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All Articles on Selling | Back to Previous Page
Reasons to Sell | Getting Financially Organized | Preparing to Sell | Your Real Estate Team | Listing Contracts and Commissions | Marketing Your Home | Negotiating | Closing the Deal | After You Sell

Negotiating
Basics of Negotiating, Multiple Offers, Contingencies, Selecting the Best Offer, Making a Counter Offer, Lowball Offers, Backup Offers, Corrective Work, Lease Options

Basics of Negotiating
If you follow these basic negotiating guidelines, your deal will practically take care of itself:

Get everything in writing. Written contracts evolved from the muck and mire of legal quicksand because people have lousy memories. If you want your deal to be enforceable in a court of law, put all the terms in writing. Make a habit of writing short, dated MFRs (Memos For Record) of important conversations (such as, "June 2 -- buyers' agent said that they'll have loan approval by Friday," "June 12 -- buyers asked to extend closing one week," and so on).

Make sure that deadlines are met. Real estate contracts are filled with deadlines for everything from contingency removals and deposit increases to the ultimate deadline, your closing. Failure to meet each and every deadline can have dreadful consequences. Your deal may fall apart -- you may even end up in a lawsuit. However, most deadlines are remarkably flexible. They can usually be lengthened or shortened by negotiation if the need for revision is properly explained and handled promptly with adequate lead time.


Multiple Offers
In multiple-offer situations, presentations are often delayed. If you anticipate receiving multiple offers, develop a strategy for handling them before putting your house on the market.

Delaying presentation offers
The key to success is alerting buyers and agents well in advance about the precise time you will start accepting offers and the way you'll handle those offers when they come in.

  • You notify buyers and agents that you are requiring a waiting period before considering offers in the "comments" section of the multiple listing write-up and on your property's listing statement. Your agent can note the time when you will allow offers. Just to be safe, also instruct your agent to tell everyone who calls about the property that you are delaying the presentation of offers.

  • Ask your agent whether your area has a commonly accepted protocol for handling multiple offers.

Setting guidelines for an orderly presentation process
You or your agent should tell interested parties that the following guidelines are in effect to ensure that presentations are handled fairly for each and every prospective buyer:

  • Offers will be presented in the order in which you or your agent was notified that offers were pending. As buyers or their agents announce that they have an offer to present, put their names on a list.

  • Neither you nor your agent will accept offers before the designated formal presentation period.

  • Tell prospective buyers in advance that you'll either accept or counter the best offer you receive. Getting multiple offers doesn't guarantee that any of the offers will be over full asking price. However, if you announce in advance that you won't counter every offer, smart buyers make the best offer they can right off the bat. They know you don't intend to give them a second chance if they submit a "let's leave room to negotiate" type of offer.

Contingencies
Any offer you receive will probably contain some buyer clauses known as contingencies. A contingency gives buyers the right to remove themselves from the agreement if there are any unforeseen problems.

The most common contingencies are:

  • Property inspection contingencies: Your house's physical condition greatly affects its value. Buyers are interested in finding out exactly the shape your house before they buy it.

  • Financing contingencies: The buyers can withdraw from the contract if the mortgage specified in their contract isn't approved.

  • Other common contingencies give buyers the right to review and approve your property's title report and, if you're selling a condominium, the condo's master deed, bylaws, and budget. Buyers can make their contract contingent upon many other reasonable events, such as having their lawyer review and approve the contract or having their parents inspect the house.

A ratified offer with escape clauses can be good:

  • From the buyers' viewpoint, a contingency-filled offer still shows your intention to sell them the property. The buyers don't have to worry that you'll sell the house to someone else while they're spending time and money inspecting it.

  • From your perspective, a contingency-filled ratified offer ties up the buyers. A buyer should deposit earnest money to prove that they are serious about purchasing your home. There isn't a standard "earnest money" deposit. The actual dollar amount varies from area to area, depending on local custom and practice.

Selecting the Best Offer
If you have multiple offers on your hands, you earn the right to dictate terms and conditions of sale for yourself.

  • Price isn't the sole criteria. The highest offer could be out of synch with your time frames, or made by someone who has not yet been pre-approved for a mortgage.

