How to Negotiate a Home Price

1. Perform market research

The price you sell your home for, and the price you purchase a home for, are both important decisions. Even a minor price variation can have a substantial impact on your financial bottom line if you’re paying for a home with a monthly mortgage payment (as opposed to paying cash in full).

The first step in negotiating a home price might seem obvious: both buyers and sellers need to know what a fair price for the home actually is. The best way to determine a home’s fair market value is to conduct thorough market research before arriving at a price.

Examine similar properties

The first part of market research is to look at similar properties in the home’s area. Real estate agents often call this process “pulling comps,” or comparisons.

A comparative market analysis (CMA) examines three to five nearby homes that are similar in size and condition, and compares the prices of those homes to determine fair selling price. This informs sellers of a good price point for their home and lets buyers know how much to offer on a house.

Understand market conditions

Is it a buyer’s market or a seller’s market? This can have a major impact on pricing, since the advantaged party will have more leverage during negotiations. A buyer’s market means there’s plenty of inventory to choose from, as homes sit on the market longer and sellers are more willing to meet buyers’ demands in eagerness to sell their home.

A seller’s market occurs when there’s limited inventory, which leads to competition among buyers, who in turn become increasingly likely to agree to less favorable terms like offering more money, closing very quickly or purchasing homes in as-is condition.

Features of a seller’s market:

• More buyers than inventory
• Low interest rates
• Sellers receive multiple offers
• Low average time on market
• Offers above asking price
• Buyers negotiate less
• Skipped home inspections

Features of a buyer’s market:

• More inventory than buyers
• Higher interest rates
• Less buying competition
• Homes have longer time on market
• Homes sell at or even a bit below asking price
• Buyers negotiate more

2. Understand negotiation and leverage

Once a seller sets a price point for their home and lists it for sale publicly, a potential buyer can negotiate a purchase price and put in an offer. But both sellers and buyers should understand steps they can take before moving forward.

Negotiation checklist for buyers

If you’re buying a home, consider these steps before you head into negotiations.

• Get preapproved: Your lender will pull your credit report and take a look at your financial history, then issue you a preapproval letter you can use to prove to the seller that you have the purchasing power you need. Always ensure your preapproval letter matches your offer amount, rather than the top of your budget, in order to leave room for negotiation.
• Decide on earnest money: This serves as an incentive for the seller to accept your offer, and shows you’re serious about this property in particular, rather than simply window shopping.
• Estimate cash to close: You’ll need to obtain a loan estimate from your lender. This very specific document comes after your preapproval, and will list any and all expenses you’ll face when you close on the home. These estimates can and often do change as you approach your closing date, but the variances shouldn’t be drastic.
• Consider contingencies: In a real estate transaction, a contingency is a condition upon which the sale of the home depends. Common contingencies include inspection, appraisal and financing.
• Schedule a home inspection: This is a step you don’t want to skip, since it can save you tens or even hundreds of thousands of dollars. A thorough home inspection can reveal scores of issues easily overlooked, like mold, leaks, pests, signs of water damage, cracked chimneys, uneven foundation and more.
• Have the title checked: A title search can reveal whether any other parties have an active claim to the home or property you want to purchase, whether there are any easements or encroachments to be aware of and whether the property is involved in any legal proceedings.
• Decide on a close date: In a hot market, the faster you can close, the more likely you are to score the home of your dreams. In a more stable market, it’s best to take your time and ensure you’re not rushing into a purchase.

Negotiation checklist for sellers

When selling, you have a little less legwork, but should still understand what you can do to negotiate successfully.

• Set a price for your home: If you work with a real estate agent, they will thoroughly assess your home and then run comps to help you arrive at a price you’re happy with. Pricing5% to 10%  above target allows for negotiation, but keep in mind that pricing your home too high could cause it to sit on the market longer than you’d hoped. On the flip side, pricing too low cuts into your proceeds.
• Draw up a seller’s disclosure: As the current owner, the onus is on you to disclose any known material defects in your home. You must disclose past flooding events, high lead or radon levels and known foundation issues. Your real estate agent can help familiarize you with disclosure requirements in your state.
• Estimate cash to close and other finances: It’s helpful to know exactly how much you have left to pay on your mortgage, along with agent commissions and what taxes and fees you’ll be responsible for at close.
• Examine a seller net sheet: Provided by your realtor, this helps you see exactly what they’ll net from their home at different price point scenarios.
• Prepare your home to sell: That list of to-dos that’s been nagging you for years? This is the time to perform small to medium fix-ups in your home. Refreshing paint, decluttering and repairing minor damage can help you price your home a bit higher.

