How to Ethically Negotiate on Price AFTER Your Initial Offer is Accepted
I saved $75,000 on the properties I bought and I'm set to buy.
In this video, I'm going to teach you how I ethically negotiate on price AFTER the seller accepts my initial offer.
The strategy I describe here today helped me save $50,000 on a 4-family property I bought in January 2020 and $25,000 on a Duplex I'm set to buy in the Fall of 2021.
Hey friends, welcome back to the channel. If you're new here my name is Sunny and I'm a real estate investor based in Northeast NJ.
On this channel, we explore tools and strategies that help us live happier, healthier, and of course, wealthier lives.
Today, I want to share a strategy that will hopefully help you save some money on your next real estate investment.
But first, let's address the elephant in the room.
The strategy that I'm about to describe will sound a lot like re-trading.
Re-trading is the practice in which a buyer renegotiates the purchase price of a property after initially agreeing to a higher price.
Habitual re-trading is a predatory practice buyers use to get sellers under contract so they have exclusive rights to the deal.
To be clear: I am NOT advising you to re-trade.
Nor am I advocating for the strategy I'm about to describe to be used maliciously.
With that said, let's get into how you can protect yourself and potentially save some money on your next real estate investment.
The first part of this process is getting your offer accepted by the seller.
I believe there are 3 main components to an offer.
The first, is obviously purchase price:
When I make offers, I like to present the seller with 3 price points.
I take a tiered approach based on the financing required to fund the deal.
- I offer the highest amount of money if the seller is willing to hold a note and finance the deal themselves.
- My mid-tier offer comes with a conventional financing contingency.
- Finally, my lowest offer is accompanied by the promise of an all-cash transaction with a 30-day close.
Why do I do this?
The reason is simple - sellers typically don't want to take the first offer they see.
So I become their first, second, and third option in one fell swoop.
If you're wondering how this works out, I can confidently say the cash offer is usually the most appealing as the sellers often can't provide owner financing and don't want to allow for a conventional financing contingency.
Sellers might say they want the highest price, but what they really want is a quick, easy, and convenient transaction.
The second most important part of your offer is making sure you include the following two contingencies.
The first is environmental and the second is structural.
The environmental contingency protects you from contaminated soil or underground oil tanks.
The structural contingency protects you from a whole slew of things from the foundation and sub-floors to the framing and roofing.
If the seller is hesitant to allow these contingencies, show them you're serious by agreeing to a large earnest money deposit.
For context, I put a 10% deposit in escrow on both properties to ensure my terms were met.
That ended up being $30,000 on the 4-family and $55,000 on the duplex.
If I couldn't perform within the agreed-upon terms of the deal, the seller would be able to keep my deposit.
The third most important component of your offer is the due diligence period.
NEVER waive your ability to get the property inspected.
Even if the seller advertises the property as an As-Is sale, you should be adamant about requiring an inspection period. However, understand that an as-is sale likely kills your opportunity to further negotiate on price.
When making your offer, be sure to ask for a 14 day due diligence period, but be prepared to settle on something like 7-10 days.
The due diligence period is where the magic happens. It’s your first and final opportunity to ethically adjust the purchase price after the seller accepted your initial offer.
OK, now let’s assume the seller accepts your price, structural and environmental contingencies, and your requirement for a due diligence period.
The next phase is Attorney Review.
This is where the suits iron out the fine details.Altogether, the Attorney Review process shouldn't take longer than 5 business days.
While the suits are doing their thing, you should be preparing for phase 3: the inspection period.
Call your local professional home inspector and oil tank technician to make sure they are available to visit the property the following week. Ideally they are there no more than a day or two after Attorney Review is concluded.
DON’T WASTE ANY TIME!
A tank sweep report can likely turn around in 24 hours, but an Inspection Report can take as long as 3-5 business days. You need to make sure both reports are in before the due diligence window expires.
If you fall out of your due diligence window to raise any substantiated concerns, you may risk losing your deposit if you have to back out of the deal.
If there aren’t any issues, Congratulations! You are free to move forward with the deal at the initially agreed upon price.
If there are major issues, the first thing you’ll want to do is notify the seller’s side. Be sure to include the report to support your concerns.
Once the sellers are notified, you need to dig deeper.
For example, the inspection report for the 4-family home we bought in January 2020 revealed numerous fire hazards with the electrical system, plumbing issues throughout the house, and structural safety issues that would likely prevent us from obtaining a certificate of occupancy.
We forwarded that inspection report to our contractor and asked him to specifically bid the additional work required to rewire the electrical, fix the plumbing issues, as well as repair the structural issues.
He came back with a quote of $46,000.
We packaged the inspection report with the contractor bid and sent it over to the seller's representative. We presented our findings and told them the truth: our original offer didn’t factor in the cost of these repairs and if we all wanted to move forward with this deal, we’d need either a reduction in purchase price or ask the seller to leave some money in escrow.
We specifically asked for a $40,000 seller’s concession in addition to the property being delivered vacant.
We wanted the property vacant because our contractor suggested it would be easier to do all of the work in one shot as opposed to working around the tenants or waiting for them to leave unit by unit.
The seller came back with a $50,000 purchase price reduction and the property being delivered fully occupied.
We accepted their counter and moved forward with the purchase.
On the Duplex we're about to buy, our tank sweep revealed an underground oil tank and our inspector identified a handful of structural issues in the basement.
The seller took it upon themselves to remove the oil tank, which probably cost them $10,000 or so.
We hired a structural engineer to assess the issues in the basement and then forwarded their findings to a contractor who bid the remediation at $35,525.
We sent the letter from the structural engineer and the contractor's remediation bid to the seller and they immediately provided a concession of $24,500. It wasn't the full amount, but it was close enough.
In both of these scenarios, we made our best offer with the information available. However, during the inspection phase, we uncovered serious issues that weren't clearly visible during our initial walk-through.
If we waived our contingencies and due diligence period, we would have left some profit on the table or worse, been forced to walk away from the deal and lose our deposit.
Here's the kicker: just because you found something wrong with the property during your inspection period doesn't mean the seller is going to come down in price.
The seller could just as easily tell you to kick rocks. Especially in today's market. If that’s the case, you’ll have a decision to make: accept the risk and move forward, or cut your losses and walk away.
At the end of the day, I believe if you act in good faith, hire professionals, and present your findings well, the seller will be inclined to continue doing business with you, even if that means coming off the initially agreed upon price.
Before I sign off from this video I think it's worth mentioning again: please don't mistake this strategy for re-trading. Please don't make inflated offers to lock up a deal only to nickle and dime the sellers once you're under contract. Sooner or later, that type of behavior will catch up to you.