When buying a home, there’s a good chance you’ll have to negotiate the house price with the seller. Why? Because many homes are overpriced when they first come onto the market. It’s a common pricing “strategy” among real estate agents and homeowners.
It goes something like this: “We’ll come onto the market a bit high, because somebody might make an offer. If we don’t get any nibbles in 15 days or so, we can drop the price down to what we feel it’s really worth.”
The idea is that the seller has nothing to lose by initially listing high. But they could gain a higher sales price from an overeager buyer.
This is often a flawed strategy, especially in a balanced real estate market or one that leans toward buyers. Still, there are plenty of sellers who take this approach. So there’s a chance you’ll be negotiating the house price with the seller at some point. Here’s how to do it…
How Do Sellers Come Up With the Asking Price?
It’s helpful to understand the motivations of the average seller. Actually, there are several different motivations, and they all tie into the listing price. Homeowners usually determine their asking amount in one of the following ways:
- Smart sellers will determine their listing price by looking at comparable sales in the area. These “comps” will show what people have been paying for similar homes in the area, which is a good indicator of what they’ll pay for the house being listed.
- Some sellers will base their asking prices on the amount they originally paid for the house. Sometimes they will increase the price based on real or perceived appreciation.
- Lastly, there are those sellers who price the house based on the amount needed to pay off their mortgage.
Of the three strategies listed above, only the first one is realistic. The other two are more like wishful thinking. The market value of a house has little or nothing to do with (A) the amount the homeowner originally paid or (B) the owner’s mortgage balance. Value is determined by what people are willing to pay for a certain item at a certain time. And this can be discovered by looking at recent sales. So strategy #1 is the only realistic way to price a house for sale.
What does this have to do with negotiating the house price, you ask? Everything! If you can determine how the seller came up with the asking amount, you can negotiate more effectively.
You might even find that you don’t need to negotiate. If the seller used strategy #1 to price the house, it might be priced reasonably already. But if they used “strategy” #2 or #3, you’ll probably have to offer less than the asking price. The latter scenario will require more negotiating on your part.
Negotiating With Comparable Sales
I touched on comparable sales earlier, when describing the three pricing scenarios used by home sellers. A smart homeowner will use comps to set the initial asking price. As a buyer, you should be doing the same thing. You should look at recent sales data in the area where you plan to buy.
You are looking for similar homes that have sold recently in the same local area where you’re shopping.
Similar, recent and local — these are the three things you should look for when reviewing sales data. This will help you when shaping your offer, and also when negotiating the house price (if it comes to that). Your real estate agent should help you compile this data, by the way. A good agent will pull up a list of comps for every home you are considering.
For example, let’s say you want to make an offer on a one-story Craftsman-style home in downtown Happyville. Your agent should look for all recent sales of one-story Craftsman homes in the downtown area. In this context, “recent” means within the last 90 days or less.
If you can come up with a handful of similar homes that have sold in the last couple of months, you have everything you need to make an offer. You also have the tools you need for negotiating the house price, if and when it comes to that.
Next, you would consider any value-adding features of the house in question. Does the house you’re considering have a pool, where the others do not? Does it have a more modern, upgraded kitchen … a bigger yard … a better view? You must consider these factors when shaping your offer.
If you base your offer amount on comparable sales, you’ll be less likely to overpay. There’s also a better chance the home will “meet appraisal” later on. Remember, when you go back to your lender for final approval, they will have the home appraised to determine the value.
If the house is appraised for less than the amount you’ve agreed to pay (perhaps because you failed to use comparable sales data), your financing could fall through. This is the last thing you want. So you need to make a realistic offer. The seller will either accept it or not. But you certainly don’t want to overpay. (Learn more about low appraisal scenarios.)
Offers and Counter-offers
You might end up negotiating the price of a house. Or, the seller could accept your first offer without any negotiations at all. It can play out in different ways. Here are the three most common scenarios:
- The homeowner(s) might accept your offer with no other conditions or changes.
- They might make a counter-offer by changing certain terms, such as the sale price or closing date.
- They can also reject it entirely, without making a counter.
It’s important to realize the seller is not obligated to make a counter-offer. They can simply turn you down with no explanation, if they choose. So keep this in mind as you try to negotiate the price.
With that being said, most sellers will either take step #1 or #2 above. They’ll either accept the initial offer presented by the buyer, or counter with different terms.
If the seller makes a counter-offer, it will probably be based on the price. If they counter with the original listing amount, they are basically saying, “We are not up for negotiating the house price with you.” If they counter with an amount lower than the original listing price, but higher than your offered amount, it means they are willing to negotiate to move the deal forward.
What you do next will depend on two things:
- The type of real estate market you are in
- How much you want the house
Before you start negotiating the house price with a seller, you need to have a “max spend” in mind. This is the maximum amount you are willing to spend on this particular home. This number will be limited by your housing budget and your pre-approval amount, obviously. But it’s also limited by the current market value of the house. (Remember what we discussed earlier, regarding the home appraisal.)
It’s also wise to justify and support your initial offer. This could help you negotiate the house price more successfully. When you put a price on paper, tell the sellers why you are offering this amount. Your agent can convey this information to the listing agent, or directly to the homeowners. You don’t want the sellers to think you’ve pulled the number out of thin air. You’ll have a better chance of getting your offer accepted if you justify the amount.
Example: “We are offering to pay $285,000 for this house based on the comparable sales data attached. We realize this home has a larger lot and several interior upgrades, so we have offered an amount above the comparable sales to reflect these value-adding features. We feel this is a reasonable offer in the current market.”
You can put this kind of statement on paper and submit it with your offer. Your agent can pass it along to the seller’s agent. If you’ve made a reasonable offer for the house, the listing agent would be wise to convince the sellers of this. It’s in everyone’s interest.
When the Seller Won’t Negotiate
In some cases, negotiating the house price is just not an option. The seller has set the asking price unreasonably high, and they are unwilling to budge. They won’t give an inch. They probably have to get a certain amount out of the deal, in order to pay off their mortgage. And that amount might be above the current market value of the home.
In these situations, it’s best just to walk away. I’ve encountered this scenario several times in the past, and you probably will to. Keep an eye out for these stubborn (and delusional) homeowners. There are plenty of other houses out there, even if it doesn’t seem like it at the time.