The time your real estate contract negotiations begin is probably the most important time in your property search. Smart people already know the importance of this stage being successful and getting the most out of their negotiations. Do you know?
It doesn’t matter if you’re looking to sell, buy, or lease some prime real estate, rest assured, you’ll need to enter into a real estate contract at some point.
Real Estate Contract Negotiation Phase
The reason so many real estate contracts end in disappointment and end-of-relationship litigation is because of a poorly negotiated agreement.
A real estate contract is a legally binding agreement between you and that other party, and if you’re not careful, you’ll find yourself on the short end of the stick in a relationship you can’t resolve.
Approaching the Negotiation Phase
Each real estate contract is unique, so each one is tailored to your particular needs and circumstances. However, before elaboration comes negotiation, and before comes search.
Before you identify any residential or commercial real estate that interests you, you must do the following:
Identify exactly what you want from the transaction. Make sure you have satisfactory answers to how much space you need, where you want the property to be located, what facilities should be on the property, and the highest amount you would be willing to pay or accept if you are selling.
Examine potential real estate options with these factors in mind and critically select those that fit your specifications. If you are selling, identify property similar to yours and how well it sold.
Get in touch with an experienced real estate attorney before making contact so they can do a full review of the property to make sure you’re on the right track.
TIPS FOR THE BUYER AND THE SELLER
All tied and well tied
What do you want to get? The first thing that the seller and the buyer must be clear about is what they want to obtain from this business, how far they want to go and at what point they consider that the operation is not acceptable because it does not pay off.
For this, in many negotiations a Zone of Possible Agreements (ZOPA) is established with the maximum amount that the buyer is willing to pay and the minimum amount that the seller wants to receive. As long as the negotiations are within the ZOPA there will be the possibility of closing the deal.
Why does the other party want to sell or buy?
The reasons why the seller and the buyer want to sit down to negotiate will greatly influence the valuation of the company, hence the need to know them whenever possible.
It is not the same, for example, that a businessman wants to sell his business because he needs liquidity or because he is approaching retirement and does not have anyone who wants to continue with his activity.
The buyer, for his part, can see in it the possibility of acquiring a client portfolio to which he did not have access, consolidating his dominance in the sector by integrating a competitor or, on the contrary, entering new markets.
Knowing what motivates buying or selling helps to make the valuation cake and to put the appropriate price on what really interests the other party.
Set the payment method and terms. Once the desirable value that the buyer and seller want to obtain has been agreed upon and before going into how to sign the contract or the number of audits that are going to be needed, we must talk about the form of payment. By bank transfer, in cash, check, bill of exchange… Whatever the agreed method, it must be reflected in the sales contract.
It is also advisable to add the clauses that the lawyers of both parties draft to avoid problems in this regard. For example, installment sales contracts usually contain a clause whereby the seller recovers ownership of the company in the event of default by the buyer.
Specify the studies to be carried out. When there is the possibility of reaching an agreement, the next step is to detail the reports that will have to be made, such as the Sales Notebook or Infomemo.
This report is provided by the buyer as a cover letter for your company. It does not include detailed business information, but rather a summary description, in case potential buyers back off.
Only when binding agreements are established between the parties, is all the information about the company provided through a due diligence process .
Sign a preliminary private contract or Letter of Intent. The Letter of Intent is a document that describes the key points of an agreement between two parties. With it, both record their willingness to formalize the transaction and establish the main guidelines for the future operation, commitments that can later be formalized by means of a contract.
In principle, the Letter of Intent does not have binding effects, except for the obligations of confidentiality and exclusivity. However, the parties may determine that it is binding and even establish the consequences of non-compliance.
It is basic that the people responsible for negotiating are the minimum and trust between them, maximum. If the information is leaked to third parties, to workers, to the competition and reaches the market, it may happen that the operation ‘burns’ and is not closed.
To avoid this risk, it is advisable to accompany the Letter of Intent and, subsequently, the contract with a confidentiality clause. With it, the parties protect themselves against the risk that the information provided to the other party is revealed and exploited by it or by third parties, especially in the event that an agreement is not reached.
One piece of advice
The confidentiality commitment must refer both to the negotiation itself, and to the economic, legal, strategic or business data and information that the buyer gets to know about the company. In addition, its wording will determine the period to which the obligation of secrecy extends, as well as the consequences foreseen for its breach for both the buyer and the seller.
Know the motivations of the sellers
It’s a good idea to understand the motivations of those selling the home so you can define how to make a purchase offer tailored to their needs. If they need to sell the house quickly, they may be happy to opt for a shorter deal and may accept a lower offer. Conversely, if they’re not in a hurry, some may seek a longer deal and be willing to wait for an offer closer to their asking price.
As such, it’s worth looking into ways to assess the mindset of the seller and how motivated they may be to sell the home. Some signs that may point toward a motivated seller include a vacant house with no furniture, a property listed in a deceased estate, or a property that is underutilized. The amount of time the property has been on the market is also an important clue in helping determine the seller’s motivation.
Make an offer they can’t refuse
Most houses for sale are all about the seller trying to get the best price. As a buyer, the ideal is to negotiate without having to auction, so use your understanding of seller motivation to gain an advantage.
First, make sure financing is pre-approved, you’ve completed construction inspections, and verified the terms of the house or apartment . Then make a serious offer, if the seller rejects your initial offer, make gradual increases, but never exceed your limit.
Be prepared to give up certain things when negotiating the purchase of your property
Negotiation is about give and take, and there are some things you may find it easy to give up, to get the price you want. For example, you can negotiate how long the settlement will take, how much of the deposit you will pay, terms for existing tenants or vacant possession, and any extras you may or may not want. All these things can be discussed; use them to your advantage if you can.
If you are buying through real estate companies , you should confirm these details in advance. If you are buying through a private treaty, the consideration period is also subject to negotiation.
Take the emotion out of buying property
When buying a property, it is vital that you remove your emotional attachment to the house under negotiation. You must be able to withdraw from a sale if the price is beyond your limit. Sometimes sellers have a set figure in mind and just don’t budge, and that’s okay: if it’s not meant to be, there’s another home that’s a better fit for you.
If you can keep yourself reasonably separate during negotiations and act like the sale doesn’t mean much to you, you’re also more likely to stay in control.