For you as a real estate investor, the right purchase price negotiation is of great importance. If you make mistakes here, it can cost you the property you want. If you negotiate too hard, you will not get your property. On the other hand, a good negotiation can save you a lot of money in just a few minutes. For example, if the seller lowers the purchase price again by more than 10 percent, that can mean savings of several thousand euros, depending on the location and size of the property.
As you can see, this topic is not very clear-cut and requires a great deal of intuition, which you need to develop. Since a successful purchase price negotiation is also based on sound knowledge, you will receive valuable practical advice in this article. We deal with purchase price negotiations every day. Either we negotiate purchase prices with buyers who want to buy properties from our investors or from our own portfolio, or we are the buyers who want to purchase a property.
Why it can be helpful if you play poker
Usually, as a buyer, you will never see the seller again. That’s why you should dare to play poker. Since you will part ways after the negotiation, you have nothing to lose. Nevertheless, you should consider the possibility of not winning the bid for the object. Conversely, the seller will also try to get the best out of the property sale.
In my opinion, there is still a red line. For example, we don’t take advantage of an uninformed person or pull someone over the coals. And there’s a very simple reason for that. I also don’t want that to happen to me if I buy something in an area that I’m not knowledgeable about. This would be the case, for example, if the car I bought gave up the ghost after two weeks and the private seller pretended not to know that the engine was already halfway down the road before the sale.
As a rule, there is a passage in sales contracts that states that the seller is not aware of hidden material defects or that these were communicated to the buyer. If this is not the case, the buyer can withdraw from the contract. We first had the case that a seller had commissioned an expert opinion six months before the sale, which quantified a significant defect in the insulation of the common property. Since this was not handed over, we could have withdrawn from the contract. But let’s get back to the topic.
What is the scenario of the purchase price negotiation?
First, you should realize what the negotiation scenario looks like. You view a property and like it. If you pay the asking price, chances are you will get the property. However, if you pay a lower price, the property will most likely go to someone else. So it pays to be aware of the risk.
Define the goal of your purchase price negotiation in advance. Usually this will be the offered price of the property minus a certain amount. Normally you want to get a concession from the seller. Therefore it is important to know in which market you are: Are you in a buyer’s or seller’s market? In downtown Munich, the sellers are probably calling the shots and you may not even get the property if you bid the asking price. Here, negotiation makes little sense.
In rural areas, the situation is quite different. Due to the low demand, you have a good negotiating position. Here, it would be wrong to enter into the purchase price negotiations with only the “usual 10 percent” negotiating leeway. You can read more about location here.
How do you find out how much leeway there is on properties in your target market?
You can approach other local brokers and pay them a fee if they appraise the purchase price for you.
You can request comparable properties through the appraisal committee. They will provide you with comparable properties for a fee. The special thing is that these are real purchase prices, because the notary is obliged to provide the transactions. Thus, you receive the final negotiated prices and can see what price is usual for the location and the object. The prerequisite for this is that there are enough transactions and that they do not go back too far. Use this argument in the purchase price negotiation and support it with the appropriate data.
What is your budget and credit line?
Before you invest in a property, you should know if it is financeable. If you already know that you can finance the object well, you have an important argument on your side. Many deals fall through because of a failed financing. You can read more about financing here. For example, you could say to the seller: “My financing is secured and I’m making a quick decision. If you take X percent off the purchase price, we can go to the notary next week.”
This will especially please the broker, who won’t get his money until then. You can go further into this in the purchase price negotiation if you absolutely want to buy the property at the reduced price. In this case you could say: “I will pay the brokerage fee on the same day, on the original purchase price, not on the reduced one.”
The best way to prove the financing is with a financing confirmation, which is usually valid for six months at a bank. It is very important that the object and the loan amount are written on it. If you then negotiate the purchase price downwards, the confirmation still applies, but no new loan agreement has to be drawn up. The banker will thank you.
The second big advantage of the confirmation is that the cancellation period has not yet begun. Because if you sign the loan agreement, but then do not get the object, you get the loan after exceeding the withdrawal period and have to pay an expensive non-acceptance compensation.
