4-28-06
Negotiating
You’ve scoured the entire Chicagoland area, or at least the areas you like, and you have finally found your new home. Congratulations on a job well done! Now we get to negotiate.
Yes, it’s going to be a bit daunting. Yes, it’s going to be a little nerve-wracking. Yes, it is absolutely worth every ounce of stress and struggle that goes into negotiating a real estate contract.
So how do you do it? There are so many questions we have when it comes to negotiating a real estate contract. Will I insult the seller if I make a very low offer? Can we close three months from now instead of in two weeks? Is there any way to convince the seller to leave that rockin’ vintage coffee table behind?
These and several other issues are critical to striking a deal with a seller, and whether you’re buying your first home or your 14th, these questions are always a bit challenging to answer. The good news is your real estate agent deals with these sorts of negotiations for a living and will be extremely beneficial during this stage of the buying process. For that reason, I decided to bring in my friend and fellow artist, real estate agent Jasen Schrock of Prudential Preferred Properties, to chime in throughout this article.
As expected, price is usually going to be the critical point of real estate contract negotiations and, therefore, will be the primary focus of this article. There are several factors to consider before deciding on the price you would like to offer the seller.
What You Need to Know about the Property
Before doing anything else you need to know what a reasonable market price is for the property. Have your real estate agent run a Comparable Market Analysis (often called “comps”) for you on similar homes that have sold in the last year in your target neighborhood. If you find, for example, there are identical properties in the same building selling for quite a bit more than what the seller is asking, then you would probably want to stay within 5 percent of the asking price. Again, your real estate agent will be very beneficial here.
Another important piece of information to consider is how long the property has been on the market. According to Jasen, “Market time is an extremely valuable tool in negotiating. In general, the longer a property has been on the market, the stronger the chances are it has been priced too high. That will often lead to better leverage and more savings. Be careful though; make sure your realtor does an accurate and thorough pricing of the area. You may think you are saving a bundle, when in reality, the property was so far overpriced, you still end up paying above market value.”
Before making an offer on a property, you should examine how fast a particular neighborhood is appreciating. Jasen agrees. “Your realtor can use past sales of similar properties to determine the appreciation rate of an area. This can help gauge whether a listing is priced correctly. If it is not, these statistics can be presented with your offer to purchase as reasoning for a lower offer.”
And now we arrive at the eternal question: Is it a seller’s market or a buyer’s market? While most publications will tell you it is currently a buyer’s market in Chicago, every neighborhood is different. How do you know? As Jasen explains, it is relatively straightforward: “An area is considered a buyer’s market if the prices of homes start to level off and market times tend to rise. Also, if the inventory of available properties is increasing but sales are slowing down, you typically are in a buyer’s market. Another indicator is if sellers start advertising big incentives to purchase their home, i.e. cash back bonuses, prize giveaways, or free upgrades. Many areas in Chicago are starting to see these trends.” The key is to take the time to research this data. Don’t be afraid to be aggressive with your realtor in obtaining answers to these questions; that’s what he or she is paid to do.
The Most Important Question of All
Now that you have collected and digested this data, you need to ask the most important question of all: How badly do you want this place? Do you consider this property a perfect fit for you and your family or is it one of five or six you really like? To put it very simply, would you be heartbroken if you lost it? If you absolutely must have this particular property then you should consider making a much stronger offer. If not, perhaps you would start with a very low bid and see if your seller is a bit more anxious to sell than you thought. That’s exactly what Jasen and I did on the River West one-bedroom condo where I currently reside. I was perfectly content to stay in my current residence, so we made an offer of $123,000 to a seller that was asking $139,900; Jasen and I wound up negotiating the asking price down to $129,000. Again, though, I was perfectly fine walking away from the deal altogether.
How Low Can You Go?
Most prospective buyers will make an offer below the asking price but how low should you go? Will you insult the seller if you make too low of an offer or is it worth a shot? According to Jasen, “This is a very delicate component of negotiating. In general, if the property is priced close to where the market says it should be, you do not want to go in below 90 percent of the asking price unless you have some very convincing reasons as to why. The bottom line in negotiating is how badly do you want the property vs. how badly do they want to sell it. If you find a property you like, you can run the risk of making too low an offer, insulting the seller, and losing the home of your dreams because of a few thousand dollars. It is almost always better to be firm but fair.”
If the Price is Wrong
For most people the primary focus during the negotiation process is the price they will pay for the property, and this is certainly an important consideration. However, there are several other elements of the agreement that can be discussed if you are not satisfied with the price point. Everything from the date you close to who keeps the microwave is fair game. We will delve further into these aspects of negotiation in the next article.
Mike McNamara has been an actor in Chicago for the past eight years in theatre, commercials, television and film. Mike is also a Mortgage Consultant and Loan Originator with West America Mortgage Company. He can be reached anytime at 773/398-0021 or McNamara310@aol.com. Special thanks to Jasen Schrock of Prudential Preferred Properties for his assistance with this article. Jasen can be contacted at 773/805-7432 or jschrock@prupref.com.