As a seller in a sellers' market, follow these tips:

  • Think like a lender. In a strong sellers' market, spirited buyer competition often pushes prices up. Lenders usually support higher prices when they reflect an overall market trend and when the mortgage isn't an excessively high percentage of the purchase price. You determine that percentage, called the loan-to-value ratio, by dividing the loan amount by the purchase price. As a rule, the lower the loan-to-value ratio, the better the chances of getting loan approval.

  • Don't issue more than one counter offer at a time. When faced with multiple offers, you have four options -- accept one, counter one, counter more than one, or reject all offers. If you counter several offers, you may inadvertently end up in contract to sell your house to several different buyers. The one sure way to avoid this scenario is to follow this rule: Counter only one offer at a time.

  • Qualify buyers carefully. When you question agents about their buyers, scrutinize each purchaser's creditworthiness, motivation to purchase, and deadline for when they must complete the transaction. Read the Section on Distinguishing Real Buyers From Fakes.

  • Pay as much attention to terms and conditions as you do to price. Sometimes, a lower price beats a higher one. If a buyer offers to purchase your house "as is," you don't have to pay for corrective work or worry about reducing your sale price because of a poor inspection report.

  • If you need a quick sale, the best buyer is the one who can close fastest. Then again, the best buyer may be the one who'll let you rent your house back after the sale if you need a place to stay until the sale of your new home closes. Remember: Price isn't everything if you have other, more compelling needs.

Making a Counter Offer
Counter-offer forms are far less complicated than purchase-offer forms, because you use them to fine-tune the terms and conditions of offers you get from prospective buyers.

Suppose that the buyers offer $175,000 for your house and want you to close 30 days after accepting their offer. Because you're asking $189,500, you think that their offering price is low. Furthermore, you need six weeks to relocate.

If everything else in the buyers' offer is fine with you, don't rewrite the entire offer. Instead, give the buyers a counter offer stating that you'll accept all their terms and conditions except that you want $185,000 for your house, and you need six weeks after the offer is accepted to close.

Define time frames with counter offers
Suppose a case in which a loan contingency gives the buyer 30 days to get approved for a mortgage. If the prospective buyers can't get a loan within 30 days, you have the choice of either giving them a few more days to get financing or putting the house back on the market. Either way, you're in control of the situation.

Good contingencies always have precisely defined time frames within which buyers must complete a specified action or drop out of the contract. Be realistic but brisk when you set time frames. You don't want your house off the market any longer than is absolutely necessary.


Lowball Offers
A lowball offer is one that's far below a property's true fair market value. For example, if someone offers you $150,000 for your house when recent comparable sales data show that it's worth every penny of $300,000, that's a lowball offer. Lowball offers are typically made by unmotivated buyers trying to get a deal, by people who think that you are desperate and willing to negotiate, or by buyers who think that your property is overpriced.

Dealing with lowball offers
Suppose that you just put your house up for sale. You priced it as close as possible to its fair market value. Two days after your house hits the market, you get an absurdly low offer. Either the buyers haven't done their homework regarding comparable home sales, or they think that you don't know your house's real value and are trying to exploit your ignorance.

As a seller, you can handle people who lowball your well-priced house in one of two ways. You can let the buyers know that their offer is totally unacceptable by having your agent return the offer unsigned. Why waste time making a counter offer to people who are either idiots or scoundrels? Or you can make a full-price counter offer. Show your contempt by hardballing the buyers on each and every term and condition in their offer. (Although emotionally satisfying, this reponse is lose-lose negotiating. We don't recommend this approach.)

People who lowball a well-priced property destroy any chance of developing the mutual trust and sense of fair play upon which cooperative negotiation is based. Real buyers know the difference between an offering price that gives them room to negotiate and a preposterous lowball offer.

Recognizing lowball offers that aren't
There's an enormous difference between submitting an offer at the low end of a house's fair market value and lowballing. For example, suppose that someone offers $140,000 for your house, which is listed at $149,500. You based the asking price on the fact that comparable houses in your neighborhood recently sold in the $140,000 to $149,500 price range. You naturally opted to start at the high end of the range of fair market values. The buyer just as naturally began at the low end. Even though you and the buyer are $9,500 apart, each of you has a factual basis for your initial negotiating position.

  • As long as an offer is based on actual sales of comparable houses, it's not insulting. A buyer who comes in on the low side of a property's value is fine, as long as you have plenty of time to negotiate, and you believe that the buyer is motivated. If you and a buyer come in on opposite ends of the fair market price range, the best defense is a good offense. You are most likely to prevail in the pricing debate if you have an encyclopedic comparable market analysis and your agent is a strong negotiator who has personally eyeballed all the comps.