Check who you are buying the property from
To successfully negotiate the purchase price, you need to know what kind of seller you are dealing with. If you are buying from a real estate agent, you are dealing with a negotiating professional for whom this is a routine situation. He usually settles everything with the seller and tries to prevent unrealistic purchase prices. If the purchase price is too high, he can’t get rid of the object and has a slow seller. If it is too cheap, he waives commission.
However, brokers offer potential sellers the subject of valuation of the object. Here regularly too high purchase prices are called, only in order to get the order. If then several months no one comes forward, the price is reduced piece by piece. This really only works for one-time transactions, which usually take place during real estate sales. That’s why you have to look carefully when choosing an agent for fresh properties.
Attract the private seller to your side
Private sellers are very special from my point of view. First, there is the question of why they want to sell the property themselves. After the listing is placed, there will be a lot of brokers calling wanting to handle the property for the seller. In addition, it is a lot of work to do all the viewings and manage the deal. I have experienced private sellers who wanted to cancel the appointment a day before the notarization and more. This is where a broker will get the seller back to the table.
With private sellers, negotiating too hard or personal dislikes can have a negative impact in some circumstances, especially if they are “married” to the property. The seller may still have a strong connection to the property and know the people in the building. If a rent increase is implemented right now, he may fear looking in a bad light. The fact is that with private sellers you save the brokerage fee, but you may also be buying Pandora’s box in the negotiation.
After negotiating the purchase price, you need to act quickly
When you express criticism, you should do so gently and constructively. No one likes to be shown up. You need to get the seller on your side in order to do business with them. Otherwise, if you come across a stubborn seller, he might prefer to file for personal bankruptcy rather than sell the property to you right now. A real estate agent will usually have already done this confirmation for you when acquiring the order.
As soon as you have successfully negotiated the purchase price with the private seller, you should visit a notary. Do not waste time! You never know what problems and difficulties may arise unexpectedly. And the fact is that the best agreement is useless if you don’t have a signature. The sooner you seal the deal, the better.
The appointment should take place on the spot and not by offer acceptance. This would be the case if you make your offer at a notary or represent the seller without power of attorney and the seller accepts the offer or post-approves the power of attorney. In this case, it is better to wrap up the deal quickly and safely.
What role does the property play in the purchase price negotiation?
If you are dealing with a realtor who knows all the negotiating tricks, it will be difficult to get him to lower the price by listing negative things about the property. When you negotiate the purchase price with a real estate agent, you will usually send him a written offer to buy. This will contain important parameters such as the desired purchase price, the date of payment and also the bank that will finance you.
Nevertheless, we always go to the object with a building expert. If there is really an important defect, you should either leave it alone or buy the object at a low purchase price. We have often experienced that the owner did not know his object himself and was surprised what was wrong with it.
Furthermore, we have a dimensioned floor plan drawn up. Because if the area deviates, which happens very often, you can also renegotiate. Most have, if at all, only the floor plan from the declaration of partition. But this is drawn up before construction. Whether this area was later really implemented to the square meter, no one knows.
Other things are problematic tenants, which the broker or seller does not get managed, but you do. Here there is usually a great need on the part of the seller to get rid of the “problem”. You absolutely need this information. Because nothing is worse than dry rot, house longhorn (a type of beetle) or even a problematic tenant.
Why many transactions do not materialize
In our experience, many transactions do not go through because the remaining debt is too high. The seller still has so many debts on the property that the agreed price would not even be enough to cover them. And this is also problematic for you. This is because the seller’s bank must release the property from its lien. Especially with new construction or monument renovations, there are high purchase prices that differ from the resale prices (inventory).
This is comparable to the new car you drive off the lot and want to resell after 5 years. So what happens if the bank doesn’t release the so-called “encumbrance release”? The notary can’t do the deal and you have to withdraw from the contract. Therefore, find out beforehand how the property was financed and how high the remaining debts are.
If you have any doubts, ask the seller’s bank for a declaration of release from encumbrances. The fact is that for many sellers there is an imaginary and real lower limit, the residual debt + X. You should always check this before you buy. You should always check this in the background before negotiating the purchase price.
Conclusion
As you can see, a lot goes into a successful purchase price negotiation. The professional gets all the information about the property, the location, the seller and is ready to strike immediately if the deal is good. I hope that this article has brought you a little closer to your goal. Learn about me and here and how I like to Negotiate