Monday, December 6, 2010

How to Negotiate Your Home Purchase

No matter how low of an offer you put in for a home, it almost never fails that at some point you get buyer's remorse wondering if you could have purchased it for even less. Some realtors might tell you that the fair market value is what you did pay, but we all know that some times buyers can, and do, over pay. Often that's because they are thinking with their emotions rather than with their head. On the other hand, did you offer too little that you might lose the deal?

Just ask Donita Nurse how she feels about home negotiations and you'll get an ear full of her experiences. When the 29-year-old was ready to move out of her rental in the historic Bronzeville neighborhood of Chicago into a place of her own, she didn't want to leave the area, which is rich in African-American history and a short commute to her downtown job at the East Bank Club.

She also wanted to purchase a short sale with a minimum of three bedrooms and with about $100,000 of equity above the purchase price. Her reasons were logical: This single woman with no kids wanted a place she could grow into, and that she would not likely lose money on, even if it went down in value.

And why the short sale (other than for a great value)? When owners are selling their homes without outside pressures, like from banks, Donita says that she has found that sellers are too attached and unwilling to negotiate a fair price. She prefers to target short sales that have been on the market awhile.

"At that point they have to sell it or they'll go into foreclosure," she says. "It has been on the market long enough for the owners to accept that."

So Donita did her research to find a great value on short sales. (She felt that homes already in foreclosure would be a bigger hassle with the banks). She studied the sale prices for comparable homes and over a two-year period Donita found her dream home -- three times. She made an offer each time, only to run into problems on all three. But a turn of events just may make the third time the charm.

Here are seven tips for purchasing a home at your price:


1. Be prepared to walk away.

If the home meets all of your criteria related to design, convenience, amenities, etc. don't go in with the attitude "I can't lose this house." That's a sure way to overpay. Instead, be prepared to walk away if the sellers don't meet your maximum price point for that home or for other major concessions that you want. The first home that Donita made an offer on took six months to get approved, then she learned upon inspection that some upgrades and electrical fixes weren't done to code, so she backed out. Know that there will always be other homes. However, be realistic about your maximum purchase price. How much you can afford to spend is not the seller's problem. It could just mean that you need to set your sights on a less expensive property.


2. Crunch the numbers.

When determining what price to make your initial offer, you need to be familiar with the "comps" -- the prices that similar homes in the neighborhood (about a one-mile radius) have sold for in the past three to six months. Sometimes you might need to search back as far as a year, but of course more recent data is most valuable.
On the second home, Donita made an offer of $128,000 on a well-upgraded, first-floor unit listed at $139,000, in a small multi-family building. The bank accepted the offer but ultimately sold it for less money -- $119,000 -- to someone who made a cash offer. The bank said they'd approve her for another unit in the building at her original $128,000 offer, but given the very recent lower comp for a similar unit, Donita said that she'd only accept if they upgraded the unit. They said no, so again she walked.

The sold price is more relevant than list prices for similar homes, because the list price can always drop. "Solds" are the most accurate gauge of the market. You will want to compare your offer price to each comp's sold price, its price per square foot, and even how much its sold price differs from its list price to help you best determine a range where your offer should be. (It might be drastically lower than the seller's list price if they have overpriced their home). If you don't have a real estate agent who can provide you with the sold data, websites such as CyberHomes.com and ListingBook list them, with the latter allowing you to display the data by price per square foot, sales data and other criteria.


3. Drive by the comps.

It's important that you go see the comps in person, because a photo can sometimes mask whether a home needs an exterior paint job, a new roof or fresh blacktop on the driveway. If you were doing due diligence during your home search, some of these comps are probably homes that you toured earlier in your quest.


4. Determine a price.

Once you've determined, that say, the comps sold on average for about 95 percent of the asking price, you might want to make your first offer at 90 percent of the asking price, with your limit being that you'll pay 97 percent of asking price.

For example, if the home has a list price of $250,000, you might make your first offer at $225,000, which is 90 percent of the list price. The sellers might counter, and you might counter again and ultimately settle at $237,500, which is 95 percent of the asking price -- the norm for nearby comparable homes. Also, you might be surprised and buy the home for the lower amount, especially if it has been on the market for 90 days or longer, or a previous sale for the owner has already fallen through.

Donita currently has an offer in on a large, and move-in condition duplex unit, with four bedrooms and three baths. It has a list price of $100,000 and an appraised value of $196,000. She offered $90,000, but it was rejected for a better one. The deal isn't over, however. The other offer fell through, and the bank's negotiator called Donita to ask if she was still interested. Now she's waiting for the banks to approve her offer.


5. Set a tone with earnest money.

If you opt to make an offer on the lower end of the scale, but you are truly interested in the home, you may want to give the appearance of sweetening the deal by giving a larger amount in earnest money. Now, technically, so long as you close the home, the sellers will get the earnest money regardless of the agreed-upon sales price. Perhaps the earnest money on a $250,000 house would be given at 1 percent, or $2,500. You might try offering $4,000 in earnest money. A higher amount gives the impression that you are more committed.


6. Set an expiration date for your purchase offer.

When you put in your offer, you don't want the seller to have plenty of time to entertain other contracts and go with the highest offer. So what you do to fend off competing offers is ask a seller to respond within 24 or 48 hours. In many cases, using a tight expiration date will get negotiations started quickly and get you a better price on the home. This strategy, however, may not work when you're negotiating with a bank handling a foreclosure.


7. Ask for financial concessions.

Even though some fees are typically split between the seller and the buyer, in a buyer's market you can negotiate these, too -- simply ask the seller to pay for all the fees, including city transfer taxes, inspections and appraisals, or to give you cash back at closing to cover these fees. You can also ask for credits when repairs need to be made, a house needs paint or new carpet, or even significant upgrading. However, in a buyer's market, you can simply ask for one as a financial concession to close the deal. Many banks allow a credit up to 6 percent of the purchase price.

Regardless of an offer price or the concessions you may receive, you might not be able to totally eliminate that sinking feeling that remains intertwined with the joy that accompanies your home buy. But if you do your research well, you'll feel more comfortable with your purchase price -- and have a better chance of getting a return on your investment down the road.

"It's all about research, research, research," says Donita. "I realized from these experiences that no one was really in it for my best interest and they were trying to get whatever they could to sell the property," she said. "You have to think of yourself and know what you need."