Negotiating 101 - The Sacred Cows
This is the first installment in a new series that I am going to write over the course of the next several weeks. The first few parts are not necessarily in order as they are providing component information to the entire Art of Negotiation. And in fact, since I just mentioned it - keep in mind throughout this series that there is an Art and a Science to negotiating for a home and you have to master both aspects to be successful. We will discuss the Art and Science of negotiating for a home throughout this series.
To commence this series, I want to recognize and then begin to kill off several Sacred Cows of negotiating for a home that can lead to big trouble for a home buyer. All of these Sacred Cows are initiated from the perspective of a potential home buyer and are in no particular order.
1. 'The average price reduction in the area is 5%, so I should get at least 5% off of the asking price.' - As with most price reduction arguments put forward by a potential home buyer, this Sacred Cow assumes that the home's listing price is essentially 5% over the correct market price. What happens if the asking price is 10% over the market? You run a great risk of over-paying for the home if you believe this Sacred Cow. What if the home is perfectly priced on the market and it is a competitive listing? This Sacred Cow can cause you to offer too low and potentially lose the home to a more savvy buyer.
Solution - Always objectively analyze the local market conditions affecting home pricing, the actual home's condition, appeal, and location, plus give consideration to your likely future buyer and their likely opinion of the home for a future sale.
2. 'Most homes in the area are selling for $25,000 less than asking price, so I want $25,000 off of the asking price.' - This is the exact same Sacred Cow as above only expressed in dollars as opposed to a percentage of price. It does not matter if it is a percentage reduction or a dollar figure reduction, you can make the same mistake of greatly over-paying the market or under-bidding for a competitive home. All a seller has to do to defeat a buyer that thinks like this is to raise their price by a figure close to the average area sales price and hope that the buyer does not do their homework. To make the point more clearly, taking $25,000 off of a listing that is $50,000 over-priced could be a devastating mistake for a home buyer.
Solution - It's the same as above - always objectively analyze the local market conditions affecting home pricing, the actual home's condition, appeal, and location, plus give consideration to your likely future buyer and their likely opinion of the home for a future sale.
3. 'My friends say that I should make a really low offer and see what happens. What can I lose?' - Well, you can lose time and money, plus you risk losing a great home by following this Sacred Cow. We are in a highly-distressed market right now and if you are like most home buyers that I know you are struggling to find a suitable home. Have you considered why this is so in this 'buyer's market'? It is because most home sellers with the best homes who do not have to sell are holding their homes through the downturn. It makes it much tougher to find a great home and if you fail to reasonably negotiate for and acquire the best possible home for you, you can lose the time spent searching for that home, the time it takes to find another suitable home, plus you can lose money if the home you fail to acquire is one that will hold its value or increase in value as the market slowly recovers. This is not a market that will fix mistakes buy a negligent home buyer.
Solution - Exactly the same as before - do your homework with the facts and think about the future. Keep in mind that I am not telling you to not negotiate for a home and keep in mind that home sellers frequently over-value their home and it requires aggressive negotiations to get to the correct price. I am telling you to not take a random stab in the dark about pricing as it can cost you big-time in the future. Do your due diligence!
I could go on and on with describing Sacred Cows and then offering you solutions, but you would find that I am going to be offering essentially the same solution to every Sacred Cow. You absolutely must not put bounds on yourself based upon what you hear in the media, what you hear from friends and family, what your agent tells you, or by what you believed to be true in the past.
If you are going to buy a home in this market, you have no choice but to perform your due diligence, objectively analyze the specific homes that interest you, research the actual home's appeal, condition, and location, and you must give consideration to how the home may appear to a future buyer when it comes time for you to sell.
Stay tuned for the next article in our series on Negotiating. I will continue to outline the information you need to know as we break down the Art and Science of negotiating to turn you into a Louisville Real Estate Expert!