Principles of negotiation. Books have been written about it. Speakers travel the world lecturing about it. Millions have been spent trying to uncover the secret. For some, it will remain an abstract principle they will sadly never master.
A few weeks ago I had the chance to speak with a fellow for whom negotiations had not bee
n a kind mistress. This fellow, we'll call him Stanley, set out to buy a home for his family and ended up outmaneuvered by a more skilled negotiator into a contract he now wishes he had never signed.
Stanley and his family had been renting a small house in Fairbanks for the past couple of years. It was comfortable and the price was right but with the changes in the housing market, he hoped to make the transition from renter to owner. A yard for his children to play in... a place in which to make memories of opening presents on Christmas mornings and birthday BBQ's on the deck. Reasons which we can no doubt all relate to.
When Stanley found 'the house' he sat down with his lender and later the seller to hammer out the details of a purchase agreement. The seller was ready to sell... he and his wife had plans of moving to be closer to their grandchildren and were ready to take the house off the market.
"Let's get this done and get you moved in." Motivated seller. That's good, right?
Having watched HGTV's endless parade of real estate programming and read every real estate article he saw on MSN, he had a plan. Take the purchase price, slice 10% off the top and negotiate up from there, if necessary. Armed with his offer strategy, Stanley and the sellers put pen to paper and in short order had a mutually agreeable contract.
"10% off the asking price and the seller agreed to pay $5,500 toward our closing costs if we would waive any contingencies and close in three weeks." The anguish was palpable as he told me the story. He ddn't need to continue... I knew the house and where this conversaton was going.
"Earnest money was placed in escrow with the title company. An appraisal was ordered and we were planning furniture placement." Imagine Stanley's surprise when the lender calls to say the appraisal came in... well... a little low. Seems as though there's a near $37,000 difference between appraised value and the contract price.
A call to the seller turns the butterflies in Stanley's stomach to catapulting, trapeze-flying monkey's trying to 
claw their way through his belly button. No re-negotiations. "You agreed to remove the contingencies for the 10% price reduction and the $5,500 in closing costs I'm paying" replied the seller. Hmmm. Now what? This is where Stanley begins his search for answers and where he lands on this blog and calls us for answers... guidance... absolution... something.
Unfortunately the only truly helpful advice I could offer is a referral to a reputable real estate attorney. Where and how did the train heading to paradise go so far off the tracks?
Representation - Stanley had none. No buyer-agent representation. No legal representation. Nothing. Mano-a-mano as it were. Given the complexities of contract law, finance, discovery, disclosures, etc. representation is key. A buyers-agent is the buyers advocate in a transaction. What a concept, huh? Their primary responsibility is to protect and promote the buyers interests. Most of the time said representation comes at little to no cost to the buyer.
Research - If you don't know the local real estate market, you need to hire someone who does. A sellers asking price is simply a number. Unrepresented sellers are notorious for having an inflated opinion of their homes worth. What are comparable homes selling for? How long is it taking to sell those homes... and how does that compare to the subject property? You need detailed market information... and someone to interpret that data.
Last but not least, forget the hype. Not even HGTV, your Uncle Bob in Poughkeepsie or Donald 'Combover' Trump will be much help in crafting a negotiation strategy in Fairbanks, Alaska... or in any market they're not well versed in. When the time comes to buy a home for your family, and now is a pretty good time, rely on a local expert. As luck would have it, I happen to know a couple.
(gold man image courtesy of Guido Jansen)
I love you style ....
This story has been told many times in many places ....
Featured in the Group "Whacked!!!
Jesse,
Stanley learned a less about hiring a buyers agent a little too late. Good story sir and I hope a lot of people read it and learn from it.
This is a shame. When you say the buyer removed all of the contingencies, I am praying you don't mean the mortgage contingency as well. Oh dear. That is too bad. The mortgage contingency should have saved him from this type of thing.
Great blog post. I have read many books on the subject, but ti is still always good to hear it from a different point of view. Thanks again for the post and have a blessed day! - Mario
Asking price does not equal value. To negotiate using that is a starting point is not wise. The value in having an agent is having the market value number in mind not the asking price. Good post Jesse!
