When buying a new home, how high or low your first offer is could determine the success of the negotiation, according to a new study by the University of Technology Sydney in the Theory and Decision journal.
While you want to get the best price possible, you don't want to offer a price that is too low. The study, which observed a bargaining game where players negotiated how to split $10, found that those who received exceedingly low offers felt disrespected and reacted with spiteful counteroffers.
In other words, offering too little money backfired.
Negotiation experts think similar principles apply when you're trying to buy a home. You don't want the offer you make to be "insulting," says Jeff Cochran, a partner at the Shapiro Negotiations Institute. And if you do go low, pad it with other incentives for the seller. "The offer has to be extreme but credible."
For example, he says, if the asking price is $350,000 and you're offering $250,000, you need to communicate with the sellers why you're coming in so low: "If I do lowball it at $250,000, I have to go to the seller and say, 'Here are the reasons.' I have to have a credible reason the offer is so low."
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Remember, homes can carry lots of sentimental value for many sellers. "There's a big difference between buying a home from someone who is flipping a house and buying a home from a couple who lived there for 30 years, raised their family there, and they see every dent and flaw as a memory," Cochran says.
If the home holds lots of memories, lowballing the seller can be hurtful. "When you come in and undervalue it, it's like telling them their baby is ugly," he says. "If I'm flipping houses, I don't care how ugly my baby is, I want to get the deal done."
That's why it's important to "know your seller," Cochran says, and give an offer that reflects not only the value you see in their house, but the value they see in their house, as well.
"Right now, people are paying over asking price just to get a house," Cochran says. If your offer is well below asking price because that's all you can afford, try to sweeten the deal somehow, he says: "You have to look at things other than the cost or price."
There are a few ways you could make a lower bid appealing to a seller. If you can, make a cash offer, says Ivy Zelman, CEO of housing research firm Zelman & Associates. Offering cash means you don't have to wait on other financing to be approved and the transaction can happen quickly. "You have to be aggressive in what you offer," she says.
You can also make an "as is" purchase, Cochran says, so the seller does not have to do any repairs.
Buying a home from the owner directly to avoid real estate agent fees can also make an offer more appealing. "Any of those things is going to make the offer more attractive," Cochran says.
Whether it's a buyer's or a seller's market, negotiating is a key part of homebuying if you want to get the most value for your money. Here are three tips to help you do that.
- Have a script ready. Even if your first offer is open-ended, it's good to have two numbers in mind: what counteroffer you'd be willing to pay, and what offer you'd be willing to walk away from. This can help you avoid putting in an offer you can't afford.
- Plan for an escalation offer. "Say, 'Here is my offer, but if anyone comes in and offers more than that I can come in with a counteroffer,'" Cochran says. This way another buyer can't swoop in with a price you could match or exceed.
- Be flexible. If the seller won't go down on price, see if there are other actions they can take to add value to the house, such as expensive renovations. This might make the higher price worth it.
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