Negotiating my first deal

6 Replies

Hi everyone,

I'm negotiating my first real estate deal currently. It's a two family home, 3,120 square feet, with three parking spaces located in East Orange, New Jersey and we have it under contract. There are currently tenants in the unit, but they will be vacating it after we close. The owner wanted $274,000 for the house, but I negotiated him down $250,000. I'm funding this project using a 203k loan.  

After the inspection, we discovered mold, both the water boilers needed to be replaced, the heating using was actually improperly set up, and the oil tank is still on the premises. The heating unit is currently pumping out unhealthy levels of carbon monoxide and dirty air into the house. My lawyer has sent a letter to the seller telling him the unsafe conditions of the house and that the tenants there should be evacuated immediately due to the health risks. 

As you can see, this is a complex project. For the most immediate repairs, my contractors said it will cost $15,000, so that's what I asked for as a credit to the seller. 

Any tips on how I can negotiate the best value for this deal? The appraisal will be happening in another week. 

Should I hold off being too pushy with a lower price until the appraisal happens and base my goal price of the house on that? Or should I try to get the cost as low as possible in case it appraises for higher than I expected which is over $235,000? 

@Quadeer Porter you've got the seller in a tough spot given you uncovered a safety hazard severe enough that the property needs to be evacuated.  Is this a property that would likely go to another owner occupant if you don't buy it?  If so you are probably in a good position to negotiate most of the items to be fixed if not you may have to take on some of the projects if you want to stay in contract.

@Aaron K. Thank you for the response! In my opinion, the seller has a very limited market he'll be able to sell the house to. It would either be investors or people with large renovation budgets. Therefore, I doubt he would back out the deal because he really does not want the house. The tenants give him a head ache, he lives in another state, and God forbid if someone in the house starts to become ill then the city/county will fine him. So I want to negotiate the best rate, but at the same time not make him feel cornered. 

@Quadeer Porter given the hidden defects that the seller now knows of and has to disclose to future buyers I think you should be able to get most of it because they either have to fix those items or lower their price so the new owner can fix them, none of them are things that can be left as is until they break with the possible exception of the water heaters.

If you truly want $15,000 I'd consider asking for more - open with $20,000 so you're prepared to accept a counteroffer at $15,000. (This is assuming you don't have any documentation for the $15,000 number... If you have actual quotes totaling to somewhere around that, I think you can open with $15,000 and remain firm on it.)

Keep in mind that depending on how much of a down payment you're making, your lender may not be comfortable with you receiving $15,000 in seller credits. My understanding is that they can sometimes be uncomfortable with situations where you'd wind up walking away from the closing with more cash than you brought with you, because then you have less skin in the game than they were anticipating at underwriting. This may be something to bring up with your lender or discuss with your attorney.

Also, keep in mind that if you are doing a Standard 203k, as opposed to a Limited 203k, that the 203k Consultant,. not the contractor, determines the scope of work and pricing for the rehab project. 

203k Consultant is required on a Standard but are optional on the Limited 203k. Even if you are doing a Limited 203k, you'll still benefit from using a 203k Consultant who will identify all the FHA required items, because most contractors don't know what FHA will require.

Otherwise, you'll have the contractor submit their proposal and then the FHA appraiser will appraise and inspect the property and identify all FHA required items. Going this route, you hope the contractor already included all FHA required items in their initial proposal. If not, then your contractor will have to revise their proposal to include the items the FHA Appraiser identified that are not on the contractor's initial proposal. Then resubmit paperwork to lender and hope everything still qualifies under the lender guidelines.

Point of that info - get a 203k Consultant on all 203k during the inspection period or ASAP.