Many buyers solely rely on their real estate agents to negotiate their real estate deals.  Regardless of how well a real estate agent performs their job; their financial interest does not align with the buyer.  Real estate agents often argue that they have a fiduciary duty to the buyer and that their reputation is too valuable to sacrifice by not representing their clients properly.  If this were truly the case, they would change the compensation system.  The system has been designed to keep real estate prices high and all parties benefit financially, except the buyer writing the check, from higher pricing.

With that understanding in mind, the buyer should drive the negotiations.  Start by arming yourself with market data.  Many of these items should be provided by the real estate agent, but be sure to do your own research on/in the neighborhood.  Potential investment buyers need to know what comparable properties sell and rent for.  Next, they need to understand the current inventory and the average days on the market.  Then, they need to figure out the trend of the neighborhood (new retails, more jobs, new developments, etc.).  Finally, buyers need to try to understand the motivation of the seller.  This is the hardest piece of the equation because many buyers never meet the seller or never get straight answers from the seller’s agent.

The information above should be used to determine a fair price for the property.  Once an investor gets the value of comparable properties, these valuations should be adjusted for positive and negative trends in the neighborhood.  If market rents seem to be declining or retail sectors seem to be trending down, comparable values might be too rosy.  Additionally, if inventory in the market is high and days on the market have been increasing, potential buyers should take this as a sign that they have the upper hand in the negotiation.

Once a buyer develops comfortable around a potential offer price, they should verify their potential return on this investment.  Investors looking to purchase stable properties should be looking for a return of 5-10% annually.  If you buy a $100,000 home today, assuming no positive or negative cash flow, and sell the home in a year, you should be able to sell it for $105,000 to $110,000 (in two years, $110,250 - $121,000, etc.).

Buyers should also be generous with earnest money deposits.  Sellers equate the size of the earnest money deposit with the seriousness of the buyers.  Be sure before you send a check for the deposit, the contract contains the appropriate contingencies. 

Finally, buyers need to consider what additional terms and contingencies they need in order to secure a painless (and costless) exit if they decide not to buy the property or to maximize their investment.  Buyers should consider asking for seller financing, a 30-day due diligence period where they verify the financials of the property and the soundness of the physical structure, financing contingencies and anything else they can think of to address potential concerns.  Even if these needs are not presented, they can serve as an alternative to price, should the seller prove unwilling to accept the initial offer.