Step 7: Time to Negotiate
Here’s where your real estate agent has the potential to really do what you probably wouldn’t do on your own and earn his/her commission. However, there are a couple points to clear up misconceptions around this:
1: Depending on the market, there may not be much room for negotiating back and forth.
Currently it’s a seller’s market in Chicago as inventory is low and spring is a busy time of year in terms of buyer competition. Rather than being able to make an offer, then receive a counter-offer from the seller, and go back and forth until we meet in a suitable place, a lot of the offers I have been submitting lately are simply “best and final” by a certain deadline since the seller has more than one offering buyer. They like this. There is still some negotiation, but it is in a much shorter time window and usually means accommodating to the seller’s preferences in other ways beyond price (more below).
2: The magic of a suave negotiator only goes so far.
Though an experienced agent can certainly make a big difference by thinking of ways to make an offer more attractive to the seller beyond just raising the amount, buyers often imagine this to be more than it actually is. At the end of the day, the seller still cares about how much money they are going to receive for their place and when. If they have a strong agent who knows the market and they have a flexible timeline, they’re probably not going for low offers. I once worked with a buyer (no longer) who encouraged me to let the selling party know “he was a nice guy” and in the same breath told me to “play hardball with them” - he apparently didn’t see that approach working against itself. He overestimated how much the seller cared about manners and our approach. Sometimes that will tip things in one’s favor, but here the seller just wanted him to pay a respectable price. Though we did draw it out and work them down a nominal amount from an already good price from my buyer client’s perspective, he later flaked out late in the process, was rude to me about it, and wasted the time of everyone involved (including tenants with a child on the way looking to be released from their lease and move). Nice guy alright…my rant over. Again, my point is that ultimately the terms of the offer factor most heavily.
Now that those misconceptions are clarified, here are some common things a buyer and their agent might negotiate on to make their offer more attractive from the seller’s perspective. One can do whichever combination of these is appropriate depending on the perceived needs of both sides.
PRICE: This is usually the primary factor, though it is probably not the only one when other offers are close. Related to price, a buyer can offer what is often referred to as an escalation clause: essentially they say, “We’ll offer X amount more than any other offer up to a max price of Y.” This has an obvious upside, but it may be less respected by the seller as well. Still, at the end of the day the money talks if the escalation difference is high enough. It is difficult to make a seller prove what other offers they have if they don’t want to though.
CLOSING DATE: This is also a huge factor for many sellers. Every week they continue to own their property is another week they have to pay HOA dues, property taxes, and their mortgage. This is all money straight out of their pocket which is often at least $2-3k a month. Closing earlier is often preferred. In many cases though, a seller may instead prefer a later closing date. They may be buying their next place themselves and prefer not to move until after they are able to close and move in there. It is perfectly acceptable to ask what a seller prefers so to accordingly strengthen your offer. Closing in about 30 days is routinely accomplished in Chicago, but much earlier than that can become difficult. The chosen closing day should also be a day and time that each of the buyers can attend (otherwise they would have to pay extra fees for power of attorney, usually at least a couple hundred dollars). If one side’s preferred closing dates and moving dates do not match, a rent-to-own agreement (buyer rents) or rentback agreement (seller rents for a time) might be done to accommodate the situation.
Closing date can make a huge difference- I once had an offer not accepted even though it was $8k above the accepted price shown online later because it was five days later than when the seller (having a baby) preferred (at least this is what the agent told me when I called her a month later…)
TERMS RELATED TO PROPERTY CONDITION: The goal of an inspection is to discover unknown defects with a property so that the deal can either be cancelled or adjustments/repairs can be made. For known or suspected defects prior to the inspection when the contract is signed though, a couple contract items might be used:
“As-is” condition: If the buyer agrees purchase a place “as-is,” there is less of an expectation that the seller will fix discovered defects. A buyer still has the freedom to cancel the deal without penalty depending on the results of the inspection, and the buyer may even still make requests for items to be fixed or compensations to be made for them. However, the seller will be more inclined to say, “Tough luck, we agreed to do this as-is.” Then you have to decide if it’s worth backing out of the deal or not.
Home Warranty: this is another solution that may be purchased by either the buyer or seller. These are purchased through third party companies that promise to replace items like HVAC equipment or kitchen appliances if they break down in a specified amount of time after closing. For example: if a buyer knows a furnace is twenty years old and near the end of its lifecycle, they may ask the seller to provide a $500 credit for them to purchase a home warranty that covers the furnace.
EVIDENCE OF ABILITY CLOSE: Though not as much a term to be negotiated as simply being a requirement, the buyer should take steps to give the seller confidence that they will not have to cancel because they can’t get a loan. Sometimes a seller will make requests of a buyer related to their lending. I once had a selling agent share that she thought my client’s lender was terrible to work with and asked if there would be willingness from my clients to explore a different lender. Our offer wasn’t high enough anyways, but if it was close then that would have been a way to make us more agreeable to the seller.
Related to this, the amount of earnest money a buyer promises to provide once a contract is agreed to and how quickly they will provide it can also give a seller confidence that the buyer is serious. If the buyer gets cold feet and backs out of the deal, they are likely required to give up that money to the seller as compensation for taking their place off the market and passing up on other buyers. If the buyer cancels because of problems with their mortgage, defects in the property, or legal issues identified by their attorney, the earnest money is instead returned without penalty.
INCLUDED ITEMS: Either the buyer or the seller can specify that items within the home will be left for the buyer to have or instead removed. In general items that are attached to permanent structures (like shelving screwed into a wall) will stay unless specified otherwise. A gas log in a fireplace or a movable kitchen island could go either way though, so it should be specified. A property I recently showed had a seller that was willing to leave a large TV that was well suited to the room.
Closing credits: buyers often ask for the seller to pay for more of the closing costs than is typical and specify an amount. A seller than evaluates the offer price as if it was lower by this amount.
Tax Proration: Since property taxes in Chicago for a given year are paid the following year, the seller needs to provide funds (factored into closing figures) for the buyer to pay for the taxes assessed on the property before they owned it. The estimated amount of this is also a point of negotiation.
Contingency based on buying or selling another property: If a buyer is only willing to buy the place if they can sell another home in a specified amount of time, this can be specified in the purchase agreement in order to cancel it if it doesn’t happen. Likewise, a seller might only be willing to sell if they are able to buy a particular property. Not having this contingency is obviously preferred by the other side since it would otherwise increase the likelihood of the deal being cancelled.
These are the most commonly adjusted terms of an offer to purchase. If a buyer is offering on a place without other competing buyers, there is often some back-and-forth between parties over these items. If one side offers a counter-offer, this implicitly rejects the offer and the previous one is no longer considered to in effect. This back and forth happens until it either meets both sides’ needs or until both sides stop budging and the deal doesn’t happen. Once agreement is in place, then the contract needs to be updated and signed by both sides.
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