John Beckett's Real Estate Blog

If you’re pondering whether to buy or rent, you know the decision is partly an emotional one. If you detest landlords and have plenty of money to put toward a house, you may prefer the pride of ownership, regardless of how low rents go. On the other hand, if you plan to leave town in a year, the transaction costs involved in owning make it a prohibitive prospect. For most people, the choice is tougher. If you’re settled in a hometown and want to make the financially smartest move, a few mathematical calculations should lead you toward an answer. First, you find a home you’d like to own and calculate its “capitalization rate.” The cap rate is the amount of rental income you would earn if you bought the house and leased it out at the market rate. You express the amount as a percentage of what you’d pay for the house. So if you plunk down $100,000 for a house that you calculate could produce $5,000 a year in rental income, you’d say the capitalization rate on the house is 5%. The higher the cap rate, the better for the buyer. If the home you wish to buy has an implied cap rate that is equal to or higher than the return you think you can safely garner in stocks or bonds, it probably makes sense to go ahead and buy. What’s nice about a cap rate is that you don’t have to guess at what housing prices will do in the coming year. You only need to know what you’d pay for a home now and what it would rent for now. It’s important to calculate the cap rate correctly. Rental income is not the same as gross rent. Get a couple of local real-estate agents to tell you realistically what the house you wish to buy would garner in annual rent. Then subtract property taxes, insurance and a reserve for routine upkeep. What’s left is your rental income. (A good rule of thumb is that rental income is two-thirds of gross annual rent.) If you do buy, of course, it’s not as though you’ll get rental checks in the mail. The rental income figure you calculate is the amount of money you’re saving by not having to rent your own home. For most of us, those savings will be directed toward mortgage payments. (For a few years, those payments will mostly go to covering interest. Eventually most of it will go toward paying down the principal on your loan, which is as good as putting money in your pocket.)

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So you’re thinking about selling your house. But how much do you really know about negotiating a home’s sale? Jump into this unprepared and you could leave thousands of dollars — maybe tens of thousands — on the table. You need to go back to school briefly and become a student of the fine art of negotiation. But how does a home seller get smart fast? You need the crib sheet, with negotiation tips you can use throughout the home-selling process, as taught by some of the savviest and most experienced real-estate teachers. And don’t worry — no one’s going to call you to the principal’s office for keeping this cheat sheet close at hand.

As you’re getting started
Smart negotiating starts early — even before you’ve gotten an offer from a buyer, the experts say. In fact, it starts when you choose a real-estate agent.

Beware the “Mr. Nice Guy” agent. When deciding upon a real-estate agent, you want an agent who represents you to be hard-nosed, irritating and determined; to have learned his or her business in the backrooms; and to tell it like it is and get what he or she goes after. You want the other guy to have the ‘nice’ agent. The lesson: Don’t choose just on personality, but effectiveness.

Understand “forward pricing.” When pricing your home — the first step in the negotiation process — “don’t simply take what the last home in the neighborhood sold for and make that your price. Instead, use forward pricing: If homes in your area are appreciating by, say, 10% annually, and the last comparable home sold six months ago for $300,000, then yours should be priced at $315,000 (half of 10% of $300,000 equals $15,000, which is the amount that should be added to “forward price” for this home).  That’s pricing it forward to the current market.

Once the offers start coming in
Stay out of it. Though the occasional homeowner will feel expert enough at negotiations to handle the sale of the home himself, experts generally say it’s wiser if homeowners stay out of sight during the negotiation process and let their agent do all the talking. That doesn’t mean you don’t play an active role — but you stay behind the scenes. You definitely need to not be seen. It needs to be the agents battling it out.

Get the conversation started. Let’s say you put your home up for sale at $300,000, and a would-be buyer offers $200,000. It’s tempting to just dismiss the offer out-of-hand. Don’t do it. If someone comes in at $200,000 on a $300,000 home, You come back at $290,000. Make some movement. Get the conversation started. By moving — a little bit — you send a signal that you’re willing to negotiate, but you’re not desperate. And that frequently will get the would-be buyer to play ball and counter with a more serious offer.

Remember, it isn’t personal. Lots of times the first offer from a buyer will be a lowball offer — just testing the waters. Let’s say it was offered at $300,000 and they offer $210,000 — some ridiculous amount. Well, the seller gets insulted. The worst thing that can happen in a negotiation is that you take things personal. Remember: It’s just business.

Keep it moving. Time is a key element of negotiation. The longer you can keep someone at the negotiating table, the more likely you’re going to come to a conclusion that’s satisfactory to you. Why? Because the more time and effort people invest, the more they feel invested in getting the deal done and buying your property. So what to do? No matter how bad the offer is, always make a counteroffer – and always give a concession — maybe it can’t always be on price, but maybe it can be on financing. Or, maybe there’s something in the property the buyer wants (that can be thrown in as a concession). … Just the act of keeping it going, keeping the deal alive, actually helps make the deal. One psychological tip: If you’re going to counter (offer), it’s usually a good idea to make the counter on the same document as the original offer. When the counter is on the same document, even though the other party knows that his or her original offer was rejected, it makes it seem like the same deal is still being negotiated.

As the negotiation continues (or drags on). Don’t split the difference. It might be tempting to make a deal happen by just saying, ‘Let’s split the difference between offer and counter offer.” Don’t do it. Why not? Because you’re being too generous, and you’re leaving money on the table.

A small concession can be big at the end. As you’re getting close to closing a deal, but you’re still not there, consider giving a small concession near the final moment. The concession could be moving back the closing date a week, or leaving a piece of patio furniture that the buyer admired. Why? The other side’s need to think they’ve “won” the negotiation, this may be what’s holding up the deal … so throwing them a small win can seal the larger victory. Because timing (of the concession) is more important than the size of the concession, the concession can be ridiculously small and still be effective.

And there you have it — a crib sheet that ensures the only thing that won’t be cheated the next time you sell a home is you.

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