For some reason, new (and wanna-be) investors think that negotiating is really hard. And while I don’t disagree with them, real estate negotiations, in my opinion, are simple and straightforward. But that’s because I don’t even begin to negotiate until I have an inspection and/or contractor’s bid in hand. At this point, the property is already under contract and both the buyer and seller are posturing to close on the property. And since we have a list of issues, with costs associated with each, it is not emotional. Its black and white. And remarkably simple.
The key here is ensuring that you build an inspection contingency and resolution period into your contract. Whether you are using a real estate agent, working directly with a seller, or making an offer on an official state offer form, or simply submitting a letter of intent to purchase, this contingency has to be built in for this to work. If it isn’t, you will not have the power to negotiate, and won’t even be able to protect yourself.
Here are the five reasons I wait until after the inspection to negotiate.
1. You’ve got the sellers set on selling.
After you’ve locked in a contract, typically the sellers will breathe a sigh of relief. The hardest part of listing a property is usually the waiting and hoping that someone will make an offer. With a bound contract, the sellers will feel that they’re making progress toward closing. And when it comes time to negotiate for repairs, the buyer has all the power and can essentially ask for anything they want. Because the seller knows that you can walk away if they don’t agree, many tend to be willing to negotiate.
2. You can make your offer strong.
I almost always offer full price, maybe even more if it’s a highly competitive market, and do all my negotiating during the inspection. This allows me to compete if needed and usually results in an awarded contract because I am offering the seller exactly what they are asking. There are other ways to make offers strong: quick closing, cash purchase, few or no contingencies, etc. Committing to negotiating after the inspection allows a buyer to put forth a strong, competitive offer, and move to the due diligence phase. If you chose to low ball the seller, or try to get everything out of them in your initial offer, you risk offending the seller, or not being awarded the contract.
3. You don’t need to waste any time on due diligence until you have a contract.
If you make your offer contingent on an inspection and resolution period, much of your due diligence can wait until after you’ve submitted an offer. This means that after a preliminary check on the numbers and a general confidence in the property and the returns, you can make an offer and feel good knowing that if something does not turn out the way you expect it to, you can walk away from the contract.
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4. You already have a solid contract locked in and now have complete control.
You can ask for everything you want and walk away if you don’t get it. If you know what’s important to you, and what actually constitutes a deal breaker, or something you’d be unwilling to concede, then you simply terminate the contract if the seller isn’t willing to give you what you want. Since you are still within the timeline of your inspection and resolution period, you should have no issue recovering the earnest money deposit.
5. The possibilities are limitless.
After you’ve determined what needs to be repaired, replaced, or further investigated, you can begin to put a creative solution together so both parties walk away content. You can ask for money off the purchase price, checks sent to vendors or contractors at closing, or even credit back to you in the form of cash you can use as you need to following the closing. You can also ask the seller to make the repairs using licensed contractors before closing or any combination thereof. In terms of a rental, my rule of thumb is, “if it ain’t broke don’t fix it.” But I still ask for the money as a credit at closing. So if an inspector tells me that the water heater is beyond its life or the HVAC could give any day, I generally ask for money off the purchase price but don’t make those repairs or replacements until the systems actually break.
So, get out there and starting making offers! Once you have the property under contract, hire a good, reputable contractor, and get a bid from vetted contractors so you know what you are asking for. And then get to negotiating. Decide what is most important, but have a list of things that are non-negotiable. That way, if negotiations begin to get tense, at least you can give a little bit, but still get the things that are important to you.