Whether looking to buy or sell a home, learning the other party’s true real estate motivation can lead to especially profitable negotiation. There’s an old negotiation strategy that says that the first person to name price and terms loses the negotiation. But that’s not always true!
EXAMPLE: A number of years ago, I wanted to sell my condominium so I could buy the house where I now live. Based on recent sales prices in the condo complex, my listing agent (the late, great Betsy White) suggested a $121,000 asking price. It was two or three thousand dollars above the last sale price of a comparable unit, thus allowing room for negotiation on the price and terms. A week or two later, Betsy obtained a $114,000 purchase offer from a strong buyer. It was all-cash with no contingencies, not even a mortgage finance contingency. She advised me, “I think this buyer will come up a few thousand dollars if you want to make a counteroffer.” Knowing I had only paid $70,000 for that condo, I had a nice, built-in, tax-free profit if I accepted that $114,000 all-cash offer. Perhaps I left a few thousand profit dollars on the table, but I didn’t want to lose that strong buyer because all-cash, no-contingency buyers don’t come along every day. So I accepted that offer. That was a situation where the first person to name a price (the buyer) won that negotiation by giving me what I wanted (a fair price and the cash I needed to buy my next home). As the saying goes, it was “win-win” for both parties because I didn’t get greedy and try to get the last dollar of profit by incurring the high risk of losing a strong buyer.
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If you are the buyer, to help discover the seller’s true motivation, find out how much the seller paid for the property. Although a few states don’t record the purchase price of a property, in most states it is possible to easily determine from the public records or local MLS (multiple listing service) records how much a seller paid for the property. This is vital information for a buyer to know before starting negotiation.
The reason to find out the price paid for the property is it lets the buyer know how much room the seller has to negotiate without taking a loss. Incidentally, this negotiation tactic is used by smart new-car buyers who check the car-cost price books to learn the dealer’s cost to determine how much room the dealer has to negotiate and still earn a modest profit.
To illustrate, in the example above I had a $44,000 gross profit. But the buyer didn’t know that (I doubt he researched my purchase price). If he had known, and if he had asked questions to learn my true motivation for selling (to buy another home), he might have offered a lower purchase price, which I might have accepted.
However, if you (or your buyer’s real estate agent) discover a home seller paid close to their asking price, then there isn’t much room for the seller to negotiate on price without taking a loss. When a property was purchased many years ago, the seller usually has lots of room to negotiate because the purchase price is far below today’s market value(based on comparable recent sales prices of nearby similar properties). From a real estate buyer’s viewpoint, the longer the seller has owned the property, the better purchase price the buyer can usually negotiate.
EXAMPLE: About four years ago, one of my neighbors decided to sell her house shortly after her divorce. She was moving to Palm Springs. As I recall, her original asking price for her house was about $1.3 million (probably recommended by the listing Realtor based on comparable square footage of recent nearby home sales – a major mistake!). The house didn’t sell for many months (it has a very odd floor plan, a lot without much open space for kids to play, and is located adjacent to a noisy, busy street). Eventually, a buyer offered $1 million. The seller eagerly accepted. Then the buyer had a professional inspection (as all smart home buyers should do) and discovered some water-drainage problems. He then reduced his purchase offer to about $950,000. The seller quickly accepted the price reduction and the house sold. I later learned that seller was so motivated to sell and move on with her life, she would have sold for practically any price because (1) she and her ex-husband only paid about $200,000 for that house many years earlier, (2) she got the house in the divorce, and (3) she was anxious to get settled in her new location. If only the buyer, or his buyer’s agent, had researched the seller’s purchase price, he could probably have purchased for an even lower price from that highly motivated seller.
Ask “Why is the seller selling?” to discover if the seller is highly motivated (if you are a seller, ask why the buyer wants to purchase your specific property). Smart buyers, whether purchasing a house, condo, or investment property, should always ask why is the seller selling? If it’s the seller’s home, the reason might be to earn a big tax-free profit (up to $250,000 for a qualified principal residence seller, or up to $500,000 for a qualified married couple selling their principal residence, thanks to Internal Revenue Code 121). Or, if it is a rental property, the seller might be making an Internal Revenue Code 1031 tax-deferred exchange for a larger investment property.
Other motivations for selling include divorce, marriage, illness, retirement, unemployment, death in the family, birth in the family, and changed in job location. The seller won’t always tell the truth, but it won’t hurt to always ask, “Why is the seller selling this lovely home?”
Just as smart buyers, and their real estate agents, should ask lots of questions of the sellers and the seller’s listing agents, smart realty sellers should also ask lots of questions to learn about their prospective buyers, such as “Why is the buyer buying and why does the buyer want to purchase my property?”
To illustrate, if you are a home seller and you learn a prospective buyer is moving from out of town due to a job location change, that is probably a very highly motivated buyer who wants to get settled as fast as possible (especially if children are involved). However, if you learn your buyer is moving up from a nearby smaller house, that buyer probably isn’t highly motivated to buy your home quickly unless the price is right and the terms are reasonable.
(For more information on Bob Bruss publications, visit his
Real Estate Center).
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