Too bad for Stanley and his family. But a great argument for representation in real estate transactions. I'm going to pass this along to some people I might be working with. Thanks!
Jesse, sounds like the buyer was flying in the dark, yet still he was surprised. Hello? You are in the dark. Get some light on this situation. You can't help everyone. Some don't want help.
Richard - It has and yet folks still end up with their derriere in a sling. Thanks for the feature.
Don - Agreed. A day late and 37K short. Ouch.
Susan Darlin' - Yep, all. "Buyer removes all contingencies... in exchange for..." language was in the P/A. I'm not sure I see an exit that's not going to leave a mark.
Mario - It's a story that bears retelling so hopefully folks won't find themselves in this pickle. Thanks for stopping by!
Paddy - You got it. There are loads of houses on the market that are nowhere near market value... how does a layman know that? Seems they don't.
Laura - Be my guest.. funny thing is that here buyer representation generally doesn't cost a nickel. Folks that forgo it do so at their peril and gain nothing.
Gary - Flying in the dark indeed. Light is a very good thing, no?
Jesse,
I started reading and got the same feeling: I knew where it was heading. In this case the guy already knows that he goofed. How often people do not even know or understand that they goofed.
Even in simple situations how often people do not act reallly smart.
The guy exchanges e-mails with me for several months, Comes on Thanksgiving day, We set the showing of homes for the next day. He drives around, sees a model home, calls on the sign, the agent comes, he signs the contract. Fine. Did it help him on the purchase price? No. If he woul dbe smart and come with me, he would get a better price, certain things done, whihc they did not do and didnot tell him, and he still would not pay me.
He is a macho. A stupid one
Perfect example of why they need us. Good post.
Why do we always seem to hear these stories after the fact. No one ever seems to come to me and and say I'm about to do this what should I do? What do I look out for?
Thanks for message.
Jesse - another story that can't be told often enough. Both buyers and sellers need representation when making the most expensive decisions of their lives.
Mano mano is that a fabulous article or what..........riveting......I'm wondering if lessons learned are like bridges burned........and you never cross them twice............maybe for this buyer - but how many more are there! Thank you! And I'd Like to Re-blog it Jesse if I may :-)
Outstanding post, Jesse! I too receive a call like that about twice a year. Flying by the seat of your pants, as an ill-informed and unrepresented Buyer, can get you some really nasty road burns!
Jesse--You've addressed several issues here but, I have to say, I laughed aloud at the 'monkeys clawing their way out of his belly button'! I KNOW that feeling--the very first time I negotiated a contract and I will never forget that feeling! Now, I think that it was silly for me to have felt that I made a horrible mistake but, this guy had LEGITIMATE cause for his monkeys! A buyers ALWAYS needs representation!
Another kicker, Jesse, is the unrepresented buyer who then, years later even, tries to sell, finds that they hadn't gotten 'quite' the deal that they thought and are either very disappointed or determined to get THEIR price for the sale of their home that they paid too much for!
Happy Easter!
I get mail like this almost every day, asking how to cancel a contract after the buyers have messed up, so I know how angonizing it must be for poor Stanley. Hopefully he'll figure out a way to get out of this situation and will look to an expert like you for his next home. Does Alaska have such a thing as liquidated damages? In CA, a buyer would simply give the seller his deposit and walk away free.
Did the buyer lose his deposit?
I get calls for help/advice frequently, but AFTER the deal has gone sour. I got one today from Active Rain in fact.
They want help after they're knee deep in it.
Jesse and Kathy, yikes! This is a true cautionary tale! Hope it works out for them.
Great post and words of advice. Love hearing it from another viewpoint!
Great post! Too little, too late, as it were for the buyer! Reminds me of the attorney who bought his first house, didn't use a buyer's agent. He bought a house with NO RAIN GUTTERS! We live in the Pacific Northwest. It rains here. A lot!! HA HA HA . . . he didn't even catch that one!!
Jesse and Kathy, One of many reasons why one should use the services of a buyers agent. Regards,
What a sad story. See it happen from time to time in our market. A shame most buyers think a "For Sale by Owner" is a better deal. Most often, it is not.
