Negotiating With Home Sellers

If you dread the negotiating process when buying a home, never fear. Your real estate agent is an experienced negotiator who helps keep the bargaining from becoming emotional and veering off track.

Your agent must know your desires by heart and have quick access to you if a negotiation point needs to be made. It’s important to stick to the strategy you and your agent have agreed upon — showing the seller how strong your offer is.

First, get preapproved for a mortgage loan. That means your mortgage lender has reviewed your credit history and assets, checked employment and income, examined your debt-to-income ratios, and has preapproved you for a certain amount, terms and interest rate so you know exactly how much you can spend.

Being preapproved shows sellers that you are prepared and able to buy. Before you submit an offer, ask your agent to find out more what the seller wants as far as terms. The more your offer matches up with the seller’s requests, such as a closing date, the more likely your offer will be accepted.

Find out when the house will be vacated, if any repairs or improvements are planned, and if the seller has any pressure points such as a relocation deadline. Also, you’ll want to review the seller’s disclosure of the condition of the property.

Your agent must also find out if other offers are on the table. Your position is stronger if there are no other offers. The seller may be less likely to bend on price concessions or repairs if there are other offers.

Have your agent pull up the most recent CMA (comparable homes recently sold or on the market) within a reasonable radius of the home, so you can sculpt your offer price. Be sure that you are comparing apples to apples in terms of updates, size of the home, amenities, location, schools districts, etc.

Once these steps are made, you are ready to write an offer.

Making the offer

Make yourself think like the seller. It helps you anticipate what the seller will accept in price, terms, and other conditions. By considering the seller’s position, you will likely create an offer that is either accepted or strongly considered.

Your offer should be clear on the terms, closing dates, repair requests or other conditions the seller needs to meet and it should be accompanied by a letter from your lender that you are preapproved to buy the seller’s home. Include a cover letter summarizing your strengths as a buyer in terms of creditworthiness, flexibility in closing, and the strength of the offer.

Don’t insult the seller with an offer that’s too low or requires too many concessions. The seller may be nostalgic about his or her life in the house and may not like the idea that you want to remodel.

The only thing a seller can’t argue with is a strong set of comparables that show the home is overpriced or out of date. These are homes that have sold that are nearby (within two blocks) and similar in age, size and features. If you can show that a similar home has sold within the last two months for less than the seller is asking, that’s good.

Be sure all conditions, repairs, etc. are agreed to in writing. Some sellers may feel that a handshake covers a promise, but it’s essential to be clear on paper what is expected and when. A seller’s promise to paint should be included as an addendum to the contract and include all details, such as primer, exact color and type of paint, how many coats, and when the work will be finished for inspection.

Negotiating after inspections

The offer is negotiated and accepted, the earnest money is at the escrow agent’s office. Now the inspections occur, and this is where the contract negotiations can break down.

No home is perfect, not even brand-new construction. During the inspection process, the inspector is usually required to tell you about any condition of appliances, heating and cooling systems, roofs, electrical and plumbing systems, etc, and if your future home is up to current city codes.

Sellers are usually not required to bring a house completely up to current local building codes. Negotiate a repair only when a system is unsafe or a major repair is needed to make the system operate effectively.

As long as the seller has a reasonable explanation of what your position is and why, and communication remains open, the seller should have as much desire to make the contract work as you do.

WRITTEN BY REALTY TIMES STAFF

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Home Sellers Need to Understand Liquidated Damages

Liquated Damages Clause Can BE Valuable, But May Be misunderstood

Is a liquidated damages clause a good thing to have in a real estate contract? If so, for whom is it good? The buyer? The seller? Both? Like so many questions in real estate, and life in general, the first answer to such questions is, “It depends.” Before we get into that, though, a word about what a liquidated damages clause is.

A liquidated damages clause sets in advance — at the time of contract formation — what the monetary value of damages shall be in the event of contract breach by one of the parties. Often, a liquidated damages clause (actually, a paragraph or section) will include a recitation that the parties are agreeing ahead of time, because it would likely be difficult to determine the actual damages should a breach occur. But such a statement is not necessary.

