How to Negotiate Buying a House
You’ve found the house of your dreams, you’ve spoken with your real estate agent, and now you’re ready to make your move. The next stage of the home buying process is one of the most crucial, as a wrong step here could lead you to pay more than the house is worth, costing you thousands over the term.
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The following tips will help you when negotiating on your house, potentially saving you tens of thousands of dollars. All prospective buyers, from first time home buyers to investors, should keep the following tips in mind.
1. Be Prepared
Many first time buyers start looking for their dream home before they calculate their affordability. The result is that they misjudge how much they can spend, start looking at houses in the wrong price range, and only realize their mistake when they have their hearts set on a specific type of house.
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By getting your finances in check before you do anything else, you can avoid this disappointment. Speak with a financial advisor, get a preapproval, and start saving for a down payment. The sellers and real estate agents will respect you more and be more willing to listen to offers if you actually have the backing of a lender.
2. Focus on the Bigger Picture
It’s easy to dismiss a few grand here and then when you’re buying a house, as it’s just a small percentage of the total balance and equates to a few dollars a month in minimum payments. However, the fact that mortgage lasts for so many years means even the smallest difference could equate to massive sums over the term.
By focusing on the bigger picture and making sure every penny counts, you could save yourself a huge sum over the term of the mortgage. What’s more, because the balance is smaller, you’ll earn equity faster and will give yourself more options for future refinancing.
As an example, let’s imagine that you’re bidding on a $350,000 house with a $300,000, 40-year, 5% mortgage. You’re desperate to get the keys and not let the house slip through your fingers, so you bid the full amount. You’ll pay $1,446,59 a month and over the term you’ll pay $394,362,55 in interest for a total balance of nearly $700,000.
But if you hold firm just a little longer, bid more aggressively, and shave just $10,000 off the total sum, you’ll only need a mortgage of $290,000. That initial $10,000 reduction will cost you $50 less per month and in total, you’ll pay close to $15,000 less in interest.
3. Take Your Time
The home buying process is not supposed to be quick and easy. It’s a long, grueling, and often-times stressful period, and that’s normal. Every homebuyer wants to get the process over as quickly as possible. They want to make a successful bid and start the process sooner rather than later. That way, they can continue with their lives, as it can feel like being trapped in a limbo of uncertainty during this period.
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But by rushing the process, you could be making costly mistakes that will come back to haunt you further down the line. The vast majority of homeowners have regrets about buying their own home. Some regret choosing the home they chose, but most regret not holding firm in the negotiations, bidding too much, not making a larger down payment, and letting their hearts rule their head.
You can’t undo those mistakes once they happen, but if you bide your time you can prevent them from happening in the first place.
4. Be Prepared to Walk Away
Many homebuyers act with their hearts and not their heads. They would sooner accept a higher interest rate and a greater monthly payment than give up on the house of their dreams.
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But as soon as you dig your heels in and make it clear you’re not going to back away, you leave the ball firmly in the seller’s court.
When that happens, you’re guaranteed to pay more than you should and to miss out on the best deal. The seller’s ultimate goal is to get the asking price, or as close to it as they can. If they know that you love the house, they’ll make a final offer, reject the counteroffer, and wait for you to cave in and throw your money at them.
Stand firm, and if they make a counteroffer that is unrealistic, turn it down, stick with your original bid, and walk away.
5. Bid for the Home Value Not the List Price
Bidding 10% or 15% less than the listing price is a great strategy if you’re confident that the house is worth less than it’s listed for, competition is low, and a bidding war is unlikely. But simply bidding this amount regardless of the value is a reckless strategy.
What happens to the couple who need to sell their house quickly, so they place it on the market for 20% less than the value? If you come in with a low offer, you’ll be ignored, while the serious buyers will get all the attention. Before you can even think about a counteroffer, another buyer will have placed a respectable bid, had it accepted, and be well on their way to becoming homeowners.
Always base your initial offer on the actual value, as opposed to the list price. You can determine this value by speaking with a buyer’s agent, looking at other houses that have sold in the area, and checking to see how long the house has been on the market.
6. Plot Your Home Inspection Contingency Plan Carefully
A home inspection is essential for many reasons. Not only can it highlight issues that could cost you money down the line, but it can also give you a reason to reopen the negotiation and make a reduced offer. If, for instance, the inspector finds a serious issue that requires immediate repair and will cost $10,000, you can quote the seller $10,000 less and show them the report.
However, the seller is by no means obligated to accept your offer and if they don’t believe they got the best price or it’s a seller’s market, they may refuse any reduction to the home price and take their chances elsewhere. Of course, if it’s a buyer’s market, the odds are stacked in your favor and you have more chance of a lowball offer being accepted.
It’s up to you to determine if you should make a reduced offer or simply cover the costs yourself. We would always recommend making a lower offer if there is a major expense to cover, and if the seller refuses to budge, you should think about backing away, lest you end up with a money pit that crumbles around you. However, if it’s a minor issue, the sale seems to be happening quickly and there is a slew of buyers ready to pay the purchase price, they can be ignored.
7. Give Up on Your Dream
Although it sounds like a pretty bleak statement to make, it’s true—you need to give up on your dream of finding the perfect home as you probably won’t find it. The odds of your perfect home being in your price range and your area is pretty slim. But if it’s your first home, it doesn’t need to be perfect. You can also improve and expand.
So, don’t get too disheartened if you can’t find a home that ticks all boxes; as long as it’s nearly perfect, or as close as you can get, then you can add the finishing touches yourself.
8. Ask About Furnishings
Many sellers can’t take all their belongings with them. They may have fewer bedrooms, a new sofa, no room for their large bed; whatever the reason, there’s a good chance some things will get discarded or sold on the cheap.
If it’s your first home, you may need those things more than the owners, so let them know that you’re in need of furnishings and they can leave a few things behind if they want. That might not work (although it doesn’t hurt to ask) but when it fails you can simply ask them if they’re interested in selling any of their unwanted goods.
They’ll either quote you a rock bottom price, acknowledging that they likely won’t get much for them and you will be doing them a favor, or they’ll quote a high price on the assumption that you’ll be willing to pay. If it’s the latter, let them know that you won’t have room in your budget and thank them for their offer. Give them time to mull it over and they may come back with a more realistic offer.
You don’t need to have the best negotiation skills or a winning negotiation strategy to get a good deal on a house. A little time, persistence, dedication, and patience is all it takes to bring that house price down and get your hands on a new home at a price that won’t cripple you for years to come.
Negotiating properly will save you a small fortune over the term, but it can also give you more money in the short-term, making those closing costs more manageable and allowing you to cover those initial monthly payments without issue.