Better Than Expected Offers
From time to time you will receive offers or counter-offers that are better than they should be, especially from inexperienced or unprepared counterparts. Focus negotiation on enforceability and execute quickly.
~~~
I listed a large house on a small lot. It essentially had no back yard. That’s a tough sale. And it took the better part of a year to sell it (March to December). But in November, the first and only offer finally arrived.
The subject of the back yard never came up. I truly believe that for these particular buyers, it was not an issue. And their broker, God bless him, did not warn the buyer, that one day they will be the seller (we talked about this in Chapter 39).
The point is, we were quite happy to get an offer. And when it came in, it was close to our Purchase Price. And here is the real kicker, it included a $2,000 Due Diligence Fee. You remember, this is the nonrefundable amount paid directly to the seller. Now for the price point of this house, a $2,000 Due Diligence Fee was a dream come true.
So we negotiated, a bit, on the Purchase Price, and never discussed the Due Diligence Fee. Easy deal.
Yes of course, too easy. Because during the Due Diligence Period, the buyer had the place inspected. Several inspections actually. And based on his inspections, he asked the seller for a large discount on the Purchase Price.
Now this was a house in very good shape. And when the request came in, for a $15,000 discount, I immediately wondered if the buyers ever had any intention of honoring the deal as negotiated. I just don’t think so; they knew that they would get another bite at the apple. And I guess most people who think this way seem to believe that by the time this happens, the seller will agree just to get it done, especially so late in the year. This is a hardball tactic, and it often works because too many incompetent listing brokers allow their sellers to get into a weak negotiating position. We talked about this extensively in our chapter on Negotiating Due Diligence.
And here, given the circumstances, the seller might very well have agreed. But these buyers were too clever by half. They had offered and the sellers had accepted the $2,000 Due Diligence Fee. With no discussion whatsoever. So when we discussed it, I asked the sellers to consider how much the buyer had spent on this property that they would not and could not recover. And we estimated (because we cannot know) this amount to be around $3,000.
Now let’s stop here and point out that $3,000 is an order of magnitude less that the buyer’s requested discount. So in a rational world, the buyer would be willing to walk away from $3,000 rather than spend fifteen thousand on repairs.
But while that may be true, it is still $3,000 out of the buyer’s pocket. And if the buyer does walk, he will have to come up with additional funds for the next house (although by then he will have learned his lesson on how much of a Due Diligence Fee to offer). Isn’t it a shame that his broker failed to adequately advise on this topic?
Now I have had residential buyers walk away from as much as a $5,000 Due Diligence Fee. So it can happen. But in our experience it is very rare for a buyer to walk away from a four-figure Due Diligence Fee. It is worth pointing out that for the price point of this house, we would have accepted a one thousand dollar Due Diligence Fee. We only got two thousand because that was what the seller offered, and it was never discussed.
But if all of this is only a game to allow for a re-negotiation of the Purchase Price, the fifteen thousand figure is not real anyway. But you know what is quite real? The $3,000 already spent and nonrecoverable.
It is interesting to point out that the three thousand dollars is a sunk cost,18 and therefore, should not be a relevant factor in the decision to move forward. But there are a number of other factors which keep it relevant. First, it still has utility because the Due Diligence Fee is applied to the Purchase Price at closing. Second, the buyer may or may not have more cash, or enough cash, for an alternative property. And three, we are comparing a very real cost with one that may or may not be real. Well, I think it is interesting anyway.
So what did our seller do? Well she is one of my shrewdest and most savvy clients. She offered a $1,000 discount on the Purchase Price and told the buyers to take it or leave it. And she held fast.
There was much consternation on the buy side. Think about it, the buyer never had any intention of paying the agreed upon Purchase Price. And now they are faced with the very real possibility that they are going to lose their three thousand dollars.
They threatened us with termination, which was their right. We took it in stride. And then the phone calls became aggressive and angry, so we stopped taking them. But the threatened termination never came.
And that is the end of the story. The transaction did close. With the one thousand dollar discount; no repairs were made. My client was tickled pink.
_____
18. I found a nice, straightforward definition of sunk cost in the Encyclopædia Britannica: In economics and finance, a cost that has already been incurred and that cannot be recovered. In economic decision making, sunk costs are treated as bygone and are not taken into consideration when deciding whether to continue an investment project.
Peter Bondarenko, Encyclopædia Britannica, 7 October 2019.