A liquidated damages clause could be directed toward both parties. For example, “If either of us fails to perform, he will owe the other $10,000.” But it need not do so. Commonly, a liquidated damages clause will be directed towards only one. E.G., “If the commercial landlord doesn’t deliver the property within fifteen days of the date promised, he will owe the tenant $10,000.”

The standard residential purchase contract produced by the California Association of REALTORS®(CAR) contains a liquidated damages clause. It says this:

“If Buyers fails to complete this purchase because of Buyer’s default, Seller shall retain, as liquidated damages, the deposit actually paid. If the Property is a dwelling with no more than four units, one of which Buyer intends to occupy, then the amount retained shall be no more than 3% of the purchase price. Any excess shall be returned to Buyer. Release of funds will require mutual, Signed release instructions from both Buyer and Seller, judicial decision or arbitration award…”

Three items are worth noting: (i) This provision is asymmetrical. That is, it burdens only one party, the buyer. It does not provide for any preset damages should the seller breach. (Presumably, a seller breach could lead to a suit for performance.) (ii) It is limited. For residential properties of less than five units, one of which will be occupied by the buyer, the amount cannot be more than 3% of the purchase price. This has been set by legislation (Civil Code 1675). (iii) Payment of the damages would still require the agreement (by signatures) of both parties. That is because there has to be agreement that there has been a breach. Otherwise, a judicial or arbitration conclusion will have to be reached.

Signing (or initialing) a liquidated damages clause is optional. Although it is preprinted into the CAR purchase agreement, it will only apply if both parties so indicate. This is where problems, based on misunderstanding, may arise.

Commonly, when encountering a liquidated damages clause, a principal is liable to ask, “What does this mean?” It would not be unusual for an agent to say something like, “This means that if the buyer breaches, the seller gets to keep the deposit.” That, unfortunately, does not go far enough in explanation for many sellers. They need to know that it means that, in the event of breach, they would be entitled to no more than the deposit (or no more than 3% of the purchase price, if the deposit is larger than that). Often, when buyers have breached a contract, the seller feels wounded and entitled to more than the deposit. If a liquidated damages clause is in effect, that will not be an outcome.

Let us consider some possibilities. Say the purchase price of a single family home intended for owner occupancy is $300,000. The liquidated damages limit is 3% of the purchase price — $9,000. Suppose the CAR liquidated damages provision has been signed and that the buyer subsequently breaches.

(a) The deposit is $5,000. The seller has a right to the $5,000; but not to pursue the buyer for the additional $4,000. Liquidated damages is limited to the amount of deposit actually paid.

(b) The deposit is $15,000. The seller is entitled only to $9,000, the statutory limit.

(c) The original deposit is $5,000, but it had subsequently been increased by another $5,000.

(i) If the increased deposit was accompanied by a separate liquidated damages provision (CAR form R.I.D., Increased Deposit/Liquidated Damages Addendum), signed by both parties, then the seller would be entitled to $9,000 of the $10,000 actually paid.

(ii) If the deposit had been increased by $5,000, but no separate liquidated damages provision had been executed, then the seller would only be entitled to the original $5,000.

Is a liquidated damages clause a good thing? For both buyers and sellers the answer may be ‘yes’ and ‘no’. It depends. Suppose the buyer backs out — breaches — very early into the transaction. Typically, that would not cause a lot of damage to the seller. A liquidated damages provision may give too much to the seller. Conversely, a seller who has gone through a long escrow and who has made plans and commitments — sometimes financial — may feel that limiting the damages to the deposit (or 3% of the price) is not sufficient.

For both parties, though, if they have agreed to a liquidated damages provision, they at least know what is at stake.

Bob Hunt is a director of the California Association of Realtors®. He is the author of Real Estate the Ethical Way. His email address is scbhunt@aol.com.