3. Structure a winning offer or counteroffer

When you find a home in your budget that you’ve toured and could envision as your next residence, it’s time to sit down with your real estate agent and draw up an offer. Your offer should include everything you want the seller to know about your interest in purchasing their home. Here’s what should be included in a strong home purchase offer:

Offer

• Purchase price: Leave room for negotiation by offering less than your target price. Depending on the market, you may offer 5% to 10% less than the asking price.
• Earnest money: List how much you’re willing to put down in earnest money, which shows the seller that you’re serious about purchasing the home. Most earnest money deposits are 1% to 3% of the purchase price.
• Financing information: Here, you’ll inform the seller of the type of loan you’ve been approved for, and which lender you’ll be using.
• Any applicable contingencies: Spell out in detail whether you’d like the right to inspect the home and request repairs or credits. Also include an inspection period so the seller knows what to expect.
• Title and survey expectations: Outline who should pay for the title search, and what you’d like to happen if the title doesn’t come back clean.
• Closing date: Clearly state the date by which the seller should vacate the home and include your suggested closing date.
• Offer expiration: Also include the date and time at which your offer lapses if the seller does not respond. It’s crucial to keep in mind that if the seller accepts your offer, you’re now a party to a binding contract. Don’t take the offer expiration date lightly.

Counteroffer

Once the seller receives your offer, they’ll likely draw up a counteroffer, which is simply a modification of your offer based on the terms they find attractive. Here’s what you can expect to find in a counteroffer:

• New price: The seller may negotiate by entering a revised price based on your offer.
• Revised contingencies: The seller may shorten or extend any inspection or financing periods you included in the contingencies section of your offer. They may also remove or add contingencies of their own.
• Revised earnest money: Especially common in a seller’s market, the seller might ask you to increase the amount of earnest money you’ve committed to.
• New closing date: The seller may suggest a different closing date based on their own needs, or they may request that the buyer allow them to rent the home for a period of time after close.
• Accept or decline requests for repairs: If the buyer has requested certain repairs in their offer letter, the seller may then accept, decline or revise those requests.
• Counteroffer expiration: The seller will set a clear deadline for buyer acceptance.

The table below quickly summarizes how buyers and sellers offer and counteroffer one another based on key elements of a real estate transaction.

How leverage affects negotiation

Understanding your leverage will affect your offers and counteroffers. The most important thing to know is if you’re in a seller’s market or a buyer’s market.

If you’re a buyer in a seller’s market, be prepared to bid at or above listing price, increase your earnest money deposit and remove any requests for minor or medium updates and repairs. Adjusting these aspects of your offer will make it more attractive to the seller and improve your chances of the seller accepting.

On the other hand, if you’re selling in a buyer’s market, you may have to pay credits, agree to pay for home repairs or agree to a few contingencies to close the deal. You may also offer the home below listing price to get the buyer to agree.

4. Use inspections, appraisals and contingencies

In real estate, a contingency is a condition that, if not met, can terminate the negotiation between buyer and seller. There are three common contingencies you should be familiar with if you’re considering buying or selling a home: inspection, appraisal and financing.

Inspection

An independent inspector should be hired to complete a comprehensive home inspection early in the negotiation process. They’ll check all major systems, as well as the structure and integrity of the home, and identify safety, repair and maintenance issues.

As a result of the inspection, a potential buyer can ask the seller to perform repairs or offer credits or even a price reduction as part of the negotiation process. The seller can then decide whether to adhere to the buyer’s wishes. Often, sellers will offer some repairs or concessions while refusing others.

Appraisal

An appraisal is an assessment of the home’s value. It’s ordered by the buyer’s lender to ensure the loan is in line with the amount the home is worth. If the appraisal comes back less than the purchase price, the buyer may have to come up with funds to make up the gap, or a renegotiation may be in order.

Financing

A financing contingency allows a buyer to back out of an agreement if they can’t secure proper financing in time to purchase a home. In the event a loan is not secured for the home, or the buyer fails to come up with closing costs, the buyer’s earnest money will be refunded without deductions.

In a seller’s market, a buyer might not include financing contingencies in their offer to make it more attractive. In the event the buyer can’t secure a loan or the funds to pay for the house, they won’t be able to recoup their earnest money deposit.

This is why it’s important to have mortgage preapproval and not take on new debts or lines of credit when finalizing your loan. If you’re unexpectedly denied a mortgage without a financing contingency, you lose out on your earnest money.

5. Finalize price and close

Once you’ve successfully negotiated a purchase price both parties agree to, it’s time to close on the home. The closing process can seem overwhelming, but after all the inspections, appraisals and negotiations, it should be a relatively simple process.

A few days before you close, you’ll have a chance to review the final closing documents. This will tell you exactly how much money you’ll have to bring to close. On closing day, you’ll head to a title company or a lawyer’s office to sign all the paperwork for the deal.

Immediately following, your lender will fund the loan, you’ll receive the keys to your home, and your real estate agent will record the deed.