  • Sometimes, a lowball offer is, in fact, a reality check. The offer isn't a lowball offer if it accurately reflects current market values. Ironically, some sellers provoke low offers by unwise pricing. These sellers insist on leaving too much room for negotiation in their price because they "know" that buyers never pay full asking price.

  • Real buyers don't play this game. They make an offer at the low end of your house's fair market value and see how you respond. If you refuse to accept facts about recent comparable sales in your neighborhood, real buyers don't waste time trying to educate you. Instead, they take the path of least resistance and move on to find a real seller.

  • Your asking price may have been close to fair market value when you initially put the property on the market. However, in a weak market, prices keep declining. If your house has been for sale for months and the only offer you've gotten appears to be a lowball, have your agent review all recent sale prices of comparable houses before you reject the offer. If prices are dropping like boulders, that "lowball" offer may be worth pursuing.

Backup Offers
If you suspect that the deal on your house may fall through, you are wise to protect yourself by obtaining a back-up offer. One situation that screams for a back-up offer is any contract that contains a "subject to sale of buyer's property" contingency. A back-up offer is also advisable if your buyer is obviously struggling to qualify for a loan or if you and the buyer hit a brick wall on some negotiable provision of the contract (such as the way to handle corrective work for problems discovered during property inspections).

  • A good back-up offer clearly states that you've already accepted another offer on your property. It also stipulates that the back-up offer will not take effect until you give the back-up buyers formal written notice that your prior contract is canceled.

  • In other words, the back-up offer is contingent on the deal in first position falling through. Motivated buyers generally don't stay in back-up position very long. They keep looking at other property after signing your back-up offer. If something better comes on the market while you've got them on hold, they are gone in a flash.

  • Back-up buyers can usually bail out of a back-up offer anytime they want before you advise them that the offer in first position is dead.

Corrective Work
Typically, at the time the buyers submit an offer, neither you nor the buyers know whether your property needs any corrective work. That uncertainty is why contracts usually have provisions for additional negotiations regarding credits for repairs after the necessary inspections are complete.

If property inspectors find that the property requires little or no corrective work, you and the buyers have little or nothing to negotiate.

We recommend that you or your agent be present during every property inspection so that you get firsthand reports about any damage that the inspector discovers. The buyers should also give you copies of any and all inspection reports for your review before you meet with them to negotiate a corrective work credit.

Solutions

  • Have repairs finished prior to closing and present paid bills and warranties to the buyer at closing.

  • You credit the buyers directly for corrective work at the closing.

  • Join with your buyers in obtaining competitive bids on the repair work from several reputable licensed contractors. Use bids to establish the amount of the corrective work credit.

Lease Options
A lease-option is exactly what the name implies: a rental agreement to lease your house, but with an option to buy the house in the future. Lease-option offers are triggered by high mortgage rates or are made by folks who have good incomes but don't have enough for a down payment.

If you don't need to sell right away and you must move soon, doing a lease-option helps you cover the house's monthly ownership expenses until mortgage rates or the local market improves enough for you to sell.

A lease-option is actually two contracts rolled into one. Here's how it works:

  • Lease: The lease differs from a standard rental contract in several ways. First of all, the lease has an option giving the renters a right to purchase your house anytime they want during the lease's term. Second, the renters pay you a one-time fee called consideration in addition to the usual first and last month's rent plus security deposit. You get the consideration in return for providing an option to purchase. If the renters exercise the option, their consideration is credited toward their down payment. Last, but not least, some of the rent is usually applied toward the down payment.

  • Purchase contract: Attached to the lease is a contract that specifies the price and terms of sale if the renters opt to exercise their option to purchase.

You should also negotiate the following:

  • Option consideration: No standard fee exists for option consideration. This fee is totally negotiable based on the amount you are willing to accept and the renters are willing to pay for an option to purchase your house.

  • Rent: The house's rental value is easy to establish. Your agent should be able to assist with this.

  • Amount of rent applied toward the down payment: A lease-option's rent is usually higher than the market rental value of a house because lease-option rent is also used as a savings plan.
Columbia MO Real Estate Jones Company The Jones Company Real Estate, LLC
Columbia, MO 65201
www.TheJonesCompany.net
Phone 573-268-6628
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