Offer vs Sale Price - Negotiation Thoughts
Between October 2004 and May 2006 I have listed over 1,000 homes and been directly involved in the sale of over 600 homes. As a result of my experience I have developed a couple of 'rules-of-thumb' that can help you to know what to expect and how to negotiate the best deal.
For the sake of this article lets say that the following is true:
- Current List Price = $300,000
- Initial Offer Price = $270,000
- Mortgage Pay Off = $255,000
- Cash Needed by Seller at Closing = $10,000
- Buyer's Agent Commission = 3%
- Title Insurance Policy = 1%
- Other Closing Costs = $500
I find it useful to take the difference between the Current List Price and the Initial Offer Price and divide that amount into equal thirds. I have found that the probability that the Buyer will come up 1/3 of the difference is at least 80%. If have found that the probability that the Buyer will come up 2/3 of the difference is about 20%. I have found that the probability that the Buyer will come up 50% of the difference is less than 50%.
In the above example the Buyer will almost certainly (80% probability) be willling to come up by $10,000 to about $280,000. It will be progressively more difficult to get the Buyer to come up more than that amount.
Obviously, as the Seller you will want to maximize your price. It is important to know what your 'Minimum Sale Price' is before you enter into negotiations. There must be a point where you will walk away from the deal and you should know what that point is before you start to negotiate with the Buyer.
I have found that there is a tendency for the Seller to adjust their 'Minimum Sale Price' as they get involved in negotiations. As you invest the time and the emotional energy into the 'deal' you have a tendency to want to make sure that the deal gets done. There is also a growing sense of 'last-chance' that often developes. As the Seller you will often be ready, emotionally and financially, to move on and to leave the old home for the new life that is around the corner.
Finally, there is a phenomena that exists related to the 'Buyer Pool' and the level of 'maturity' of the Buyer Pool that impacts the sale process and the decision related to the sale. Lets discuss that in a later BLOG.
If you have a Minimum Sale Price based on your mortgage and a desired (required) minimum amount of additional cash that you need to come away from the sale with you take that number and 'gross-up' to the required Sale Price to achieve your Minimum Sale Price. Lets take the Mortgage Pay Off plus the Cash Needed by Seller at Closing which totals $265,000. Since the Other Closing Costs will increase the needed Cash by $500 the Cash Need by Seller at Closing becomes $265,500. The total Commission and Title Insurance cost is 4% of the sale price. To determine the Minimum Sale Price take the Cash Neede by Seller at Closing and divide by 96% to get the 100% number.
$265,500 / .96 = $276,563
In the situation defined by the above any Sale Price above the $276,563 will net the Seller the cash that they require out of closing.
You can adjust the above $ amounts and use your particular transaction details to come up with the same numbers for your deal.
For the sake of this article lets say that the following is true:
- Current List Price = $300,000
- Initial Offer Price = $270,000
- Mortgage Pay Off = $255,000
- Cash Needed by Seller at Closing = $10,000
- Buyer's Agent Commission = 3%
- Title Insurance Policy = 1%
- Other Closing Costs = $500
I find it useful to take the difference between the Current List Price and the Initial Offer Price and divide that amount into equal thirds. I have found that the probability that the Buyer will come up 1/3 of the difference is at least 80%. If have found that the probability that the Buyer will come up 2/3 of the difference is about 20%. I have found that the probability that the Buyer will come up 50% of the difference is less than 50%.
In the above example the Buyer will almost certainly (80% probability) be willling to come up by $10,000 to about $280,000. It will be progressively more difficult to get the Buyer to come up more than that amount.
Obviously, as the Seller you will want to maximize your price. It is important to know what your 'Minimum Sale Price' is before you enter into negotiations. There must be a point where you will walk away from the deal and you should know what that point is before you start to negotiate with the Buyer.
I have found that there is a tendency for the Seller to adjust their 'Minimum Sale Price' as they get involved in negotiations. As you invest the time and the emotional energy into the 'deal' you have a tendency to want to make sure that the deal gets done. There is also a growing sense of 'last-chance' that often developes. As the Seller you will often be ready, emotionally and financially, to move on and to leave the old home for the new life that is around the corner.
Finally, there is a phenomena that exists related to the 'Buyer Pool' and the level of 'maturity' of the Buyer Pool that impacts the sale process and the decision related to the sale. Lets discuss that in a later BLOG.
If you have a Minimum Sale Price based on your mortgage and a desired (required) minimum amount of additional cash that you need to come away from the sale with you take that number and 'gross-up' to the required Sale Price to achieve your Minimum Sale Price. Lets take the Mortgage Pay Off plus the Cash Needed by Seller at Closing which totals $265,000. Since the Other Closing Costs will increase the needed Cash by $500 the Cash Need by Seller at Closing becomes $265,500. The total Commission and Title Insurance cost is 4% of the sale price. To determine the Minimum Sale Price take the Cash Neede by Seller at Closing and divide by 96% to get the 100% number.
$265,500 / .96 = $276,563
In the situation defined by the above any Sale Price above the $276,563 will net the Seller the cash that they require out of closing.
You can adjust the above $ amounts and use your particular transaction details to come up with the same numbers for your deal.
posted by DallasFlatFee at 9:12 AM
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