for the negotiation surprises, and have all your team on the same page before you get to the meeting. Know who is to be the key negotiator and set the roles of the other members of your team.

As the commercial real estate expert you have to be questioning and interpreting all the way up to and through the negotiation. Given that you are in negotiation sometimes 4 or 5 times per day in different deals, on different matters, and on different properties, the mental challenges can be daunting. Remember to ‘vaccinate’ yourself and your team for every critical negotiation and do that well before you arrive at the meeting. This process will help your listing conversions and negotiation outcomes.