WRITTEN BY

HOME SELLERS: CREATE A ‘MILLENNIAL MAGNET’

Sellers whose homes are ideal first-time-buyer starter homes may count on attracting millennial buyers to purchase this real estate. If so, sellers benefit from learning how to look at their homes from the millennial point of view since this group does not represent the force that it has in the past.

With more than 83 million millennials — a larger group than boomers — needing a roof over their head, millennial home buyers should represent very significant proportions of the real estate purchasers in many markets — but they don’t.

According to the National Association of Realtors 2015 2015 annual home buyers and sellers survey, the percentage of buyers who were first-timers was down to an almost historic low of 32%. Only one-third of these first-timers are millennials, where traditionally this group represented the majority of buyers. The thirty-something millennial segment that is buying has the income, borrowing clout, dual income status, and parental-boosted down payment to afford home ownership, where their millennial colleagues are renting or living with their parents.

“Millennial” is a popular label (replacing Generation Y and Echo Boomers) that business gurus and authors apply to those born in years ranging from the early 1980s to the first years of the 21st Century — that’s the Millennium connection. The millennial label has no absolute definition. The defining range of years is usually chosen to prove the user’s point. Popular start years are 1980 or 1982 while wrap years run from 1992 to 2004.

As more millennials reach traditional home buying age, buyer ranks will swell since the age 23 cohort is currently the largest in the overall population. Until then, sellers intent on attracting millennial singles and couples — and other first time buyers — will benefit from understanding how to transform their home into a “millennial magnet.”

Five Seller Perspectives Create a “Millennial Magnet”

1. New Functionality & Cool Design Matter

To millennials, many rooms have new functions and, therefore, should look very new and different from the decor many sellers preserve from their move-in decades ago. TV rooms are now media rooms; bedrooms are now sanctuaries; bathrooms are spas; recreation rooms are man caves; garages are studios; closets are to die for. Keep in mind that rooms themselves are on the out. Open concept is the preferred “dream home” configuration. Sellers must disregard how they have used and enjoyed specific rooms to concentrate on transforming old rooms look to like the right new space. Hot real estate markets have millennials feeling that they are settling for less than they want. Give them something to be excited about when they prepare a an offer to buy your property.

2. Fun-Filled Low Maintenance Yards Are Mandatory

“High maintenance” is out everywhere in, on, and around a house and especially in the garden. Temperamental roses, shrubs that demand pruning, bulbs that must be dug up each fall, plants that must be watered, lawns that need mowing, and anything that adds to millennials’ “To Do” lists does not add value according to their appraisal of the property. Environmentally-friendly, low maintenance landscaping along with anything fun, like hammocks, earn “wow’s” and add value for buyers. Fire pits, outdoor kitchens, and party zones display more value that high-maintenance fish ponds and fountains. Real estate professionals know when swimming pools are a plus or are considered a work zone by buyers.

3. Storage Plus

Millennials are moving from their family home or a rental condominium, neither providing enough storage. Adding storage is equivalent to adding space — you can never add too much storage.

4. Walkability Is Key

What’s in the neighborhood can hold more value than what’s in the house. Proximity to cool places and hot spots represents big value to buyers. Millennials think of their dream home as the center of a universe of fun and convenience. Sellers need to switch from evaluating the area from their own point of view and consider it the way thirty-somethings do.

5. Bearable Trade-Offs

Urban lifestyles in major cities like New York are irresistible to most millennials until they start a family. Then, the less expensive, traditionally-safe suburbs look attractive. Sellers in the burbs should check with their real estate professional to learn which benefits local millennial buyers value most — proximity to train a station, a large entertaining-friendly yard, a detached home, great schools…to understand how the seller’s home will rate against local attraction factors. According to a recent study of counties by California-based CoreLogic, a global property information, analytics, and services provider, millennials favor the more affordable properties found in counties in the middle of the country over higher-priced east and west coast real estate. The top 10 counties are in central states like Utah, Colorado, and Minnesota; the bottom 10 counties are in coastal states including Florida, California, and Massachusetts. The study revealed that “millennials are buying in markets they can afford, and specifically, where there are good paying jobs.”

Written by PJ Wade