Home buyers will often ask me, "How do I decide what price to offer the seller of a house, initially?" I answer this question with the one response in real estate that is never wrong. It depends. Before you back click in disgust, allow me to clarify.
Your initial offer price is going to depend on what your goal price for getting the property. This is the price you desire to pay based on an examination of your financial position, what you want to pay monthly, and how much money a bank will lend to you. Once you determine this number, I recommend using the Seesaw Technique. If you have ever seen children playing on a seesaw, you can relate to what I'm talking about. One child will get on the seesaw and the other child will try to get exactly the same distance from the center to balance the seesaw out (assuming they are about the same size). This is how I recommend structuring your initial offer. Your initial offer should be an equal amount below your goal purchase price as the seller's price is above your goal.
For example, if the seller is asking $200,000 for her house, and your goal price is $190,000, I recommend you offer $180,000. The seller is $10,000 above your goal purchase price, so you offer $10,000 below your purchase price. Therefore, when you negotiate away from your initial position, chances are good you will still end up at your goal price. Also, this creates a win-win situation with the seller that leaves everyone feeling good. They had to come down $10,000 but you came up the same amount so they feel like they did well in the negotiation.
The reason you do this is there is an overwhelming sense of fairness in meeting in the middle. For whatever reason, people in this country feel like that is a very equitable thing to do. Contrast this with other countries where almost every item you buy is negotiable and sellers will mark their products up 5-10 times what they will accept for them. Interestingly, you possess a large degree of control over where the middle is. So make sure your first offer allows enough room to achieve your goal price and still create the perception that the seller won in the negotiation.
Now, many people will say "Why don't I just offer $190,000 and tell the seller that is the best I can pay. Take it or leave it." I recommend against drawing that line in the sand with a seller because this type of ultimatum breeds competition. You risk antagonizing the seller and causing them to refuse to negotiate with you. Plus, in order for you to win (achieve your goal price), the seller has to lose. They have to come down to your price and you didn't give anything. Even if you do get the seller to come down to your absolute price, they may feel resentful and refuse when you have to ask for any further concessions, like repairing items after the inspection. Most likely, you will pay above your goal price because the seller will assume your first offer is not the highest price you can pay.
So try this negotiating technique out and see how it works. Remember however, that any negotiating technique should be employed in conjunction with other techniques and only after having gathered sufficient information.
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