How to Negotiate the Best Home Purchase Price
If you are a real estate investor, you want to get the best return on investment (ROI) possible. Whether you are buying the property to use as a rental and gain appreciation (buy and hold) or you are planning to flip the house (fix and flip) as quickly as possible, you want to purchase it for the lowest possible price. This leaves more meat on the bone for potential profit down the line.
First and foremost, it is important to understand that the home purchase price isn’t everything. There are many other factors you need to consider. Some investment properties may be worth spending a little more to buy. Perhaps they are in a very desirable location or the property is in good shape, meaning you won’t have to invest as much time and money for renovations and repairs. You have to run detailed analytics to project the ownership costs (including purchase price, renovations, repairs, real estate agent commissions or property management fees, etc.). Then, you compare those against income potential, whether it’s one big lump sum collected in a quick resale of the property or long-term investment gains as a rental unit plus appreciation.
Let’s assume you’ve run all those numbers and have determined this is a worthwhile investment. Now, it’s a matter of negotiating the best home purchase price with the seller. What are the steps you need to take to get a lower price without blowing the deal?
Understand the Seller’s Situation
First and foremost, you have to take the time to understand the seller or owner’s situation. Who owns the property? Why are they selling? Do they want to sell or do they need to sell? Are any banks, lawyers or other outside parties involved (such as a foreclosure, tax default or short sale)?
Every seller is different and this will affect who you need to negotiate with and how you should negotiate. Working out a purchase deal with someone who lives out of state and outright owns an unwanted inherited property will be very different than purchasing from a bank who has seized the property in a foreclosure or a homeowner who is in the pre-foreclosure process. Some sellers will be dealing with financial distress. Others may not have that kind of urgency. They may be entertaining offers from multiple real estate investors while still considering a traditional sale through a Realtor®. This is why you ask questions and try to see the bigger picture of the homeownership situation.
Set Your Budget
If you have run property analytics, you should have a project-specific budget in mind. How much time and money will it take to get the property ready for rental or sale? What kind of profit margin must you have for the investment to be worth pursuing? Running these numbers should give you at least a general idea of your target price range. You will definitely want to know your max purchase price. How much is the most can pay to stay within budget and ensure your target ROI?
Making an Offer
Once you have a good idea of the seller’s situation, what they are looking to get out of the property, and your own investment analytics/budget/plan, you can start making offers. There are different strategies you can take here. You can start with a low-ball offer and hope it sticks. The problem with this approach is that it can turn off the seller and quickly close the door on the deal if they feel insulted.
You certainly don’t want to offer the high end of your home purchase price budget right off the bat, unless you really want the property and you are willing to bend a little on your budget to get it. You may be up against other investors or direct buyers, so the competition will often drive the price point.
We’ve all heard the phrase “reading the room.” It’s a bit like this. Understand your buyer competition. Know your seller’s situation and urgency. Get a sense of the lowest amount they may be willing to accept. Start your negotiation with a low offer that won’t insult them, but gives you plenty of wiggle room within your purchase budget.
Know Your Limits
Last but not least, you have to know when to walk away when the deal just isn’t going to happen. Set the high end of your purchase price budget and don’t exceed that unless the property is really worth paying more (and if you can afford the extra expense). Even then, be careful about overextending yourself or showing desperation. Not all deals will work out as you hope. There will be other investment opportunities. Know your limits, stand your ground and move on if the negotiations aren’t going your way.
These are some of the key steps to take when negotiating a fair home purchase price on an investment property. For help with all your real estate investment needs (including home search resources, off-market deals, analytics tools and more), consider joining the PropertyLark home buying network. Fill out the contact form to the right and our brief real estate investor questionnaire to see if you qualify.