Sunday, August 25, 2013

What's the Difference Between $4000 and $4000 in a Real Estate Transaction?

No, this isn't a trick question.  Like most questions and answers, it all depends on your Point of View.

If you are negotiating the purchase price of a home, there is a huge difference between $4000 to a seller and $4000 to a buyer.  Looking at the other person's situation might make a difference.  Lets take a look at the difference between $4000 in the selling price of a home from different perspectives:

As a seller: The difference is literally $4000.  That's $4000 less (or more) in your bank account at closing.  It can make the difference in your purchasing power for your next home (less of a down payment or part of your closing costs).  Perhaps you need the $4000 to replace the carpeting in the home you are hoping to buy.  On the other hand, you are selling for a reason...either you need a bigger (or smaller) house, you are relocating to a new area or whatever the reason.  Is $4000 worth putting your plans on hold?  Will this offer allow me to accomplish what I am trying to accomplish?  I've said it before and I'll say it again:  "Your first offer is generally your BEST offer."

As a buyer:  The difference is really minimal.  The $4000 in purchase price means an additional $140 in down payment (with an FHA 3.5% down loan) or $800 if you are putting 20% down.  Of course your payment is going to be higher because of the $4000 higher price, but how much higher?  If you are getting a 4.5% interest rate on your new loan, then your payment will be a whopping $16-$20/month higher..or to break it down to the ridiculous, about 75 cents per day or $5/week (One mocha each week).  If you are a typical buyer, you will stay in your home for 5-7 years.  Let's use 7 years on the outside.  At $20 month for 7 years, that comes out to $1680 difference.  Now $1680 is a lot of money, but how much will that $20/month really cost you in 5-7 years? Right now gas is about $4/gallon.  Five years ago it was closer to $3/gallon.  What will it be in five more years? Do you see where I am heading with this?  Your $20 today will NOT be the same as $20 in 5-7 years.

While I am never a proponent of overpaying on a home (or accepting less than market value if you are selling), I DO try to look at the long term effects of any negotiation rather than the immediate situation.  You should also consider if your dream home is worth an additional $20 per month to you.  How long did it take for you to find the home you are negotiating on?  How much longer will it take you to find another home just as good?

Whatever your thoughts or situation, I would like to caution against nit-picking over a relatively small amount on either side.  I can't tell you how many times I have had a customer miss out on a home over a few thousand dollars only to have them always compare other homes to "the one that got away".