Negotiating the Right Price Depends on Your Market

If the thought of negotiating the price on a new car makes you nervous, the idea of negotiating for your new home may give you hives. But unless you’ve decided to go it alone, you have a partner in the home-buying process: your real estate agent. Your agent will handle all the face-to-face negotiating as well as help you determine the best price and other elements of your offer.

Here’s the pitch for hiring an agent. They write real estate contracts and negotiate sales all the time. The best agents have tremendous expertise when it comes to market value in the areas where they work. In addition to their own expertise, they know and work with other agents and speak the same language. They have the knowledge and experience to help guide you through the process. They know how to negotiate a home price. And they don’t cost you anything. In almost every case, the seller pays the real estate commission for both sides of the deal.

Can you get the seller to lower the price if you work without representation or use their agent? Perhaps. But that’s a gamble as well as a lot of work. You may negotiate a three percent price reduction when an agent working for you could have gotten you five. Or you may not negotiate for any seller-paid closing costs when the current market standard is at least half.

Whether or not you work with an agent, it's smart to research the property and the market. You'll want to determine a value on the home and decide what negotiating strategy you want to use.

When negotiating a home price, a lot depends on the market. The local market condition is the single-most important factor in negotiation strategy. And just like the weather, the landscape is a crazy quilt of micro-climates. Markets vary from city to city, neighborhood to neighborhood. Your agent should know the neighborhood well and be able to tell you what kind of market you are in: a buyer's market, a seller's market, a balanced market or a market where you are likely to become embroiled in a bidding war.

Negotiating in a buyers market

Congratulations! When you are buying in a buyers market, you have the power. This means there are more homes for sale than there are buyers to purchase them. For sellers, especially “motivated” sellers who have to move, this is tough. If you show interest, they won’t want to let you off the hook. You are likely to get more from them in terms of concessions and price reductions than they really want to give – because they have no choice.

Your strategy: Ask for the moon. Make an initial offer at least 10 percent under the price you want to pay. Ask for the seller to pay closing costs and set a closing time that works for you.

Like the appliances? Ask for them. Like the ping-pong table or the kids’ swing set out back? Ask for that too. All they can say is 'no' but more likely they will come back with some sort of counter offer.

Caution: A true 'lowball' offer can insult the sellers. In that case they will probably reply with a simple 'no.' Chances are they will then adjust their asking price down a bit and the next buyer will reap the benefits of your opening gambit. If you really are willing to walk away and continue your search, a lowball offer may be worth it to you. Sometimes they pay off. But if you truly are ambivalent about the house, maybe you shouldn’t be making an offer at all. There are probably other houses that will make you happier.

Negotiating in a sellers market

This isn’t going to be easy. You won’t have much leverage as sellers generally have their pick of buyers to sell their home to. If your offer is low or complicated by contingencies, the seller won’t even bother negotiating. In a sellers market, you want to make a clean offer that isn’t muddied by too many contingencies or demands for extras tossed in. Stick to the basic contingencies: financing, appraisal and inspection. Additionally, unless the house is overpriced, you aren’t going to want to make an offer for much under asking.

In addition, you’ve got to be quick. If you find a home you want, a good agent will urge you to decide quickly, possibly writing up the offer the same day you tour the property. If you aren’t pre-approved for a loan, you can probably kiss a well-priced house goodbye in a hot market. Pre-approval letters are often good for up to 90 days, so it's a good idea to get pre-approved early in your home search so you can act fast when you find a home you love.

Caution: Even with a full-price offer you may be in competition with other buyers offering as much or more. Consider including an 'escalation clause' to prevent someone from swooping in and taking it for some paltry amount more than your offer or some other means of “sweetening your offer.”

Negotiating in a balanced market

In a balanced market, there are enough buyers and enough homes but not too many of either. This might seem to be an easier market to negotiate in, but expect the back-and-forth counteroffer phase to take longer than in buyers or sellers markets. There’s less urgency from the market and neither side feels pressured to close the deal quickly. Go ahead and offer less than the asking price and ask for whatever additional property or terms you might want. But be prepared to split the difference with the seller.

Caution: Even in a balanced market, you can have someone swoop in with a better offer, so you don’t want to drag negotiations on forever. A difference of $5,000 on a $250,000 probably isn’t worth losing a great house over. You and the seller will both get and give things in the process, but both should end up happy with the final contract.

Keeping a poker face

The truth is, you probably can’t do it. After all, a home is a pretty big purchase both financially and emotionally. That’s why you should let your agent and the seller’s agent handle all the face-to-face stuff. Resist the urge to call the seller or their agent to check up on what they are thinking.

Likewise, when touring homes, if the seller or their agent is present (usually just in an open house situation) do not gush about the home in their presence. In fact, keep your enthusiasm at bay regardless of who is there. Neighbors make pretty good scouts and if they catch you taking a selfie in front of the home, it’s a good bet the seller will soon learn that you are smitten with it. It’s tough maintaining an air of indifference once the seller knows that.