Now what? With no appraisal contingency, the buyer can only default and forfeit his earnest money.
I never, never, never write a contract without an appraisal contingency. Never. Although our appraisals usually come in above contract, it's a risk we didn't have to take.
Ouch. I guess thats why you need a Realtor. That happens once and its a big buzz kill.
Great story and another reason for buyer's needing good solid representation!
Too bad. But I sometimes have a hard time feeling sorry for the buyer who is trying to save money and not use a realtor. He thought he'd won even though the house was priced $40,000 too high! I doubt that he'll go that route again.
This is why buyers need representation. Too many people watch HGTV and think they can do the work that professionals have worked their whole life accumulating the knowledge to do. I dont perform surgery after watching ER!
Why does a Seller want to market their own home? And why does an unrepresented buyer want to buy from a FSBO? Could the answer to both questions be "To save paying a commission!" Two dogs chasing the same bone usually does not have a nice ending.
And Mr. Savvy seller isn't quite as sharp as he thinks either. Chances are dog gone good Stanley is going to get some costly legal advice and a couple of demand letters and lot of anger and worry later this deal will not Close as originally agreed.
If Stanley's transaction had been in NM and he called me, I'm FSBO freindly and could have saved him one painfull dog bite!
Kent Davis
Kudos on the gold star. This is a great post! I just noticed you were featured and wanted to say...
WELL DONE!
Evening Jesse, Well said. Going through such a challenging market alone is just scary !
Hi Jesse - This is great advice. I love the HGTV shows because they save me the arguing with sellers to clean up and declutter their homes for sale, and advice like that, but the downside is that viewers begin to think they are experts. The problem is that none of the TV shows teach what our experience has taught us - how to negotiate and on what terms. Your post is a cautionary tale!
Hey I don't feel sorry for the do it yourselfer. Now he wants a real estate professional to help him. Sorry his earnest money is gone.
Wow, Jesse & Kathy, UGLY! It just reinforces that buyers should never proceed without good representation.
Hi Kathy and Jesse, Well Stanley certainly got himself knee deep in trouble, didn't he? A transaction for real property is detailed and complex. It is so unfortunate that Stanley has learned a difficult lesson.
Jesse - This is a stellar post, my friend. In Texas, this type of thing can't happen IF the standard contracts are used, since they provide an automatic "out" for the buyer in this instance. If they don't use the Real Estate Commission forms, however, it's anyone's guess.
I think not having representation is a lot like bringing a knife to a gun fight, you are going to lose that battle every time.
I've had to deal with the buyer who insisted on putting in really low offers, based on advise of the Realtor her mother knew at church that basically the banks were desperate and all the investors where paying $75,000.00 under asking. After tons of work she dumped me when no one accepted her offers. I saw latter she did buy a home and she did not get it that cheap. My satisfaction is that it didn't look that great, the neighborhood has gone done, and she bought last year before the real crash began.
Educating buyers that there may be multiple offers and they might need to go higher than asking for a bank owned home is one of the toughest parts of my job.
What a brilliantly written post - albeit sad for Stanley - but very cleverly presented indeed !
Buyers without representation are simply gambling with their future ...
Cheers Jesse !
Sheldon
What a crazy story. Bad things happen when you have a rookie go up against a pro.
I enjoyed reading your post. Sometimes we need to demonstrate our value to the consumer and your story got me thinking of how many things we do that greatly benefit our clients which I should really be including in my buyer consultations.
Great post. I bet this happens a lot more than we know of simply because some people will not admit to being taken advantage of because they "didn't need representation". Hopefully the e/m wasn't very much.
When you don't really know what you are doing, it's very easy to get in over your head.
I guess they watched too much HGTV and thought they had every angle figured. Too bad. This is a stellar reason why real estate agents have significant value to offer in a property transaction.
It hurts just to read the story. I read this and wonder how many people are in or have been in this position that we don't read about. Great example of why a real estate agent is valuable.
These stories scare the crap out of me.
YO-YO-YOOOOOOOO,
My friend you do need to do your research before removing anything from any contract it is your second chute, your safety net. Don't go off willy nilly without a realtor by your side either!!!!!!
