Tips and Traps When Negotiating Real Estate: Be Informed

Walk Away a Winner – Be Informed

TIP

The old maxim “Knowledge is power” applies doubly in real estate.

Being informed can make a big difference in almost every sale. For example, you’re presenting an offer that contains a financing con­tingency that specifies that the purchase is subject to your obtaining a 90 percent of value mortgage. (You’re putting 10 percent down.)

As soon as you present your offer, the agent for the seller says, “You can’t get that loan because you’re not planning to live in the property. Only buyers who intend to live in the home can get a 90 percent loan. The best investors can get is 80 or maybe 75 percent mortgages. Either come up with more down or you’ve got no deal!”

Now, do you look wide-eyed, confused, and slightly embarrassed by this turn of events? If you do, then you haven’t done your home­ work. Further, you’re not going to be able to negotiate successfully here unless you come up with a lot more money, which you probably don’t want to do (or are unable to do). The problem is that you don’t know the right answer.

You should previously have contacted lenders or a good mortgage broker to find out if a non-owner-occupied purchase would qualify for 90 percent financing. (It seldom does!) If there’s no financing available, then you should have structured your offer differently, perhaps with a 75 percent first loan and a 15 percent second from the seller.

Or, you should have found a lender who will give you a nonoccupant 90 percent mortgage. (A few do exist in some areas.) If you had done your homework and been properly informed, when challenged by the seller’s agent, you could have simply smiled and whipped out aprcapproval letter from a lender promising to make you a 90 percent loan on the property. The seller’s agent would now look foolish (instead of you) and you might be able to press for some other concessions, having thus established your authority.

READ:  Tips and Traps When Negotiating Real Estate: How Do You Negotiate over Deposits?

Or, can you imagine this happening? You’re a seller receiving an offer to purchase a property that contains a contingency clause. (A contingency is simply a condition that must be met before the sale can be completed.) The clause says, “Seller agrees to pay for all costs of repair or retrofitting as required by termite or other reports as required by lender, insurer, or state.” Now, should you sign a contract with this contingency in it or not?

You may know that virtually all lenders require at least a termite report clearance before they will fund a mortgage for the buyer. Also, in almost all locales the seller is expected to pay for correcting all damage. You’re prepared for this. But, are there any other reports that are required? If so, then this could add up to a lot of money and you may want to delete the condition. If not, and the buyer is just being cautious, you may want to go ahead and sign. The question is one of knowledge.

Many people, figuring this only applies to a termite report and clearance for which they have to pay anyway, would sign. However, in some areas today there are additional requirements now being made by the lender, insurer, or the state. For example, some states may soon require that an earthquake, hurricane, or cyclone report be issued and that a clearance showing the house is protected from these be given prior to sale. The costs here can be extremely high, perhaps in the range of $20,000 per house or more. If you sign, you could be committed to making the corrections.

READ:  Tips and Traps When Negotiating Real Estate: Question Authority

Or perhaps the lender may require a special report on flooding because you are in a flood plain, as well as a clearance showing that certain expensive retrofitting steps have been taken to protect your home. Or a fire insurance company may require a report on roofs in your area because of an extreme fire hazard where your property is located. The insurer may also insist on a clearance saying that your roof is of fireproof materials before issuing insurance. (Replacing an old wood shingle roof with fireproof shingles or tiles can easily cost $15,000 or more.)

TRAP

Some sellers simply don’t realize that everything in an offer is negotiable, including the contingencies. If you don’t like the contingency, you can rewrite it. Of course, that nullifies the offer and now you must get the buyer to accept your changes. But that’s all part of the negotiation.

Today the whole world of real estate transactions is complicated by the demands of a host of companies and agencies that are external to the transaction. However, if you’re unaware of what’s required of you in your area, your ignorance could cost you a fortune. If you sign a clause saying you’ll pay, then you’ll probably have to pay.

TIP

Although signed sales agreements are supposed to be binding, in actual practice, the language in them is often flawed or the sellers or buyers can claim they were not properly informed about the consequences of their actions by their agents or attorney. Thus, another useful bit of knowledge is that just because you signed doesn’t necessarily mean you’re always on the hook. Extenuating circumstances just might save your rear end. Only you can’t count on this. It’s far better to have the knowledge you need to avoid signing a bad agreement than to sign and have to try to get out of it later on.

The key here is to be informed. Having knowledge of pertinent facts can often mean the difference between negotiating a winning or a losing deal.

READ:  7 points to consider when taking out a mortgage