So you’ve made an offer on your dream house. Or your starter home. Or an investment property. No matter your situation, you and your agent have made your offer and now you may be wondering now what? Many buyers believe they can sit back and breathe a sigh of relief and wait. The seller will either come back with a yes or a no, right? Wrong. The negotiation process has only just begun. Read on for tips, tricks, words of wisdom, and a look behind the scenes for your negotiating your offer, having it accepted, and getting the keys to that house.
I mean, your offer could be accepted just as it is. many sellers accept the best offer they receive, especially if you and your agent have crafted and drafted it just so. But what’s more likely to happen is that sellers will come back to you with a counter offer. Here’s where the negotiation comes in, plus the specific talents and knowledge of your agent. First, when you do receive a counteroffer, you have three options:
- Accept the new contract
- Negotiate the terms
- Walk away.
Something tells me you’re a “negotiate the terms” kind of person. Here are some tips I’ve learned over my years a successful buyer’s agent that can help you keep calm and cool during the negotiation process.
#1 Act Fast – Many buyers would love to have the luxury of mulling it over. It’s a big decision after all! But as we say in real estate, (and as lots of people everywhere): time is of the essence. Ideally your agent should help you make a decision and you should respond within 24 hours – or faster! The longer you wait to accept, decline, or return to the table, makes it more likely for another buyer – your competitor! – to swoop in and nab the property. The sellers most likely want the home sold as quickly possible.
#2 Increase Your Offer – Of course, as we all know, money talks. You obviously do not want to overpay for a home – and if you have an honest and trustworthy agent they won’t advise you to – but increasing your price by X amount could give you the competitive edge. It’s not always so simple as meeting somewhere in the middle.
As your agent negotiates, it can feel like things are escalating quickly. It’s a stressful time. You may feel a sudden urge to do whatever it takes to win.
Before you go overboard, there are two things to keep in mind:
- Do not exceed the monetary confines of your pre-approved mortgage you received from your lender.
- Do not overextend your budget.
Because your counter offer has to be an amount you’re comfortable spending on a home. You’ve heard the term “house poor” before, right? You don’t want to be that and your agent shouldn’t want you to be that either.
Also, remember: You’re not out of options just yet.
#3 Add an Escalation Clause
In a multiple offer situation – and let’s face it these days in Los Angeles, what listing isn’t a multiple offer situation? – and when the seller comes back at you with a counter offer, consider the escalation clause.
An escalation clause is a real estate contract, sometimes called an escalator, that lets a home buyer say “I will pay x price for this home, but if the seller receives another offer that’s higher than mine, I’m willing to increase my offer to y price.” But always remember: Only go up as high as you’re comfortable with and always rely on your agent to figure out the seller’s offer review process before including an escalation clause in your offer. Some things to keep in mind:
- What is the original offer of purchase price?
- How much will that price be escalated above any other competitive bid?
- What is the maximum amount that the purchase price can reach in case of multiple offers?
For example, say you offer $800,000 for a home. Your realtor suspects this will be a multiple offer situation and adds an escalation clause that, in the case of a higher competing offer, will increase your offer in increments of $2,000 above the competing offer. We’ve agreed that your escalation clause goes up to a maximum of $810,000.If no other offers are submitted, your offer remains at $800,000.
Another very important thing to note, always, always, always have your agent check in with the listing agent before you write one. Check to see if their sellers are okay with escalion clauses because sometimes they are not. They want your best and final offer ASAP because they believe it will motivate buyers to outbid one another to begin within.
#4 Increase Your Earnest Money Deposit
Increasing your earnest money deposit (EMD) — the sum of money you put down to prove to the seller you’re serious about buying the house — is a great way to show the seller that you are, in fact, serious. A standard EMD is typically 1% to 3% of the sales price of the home. Making a counter offer with a 3% to 5% deposit could be what you need to persuade the seller to choose you.
#5 Take Possession Later
Depending on the seller’s timetable, you could offer to allow the seller to stay in the home for a few days after closing and take possession at a later date. You could also draw up a “rent-back” agreement, meaning the seller pays you rent for staying in the home for a set period of time after the closing date.
#6 Decrease a Few Contingencies
One of the best ways to win the house.Reduce the number of contingencies you’re asking for. It could give the seller more reassurance that the deal with you will close smoothly and quickly.. But be selective: Some contingencies are too important to give up. A home-inspection contingency — the right to have a home inspection and request repairs — gives you an out if you spot major problems with the home. Ultimately, waiving contingencies depends on your market, your loan program requirements, your risk tolerance, and the circumstances of the house in question. And if you waive contingencies and then you find a problem, the seller isn’t responsible for fixing it. Ask your agent about what your options. Keep these in mind:
- There are three main contingencies: Inspection, appraisal, and loan contingency. You always will want to do an inspection. So, onto advice on the next two:
- Appraisal – the most important thing is to check with your lender to see what they are comfortable with you doing. Every lender is more comfortable with different things. Many lenders can get the appraisal back during the inspection contingency period. But! Keep in mind that if you waive your appraisal contingency and if the house does not appraise you are on the hook for making up the difference between the appraised value and the purchase price.
- Loan contingency – I never recommend removing their loan contingency unless your lender says it’s okay, and some lenders have the ability to fully underwrite the loan before you go into escrow. But it is still a risk in case something happens. You and your agent will have to speak with the ldner.
#7 Pick Up the Cost of the Home Warranty
Sometimes sellers offer prospective buyers a home warranty. This is a plan that covers the cost of repairing major home appliances and systems, like the air conditioner or hot water heater, if they break down within a certain period (typically a year after closing). A basic home warranty costs about $550 to $800 a year. If it seems like waiving the home warranty can sweeten negotiations, but you still want the peace of mind of having one, tell the seller they don’t need to cover it — then buy it yourself.
Just keep in mind, whether you or the seller buy the warranty, you’ll need to pay the service fee (typically between $50 and $100) if something does need to be repaired while under warranty. Also, FYI: A home warranty is entirely separate from homeowners insurance. Homeowners insurance — the security blanket that covers your home’s structure and possessions in the event of a fire, storm, flood, or other accident — is required if you take out a mortgage. It can cost anywhere from $300 to $1,000 per year. So remember: Home warranty = optional, homeowners insurance = required.
#8 Know When to Walk
And last but nowhere near the least important, know when to walk. Actually, this is the most important tip I can give you. When negotiating with a seller, trust everything you’ve learned and, of course, your agent. If he or she says a deal is bad for you: Listen to them. They’re almost certainly right.
And if you don’t want to make any more trade-offs — and the seller won’t budge — it’s smart to walk. That can be a tough decision to make, and rightfully so! Negotiating is tough.
And losing something you’ve worked hard to get can be disappointing. But don’t worry. There’s a better deal for you out there.
Best of luck on your home ownership journey! If you’d like to talk more or have any questions, give me a call or send me an email!
Best,
Tatiana