Tips & Traps when Negotiating Real Estate

Oh, look at what we have here: Another book summary!  Please don't expect this pace to continue - there really are just a handful of real estate books that I plan on reading, I just happened to grab a bunch of them on a recent trip to the library. 

I'm paying particular attention to the topic of negotiation as I lay the groundwork for an eventual purchase, mainly because it's as aspect that starkly divides home shopping from almost any other American act of commerce.  I consider myself to be a savvy shopper, and pride myself on getting the best price for almost everything.  However, you can't negotiate with Amazon.com, or with Best Buy, or with Whole Foods.  For most commerce, getting the best price means searching among a large number of sellers until you find that price, and then acting quickly enough to take advantage of it.  In real estate, the search is still a big part of it, but even after you have found what you want, the negotiation phase can modify the price by tens of thousands of dollars.  This is the sort of thing I'll only experience a few times in my life, and I want to make sure I do it right.

I was pleased to see that there is a book out there that specifically covers the subject of negotiation within the context of home shopping, and it was pretty well reviewed at Amazon.  "Tips & Traps when Negotiating Real Estate" is written by Robert Irwin; this is the first thing by him that I've read, but apparently he writes a lot of real estate-related material, and also runs a web site with an annoying and intrusive registration requirement.

The book itself is extremely well written, though.  Unlike "Your New House," this book is written by an expert in the field, and it shows - he regularly recounts anecdotes from his decades in the business, and speaks with a strong air of authority.  The structure is very sound as well.  On the broad scale, it is soup-to-nuts, covering every aspect of negotiating that you may run across.  On the small scale, each chapter is focused on a particular topic, and usually includes a specific example or two to illustrate the importance of a particular type of negotiation.  As he talks through the importance of a given topic, the main text is punched up with occasional "Tips" - things you can look out for to gain advantage - and "Traps" - potential mistakes that could cost you a deal or money.

If there is one overriding theme to the book, it would be, "In real estate, EVERYTHING is negotiable."  Nothing is off-limits, even though it is in other people's interests to make it seem so.  Brokers' commissions, sales prices, the swing set in the back yard... everything can become a part of the deal.

At the same time, the most crucial tools you can have as a negotiator are knowledge and leverage.  Knowledge is crucial so you can recognize when something is a good deal, identify a reasonable price, know how hot or cold the market is so you know how much you can push the other side, and know the right questions to ask.  Leverage is crucial to get the best terms possible.  Whichever party has the most leverage can drive the other party.  In a hot market, sellers automatically have leverage, since if they don't like an offer or buyer they have plenty of others to choose from.  However, Irwin also describes ways that you can increase leverage in any market.  These all make sense, although I wouldn't necessarily have thought of them on my own.  For example, simply investing time can increase your leverage.  If you and the other party put four hours into making a deal, and then you mention that something is likely to be a deal-breaker, the other person will be much more likely to want to accommodate you and close the deal than they would be if you had brought up the deal-breaker when you first met.  Personally, I'm very Type A and I like to act quickly on everything, so I ordinarily wouldn't even consider engaging in a long conversation with an uncertain outcome like that, but Irwin's reasoning seems very sound.

The book is also valuable in the way it continues to re-emphasize things that I've read or heard from other sources: Buyers should always get a private inspection.  Make sure that your agent represents you and not the seller.  Give yourself enough time so you don't rush into a bad situation.

While everything is negotiable, you need to recognize that not everyone has the power to negotiate.  It's a bit of a waste to spend an hour chatting up the husband if the wife is responsible for all decisions.  New homes can be negotiated, but the front agent at the desk may not have the authority to change terms; you might need to get directly in touch with the builder.  Similarly, loan products are usually sold as prepackaged products by salesmen, but if you already have a loan or get in touch with a loan officer, you might (in the right market) be able to change terms.

I have to say, Irwin does seem like a formidable opponent, and I'm not sure if I would necessarily follow every one of his recommendations.  While he never recommends doing anything unethical or dishonest, he is a big advocate of taking a very hard line to get the best possible deal.  A late chapter describes why in some cases you might want to negotiate without using a real estate agent.  As he points out, even if the agent is representing you, the agent is also concerned about their reputation in the industry.  They don't want to be known as the mean person, or the person who brings in the lowest price (and hence lowest commission) for sellers.  You, on the other hand, will never see any of these agents again, and have no reason to hold back on arguing for the best deal you can get.  When he puts it that way, I can certainly see the advantage, though it's a role I wouldn't want to play often.

A lot of the negotiation-specific things he describes are worth keeping in mind.  For example, "Never negotiate at offer that cannot be closed."  He cites a hypothetical: A buyer comes to you and asks, "Would you accept $390,000 for this house?"  You reply, "We're asking $450,000, but I could go as low as $425,000".  You've just given away $25,000 - and, worst of all, you haven't gotten anything for it.  The person hasn't made you an offer - negotiations haven't truly begun - but you're already arguing from a weaker position.  The correct response is, "Are you offering $390,000?"  Ask them to put the offer in writing - in a form that can be closed - and only then begin negotiation.

I do feel pretty good about my overall chances in this field, thanks in large part to the knowledge and leverage pillars.  By investing as much time as I plan into researching the market and educating myself, I hope to get a great feel for what's a good deal.  Leverage may go up or down based on how the market is doing later this year, but even if the market warms up, I think I'll be in pretty good shape.  I plan to focus my search in the fall-winter period when sales are generally slow, and because I have such a wide time frame to work with, I'll be able to take my time to look for a good deal without feeling pressure to choose any one property.  As Irwin points out, at the end of the day you need to recognize when a deal just isn't possible and walk away.  (And be prepared if it turns out that the other party is willing to negotiate further after all - presto, instant leverage!)

All in all, this was a great book, Irwin's praise of Nixon notwithstanding.  I'll probably revisit it once more before I head out into the field for real.  After all, this will be one of the most expensive purchases I make in my entire life, and I want to get every advantage that I can.