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The Negotiating Process in Real Estate

The Negotiating Process in Real Estate
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  • 0:03 The Offer
  • 0:56 Counter Offer
  • 1:53 Delivery
  • 2:22 Earnest Money
  • 2:54 Contingencies
  • 4:32 Lesson Summary
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Lesson Transcript
Instructor: Ian Lord

Ian is a real estate investor, MBA, former health professions educator, and Air Force veteran.

In this lesson, we'll discuss how the negotiation process works in real estate. We will define the basics of offers, counteroffers, and delivery. The role of contingencies and earnest money is also central in the negotiations.

The Offer

Real estate sales are one of the more intimidating transactions for buyers and sellers because of the negotiating process. Fortunately, real estate agents can help make this process less intimidating by acting as an intermediary in the deal. In plain English, the agents communicate with each other based on what they are told to do by the buyer or seller. Let's look at the back and forth between James the buyer and Fred the seller.

James is ready to buy Fred's house. His offered sales price is $215,000, which is $15,000 below Fred's asking price. The offer is a proposed contract given to the seller. James fills out a contract with his agent to be delivered to Fred's agent. The contract states the offered price, along with standard contingencies, such as a home inspection, home sale, and finance contingency.

Counteroffer

Fred is excited to have received an offer, but isn't so happy about the low sale price. He wants to sell the house, but he would prefer to get closer to his original asking price. Fred has his agent prepare a counteroffer. Counteroffers typically approve of many of the items proposed in the initial offer, but are subject to additional considerations or demand certain changes in the original contract. Making a counteroffer cancels James's original offer. Fred's counteroffer keeps the original contingencies but instead proposes a sale price of $226,000.

The negotiation process can continue with counteroffer after counteroffer until James and Fred reach an agreed upon deal or quit. Let's say, in this case, James agrees with Fred's counteroffer. James would then sign the contract to show agreement with the terms. His agent would then deliver it to Fred through Fred's agent.

Delivery

Delivery is an important concept in finalizing negotiations. The signed contract isn't legally binding until it is delivered. That is to say the other party must actually receive the document. Until that point, the contract can be taken back. This concept is less of an issue as more negotiation and contract paperwork is done online rather than personal or mail delivery. James and Fred don't have a binding deal until Fred takes delivery of the ratified contract.

Earnest Money

Earnest money is a major factor in real estate negotiation. Buyers offer a sum of money as a sign of good faith in their intent to complete the purchase. The money goes into an escrow account until closing or the cancellation of the contract. If James were to arbitrarily back out of the deal or find some other excuse to cancel the deal, Fred would get to keep the earnest money. Contingencies not only give the buyer an opportunity to cancel the deal in certain problem situations but also get their earnest money back in those events.

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