The "It's-All-I-Can-Afford" Offer

Buyer's Budget as Negotiating Leverage

I'm seeing and hearing more instances of Buyers, in the course of negotiating for a home, instruct their Realtors (including, sometimes, me!) to tell the Seller that "that's all I can afford."

Is that a smart tactic?

I discourage it, for three reasons.

One. Sellers tend not to believe such representations.

The only way to really prove that the Buyer's offer is 100% of their budget is to put the Seller in touch with the Buyer's lender, then authorize the lender to share confidential information.

Most Buyers, understandably, would be reluctant to do that.

Instead, the convention has developed for lenders to generate a pre-approval letter verifying that the home in question is within the Buyer's budget.

Two. A home's fair market value and a Buyer's budget aren't related.

Whether Bill Gates or Joe Middle Class is the prospective Buyer, a home's value is still the same: whatever the "comp's" say it is. That is, how much the three most similar, nearby homes fetched, most recently. Period.

That's how Realtors assign value. It's how appraisers determine value. And that's how the Seller's expectations will be framed.

Put it this way: imagine your reaction if the Seller raised their price because you could afford to pay more.

(Can this be a factor in negotiations? You 'betcha. How much do you want to wager that ex-Green Bay quarterback Brett Favre, who's reportedly house-hunting locally, is buying through a corporation or other third party?)

Three. It can spook Sellers.

Signaling that the Buyer is at the very top of their budget can just as easily make a Seller skip the deal as bring them to heel.

That's because any hiccup -- like a jump in interest rates, or the home not appraising -- can derail the sale.

In fact, when I represent Sellers, one of my favorite questions to ask the Buyer's lender (yes, I always call) is how "stretched" or "comfortable" the Buyer is buying the home in question.

Hearing that "it's a close call" would hardly be confidence-inspiring.

Better Tack

Instead of putting a spotlight on the Buyer's finances -- except to establish that they're qualified -- I've found that a better tactic is to focus on value.

Specifically, to make the case that, based on the home's location, features, condition, etc., the Buyer's offer represents fair market value. If not more.

And rattle off all the competing, nearby homes for sale and how they (favorably) compare (assuming that that's true; if not, it can boomerang).

As a general proposition, home sellers usually accept the price they think is the highest they're going to get -- not the highest they believe any particular Buyer can afford to pay.

P.S.: One exception to the foregoing can be when the home's price starts to move out of the range that can be financed with a "conforming" loan (up to $417k). Above that, Buyers need a jumbo loan, which is both much more expensive, and harder to obtain.

Buffett's Negotiating Secrets

Berkshire '09 Annual Letter -- Part Two

For investors, perhaps the most tantalizing -- and useful -- part of Warren Buffett's 2009 letter to shareholders is a little tidbit that's appended to the end.

Actually, it's a solicitation, addressed to perhaps a few hundred people in the world.

Who? People who run or have large minority stakes in a specific kind of company. One that Buffett might want to buy next.

Specifically, the desired company should have: a market value of $5 billion to $20 billion, ballpark; top-flight management in place; and be able to earn more than $75 million annually pre-tax, through "thick and thicker," as Buffett might put it.

Buffett also stipulates two negotiating prerequisites: 1) the Seller must have a firm selling price -- and be able to deliver it (thus, no consultants or other go-between's; only principals need respond); and 2) there must be no other suitors -- no auctions.

Buffett's Negotiating Secrets

What can Buyers learn from Buffett? Three things:

One. Never negotiate against yourself.

That's what you do when you open negotiations by announcing what you're willing to pay -- as opposed to insisting that the Seller announce its selling price (and indeed, commit to being sold).

Two. Never negotiate against other would-be suitors. That's what an auction is.

Buffett doesn't do auctions because he knows that a skillfully run auction will raise the price (savvy home sellers and their Realtors know that, too!).

One of two things happens in an auction (at least when the prize is gold, not dross).

Either you prevail, in which case you'll likely have overpaid.

Or you lose, in which case, you'll just have helped drive up the price the winning bidder paid.

No thanks.

So why would a choice, up-and-coming company -- and Buffett doesn't covet any other kind -- pass up the opportunity to "play the field?"

Several reasons, actually.

Berkshire Hathaway is like a beneficent -- and distant -- ruler. A very rich and patient ruler, with an unusual commitment to building long-term value and actually investing and creating capital, not sucking it out.

For an ambitious and capable manager, there are worse places to be than part of Berkshire Hathaway's corporate fold.

Oh . . . and negotiations will be simple, quick, and painless (Buffett doesn't do hostile deals). And cheap! (remember, no go-between's). That's actually Lesson #3 -- "keep it simple and friendly" -- for anyone who is counting.

"We can promise complete confidentiality and a very fast answer — customarily within five minutes — as to whether we’re interested," Buffett promises.

I'll bet Buffett gets two corporate takers by this July 1 -- three if the market's down significantly before then (Berkshire's pretty good shelter in a storm).