House Hunting Part 7 – Negotiations
Negotiate as defined by Merriam-Webster is to confer with another to arrive at the settlement of some matter. The hunter has done their homework and found the perfect abode, the one he/she cannot live without, and the excitement builds. He/she has their Realtor write an offer they sign and submit to the Seller’s agent and wait. Sometimes word gets back fast or drags on seeming like an eternity. When it does arrive, the offer is not in the form of a contract but a counter offer. The counter is a good thing; it means the original offer is not too low. If the price is much lower then what the Seller is expecting he may just reject the offer and ask the Buyer to submit another more reasonable offer. However, the counter means you are in the game and now the fun starts. Everything in the offer is negotiable; however, in Texas, a few things are customary for the Seller to purchase, such as title insurance and a home warranty. When buying a house the Purchaser is not actually purchasing the property, he /she are buying a title to the abode, the right to occupy and use the space. Title insurance protects the document from claims and limitations placed on the title by others. This can save the Buyer a lot of heartache and financial loss. The home warranty is a one-year contract with a home warranty company and is different from homeowner’s insurance in that the warranty covers major appliances such as air conditioners, heaters, pools, and plumbing fixtures etc.
The typical negotiation points in an offer are price, repairs, closing costs, survey, closing date, and possession. Sometimes the option period is included and on rare occasions, escrow/earnest money. In order to determine a reasonable offer price, a good Realtor will perform a comprehensive market analysis (CMA/comp). This is the same procedure used by the Seller’s agent to set a price on the home so makes sense for the Shopper to do the same. A CMA compares similar properties in the same or comparable neighborhoods that recently sold, and averaging price per square foot of the abode. The house hunter will have a better understanding of the market value. Market value is a very important concept to understand when purchasing. Market value is the cash price that a willing buyer and a willing seller would freely agree upon, given reasonable exposure of the property to the marketplace, full information, and no undue compulsion to act.
The goal in all negotiations to find the true market value and this is hard, because many times the Seller has an over inflated assessment of his/her castle and on the other side the Buyer is unrealistic. A good house-hunting guide educates the Client while showing listings and explains the price differences of listings and coaches the Consumer on pricing. Sometimes repairs are needed and often are negotiated twice, once at the initial offer and a second time during the option period after a home inspection. Safety hazards are the number one concern for Buyers; these repairs are typically accepted by the owner, others such as updating and taste, not so much. Closing costs are also on the table. Certain loans have particular limitations on how much a Seller can contribute to closing costs. The well-informed house hunter must be aware requesting payment of closing costs reduces the overall bottom line of the house for the Seller, when negotiating both need consideration. The survey is required by the Title Company, sometimes the Seller has a copy of a good survey the Title Company can use, however if the owner has changed the foot print of his abode or has added a permanent fixture to the yard then a new survey is required. The time to close takes at least twenty-one days but depends on the lender or the type of purchase. Cash for instance quickens the closing time. Possession after closing depends on if the Seller requires more time to vacate the property. The option period is the time allowed by the Seller in which the Buyer can get out of the contract and not lose his/her escrow/earnest money. Typically, the length is ten days at a minimal cost. Escrow/earnest money guarantees the Buyer will come to the closing table; the cost is normally $1,000 per $100,000 of price, and both money for the option period and escrow/earnest money refunded at the closing table.
The current tight housing market has created the semi-new phenomena of multiple offers. In this case, several Buyers are after one castle and the Seller has many offers to consider. This almost creates a bidding situation however a Realtor is not a licensed auctioneer and it is illegal for them to create an auction, so the Seller’s agent cannot give the price of the highest offer to another Purchaser. Multiple offers create a nerve-wracking circumstance for house hunters and true market values can go out the window. Although, if he/she loves the house and no others are available, the Buyer may be tempted to offer a price above market value. If the Client is using cash, there is no problem, but when a loan is involved, especially FHA and VA loans then the house-hunter could find themselves with a low appraisal. The lending institute financing the loan typically does an appraisal of the home’s value to determine if the abode purchased provides enough collateral for the loan. If the loan is higher than the lenders appraised market value of the house, either the Buyer or the Seller must pay the difference. The house hunter may not have enough cash so it falls onto the Seller to lower her/his price. If this does not happen, the deal is dead.
Negotiations do not need to be difficult. As long as both parties are realistic and have good representation, this portion of the real estate process should be easy. One good hint for all potential house hunters is to be emotionally unattached to the abode prior to closing, easier said than done, but can produce a smarter purchase. See ya down the road. http://www.djlyons-realtor.com