Congrats ont the feature.
Hi Jesse...Like Liz, I'm re-blogging.
Hopefully many, many future buyers will read this and realize that "Yes indeeed, a seasoned REALTOR does bring great value to a real estate transaction!".
I am sure Stanley will advise all his friends and family members to seek your advice and representation prior to looking at property.
Kate
You know what? I have been buying and selling Real Estate for over two decades. I think it is safe to say that: Yes! If I were unlicensed I might attempt to sell my personal home myself; However I would never and I say NEVER try to buy a property without the representation of a good Realtor. With all of this said. I have looked at the current situation our Real Estate Market is in and have come to some small and overlooked conclusions. Now what I’m about to say may need to be debated and I’m open for discussion. I feel the Majority of the problems we are now facing were caused by and continues to be caused by allowing unlicensed individuals to Practice Real Estate. Licensing is not only away for governments to collect fees, but an attempt to protect the public at large from unscrupulous acts. No one should be allowed to Sell, resell, buy or otherwise invest in Real Estate without using a Licensed Real Estate agent. Banks should not loan money for Real Estate investment to unrepresented individuals. Practicing Real estate without a License is and should be illegal. We must insist that individuals use a licensed individual. to give advice on or buy or sell Real Estate. This goes for all these investment books, tapes, CD’s and the like. Other professions require a strict licensure. Attorneys, Doctors, Pharmacist, Insurance, CPA’s. Heck the Termite Company must be licensed and bonded. It’s not a fundamental Right to sell Real Estate. I say make the laws stricter and not continue to allow this. Think this over and really look at it. Banks schemed with a lot of unlicensed investors to loan money to the to buy and Sell Real Estate without a licensed entity involved. They called in creative financing? When a Real Estate Agent looks at a “Deal” they should see it for what it is and ask themselves is it Ethical and is it Moral. I have made a lot of money just doing business right. I have backed my clients out of deals that just were rotten and had the potential to cause harm. I take a lesson from my former profession. ”First to do no harm”. Let’s straighten out our industry. Make it mandatory to use a Professional when buying or selling Real Estate. Lets Hold Real Estate Agents to Higher standards and in the long haul we’ll all make money, The investors, buyers, sellers and yes the Mortgage Companies.
Fantastic post! Just sold a home the other day belonging to a seller who had transitioned from "unrepresented seller" to "unrepresented seller who has paid a fee to be in MLS" just the day before. When I presented my offer (at the real market value) he told me he didn't need to respond because he had only been in MLS for a day and was confident he could get his price.
OK, I told him. But let me share with you that the ONLY REASON you got this showing was because you are now in MLS. Further, my thirty years in the business gave me the experience to be able to explain to him why my buyers offer was worth responding to. He was unimpressed. I told him it would be very unwise to discount my buyer because now that Realtors were going to be involved in his sale, he would not be doing himself any favors by pretending that any potential buyers would NOT be getting better advice than he was getting.
He called the next day. We're under contract and he and I are doing just fine!
The Stanley's of the world think they are smarter than the average bear and that's why Real Estate Attorneys charge so much to unwind their"deals" if it's possible.
Jesse and Kathy,
What a story; I agree with Lenn, did these people not have have a "Subject to appraisal" clause?
Jesse & Kathy - Just a superbly written post. The pitfalls of going it alone. I smell a reblog.
When will those buyers learn!?! Why wouldn't you want a Realtor to help you, especially when it won't cost you a cent for professional advice???
Excellent post. I'm not currently a lic. Real Estate Agent, even after going to the classes, getting lic. years ago, I'm not up to speed in the Residential Market so there is no way I wouldn't use a Real Estate Professional when buying a home. This Buyer learned his lesson the hard way, which is what some of us do. I believe that the Seller was asking only what he believed his home was worth so it is not his fault the Buyer took it upon himself to play Real Estate Agent. Good story to use as a reference in the future.
This post was so famiiar that I actually searched for "claw their way through his belly button" and found it had been posted a couple of other times earlier this month. I guess a good post is a good post!! I'm just glad I'm not losing my mind. :-)