Getting a great deal on a house has a lot to do with good negotiating. Unlike investing in stocks, where you have no ability to affect prices, a savvy real estate investor can make a difference. And one of the negotiating tactics to consider is writing a price concession letter. A price concession letter asks the seller to lower their asking price usually once in contract.
A price concession letter is almost like the opposite of a real estate love letter, which tries to convince the seller you are the ideal candidate. Once in contract, no seller wants to get a price concession letter. However, as a buyer who might be struggling with uncertainty, such a letter may help you follow through with the transaction.
The price concession letter can either be friendly or threatening. The tone of the letter will depend on how ruthless or scared you are. I highly recommend writing a more collaborative and friendly letter. Holding the seller hostage is a last resort tactic to delay the close of escrow.
For my last three property purchases, I've written price concession letters in order to get the best price possible. The first letter was written after discovering more remodeling issues. The second letter was written out of fear since we were in the beginning of a pandemic. My final price concession letter came 50 days into escrow. I asked for $80,000 off due to a potential future leak. The seller agreed to giving a $50 credit.
Example Of A Friendly Price Concession Letter
In early 2019, a larger house in my neighborhood came up for sale. Because we were expecting another child and we liked the neighborhood, I thought buying this house would be ideal. It had one more floor and ~600 more square feet of living space. We also had been living in our old house for five years already.
We didn't need to buy this new house. However, the investor in me had a goal of buying another panoramic ocean view property in San Francisco. I thought and still think they are undervalued. Besides, the property had roughly 300 square feet of expansion potential (900 square feet larger after expanding), which meant a clear path to higher returns.
However, once I got into contract, I began to have second thoughts. Moving is a big pain and the house needed a lot of work. Did I really want to go through another remodel with a baby on the way? Not especially.
Here was my short price concession letter.
I'm writing today to see if you can work with me on a slight pricing adjustment.
After inspection, we noticed there is a small crack in the foundation. It could be nothing or it could be something that could cost upwards of $100,000 to fix.
I understand that I waived inspection conditions. However, a strong foundation is important, especially since we are on a hill. With one young son and a daughter on the way, my main goal is to provide a safe household for my family.
Rest assured, the escrow process is still on schedule. I was just wondering if you were open to a $20,000 price concession that would be allocated towards hiring a contractor to bolster the foundation for greater peace of mind.
Thank you for your consideration.
Seller's Reaction To My Price Concession Letter
I wasn't threatening to cancel escrow in my letter. Instead, I reassured the sellers that everything was still on track. I just felt like I had to voice my thoughts so I didn't end up with any regrets once closed.
My price concession letter was warmly received. As older parents who grew up in the house, the sisters could relate to my concerns about safety. Further, they knew the house needed work.
In the end, we agreed to a $10,000 price concession, all of which I used to remodel the house, including the foundation.
My price concession letter worked because we had a very amicable relationship. From the very beginning, I was very open about my intentions of remodeling and then moving in. They had considered offers from contractors and flippers but went with a family instead.
The sellers had also spent plenty of money remodeling the home decades ago. 20 years ago, they spent $85,000 to put a steel beam in the garage. They also spent another $60,000 fixing the siding and windows on the south side. Therefore, they knew my ask was not unreasonable.
The price concession was adjusted in escrow as a credit back after closing. Alternatively, you could also ask for a price concession by having the other party cover your closing costs.
Example Of A Stronger Pricing Concession Letter
Surprisingly, in April 2020, one month after lockdowns, one of my favorite houses in the neighborhood came up for sale. Ah hah! A potential forever home!
My son and I had walked by the house probably 60 times before then. Every time we'd pass by he'd run down the driveway to marvel at the double-wide glass garage door. He had an obsession with all types of garage doors and this was his favorite.
We had moved into the house we purchased in 2019 after months of remodeling the bathrooms and kitchens upstairs. But the downstairs, with the 300 square feet of expansion potential, still hadn't been completed. Instead, it had been demolished and left empty so my contractor could update the house wiring. Unfortunately, my contractor then disappeared for months and I was uncertain when he'd return.
Instead of having a 600 -900 square feet larger house to enjoy for my family, as intended, our new house was only 200 square feet larger. It was fine, but it was not ideal.
Therefore, once again, as an investor and as a father, I was emboldened to do something about a suboptimal situation.
A Long Negotiation Process
Once the pandemic hit on March 18, 2020, public open houses shut down in San Francisco. From March 18, 2020, through June 2020, real estate transaction volume slowed tremendously. But I used the opportunity to take private tours of the house and develop a good relationship with the seller's agent.
After 45 days, the sellers took the house off the market because they hadn't gotten the big number they were hoping for ($200,000+ over asking). During this time, everything was still uncertain and the sellers didn't need to sell. Further, I knew my wife would kill me if we had to move again so soon! Therefore, I delayed putting in an offer.
About three weeks later, the selling agent called me while I was playing with my son at the playground. He said they'd be putting the house back on the market. He also said he had another interested buyer. I was intrigued, but still unwilling to pay top dollar given we had just bought a house a year earlier.
In the end, I offered $170,000 below asking, which beat out another offer that was $100,000 higher. How so? I let the selling agent represent me (dual agency). To convince the owner to accept my lower offer, the selling agent decided to lower the commission to the owner by 2.5%. All the hours of talking to the agent one-on-one paid off!
In early June 2020 I got into contract with an estimated 30-day close. Soon after, I started feeling some dread because the pandemic was going on longer than I had anticipated. What if I was making a huge mistake?
Once again, for peace of mind, I wrote another price concession letter. This time, I was more aggressive with my ask and analysis.
Another Price Concession Letter Example
I hope the family is well.
It was not my intention to ask for a price concession when we put in our initial offer. However, due to a large downdraft in comparable property pricing and a lower-than-expected appraisal, I am asking for a price concession of $50,000.
Around the time we got into contract and since getting into contract, there have been a rash of very aggressive price cuts for comparable homes that has given us great concern. Here are specific examples we have been monitoring in real-time:Property 1 – Price cut from X to Y
- Property 2 – Price cut from X to Y
- Property 3 – Price cut from X to Y
- Property 4 – Price cut from X to Y
- Property 5 – Price cut from X to Y
- Property 6 – Price cut from X to Y
Despite the price cuts, none of these homes have gotten into contract yet. However, the wave of price cuts for similar type homes is concerning as it puts significant downward pressure on all homes in this segment.
Further, the appraisal report came in at $125,000 below my expectation. I understand the appraisal report is subjective, however, all the same, the appraisal report is a valid valuation opinion from an expert that should be taken into consideration.
Tight Lending Standards
I spoke to my mortgage officer at Wells and he said that the lending industry has really tightened up with jumbo and superjumbo loans. In the past, banks were able to sell these jumbo loans to the private secondary market. Now that the secondary market has dried up due to tremendous losses, it is no longer buying. As a result banks can’t offload their risk and must keep these jumbo loans on their books.
My mortgage officer also said that many banks are not funding jumbo loans with a down payment of less than 30%. The banks want more skin in the game. Further, the value of Restricted Stock Units (RSUs) and Schedule E income (rental income) are no longer included when being evaluated during underwriting, which means borrowers can no longer borrow as much.
In contrast, we remain in a strong financial position with a 40% down payment. Our income, although down since the start of the pandemic, continues to be strong enough to support the purchase. Finally, all additional paperwork requested since ratification has been obtained and submitted as well. We are just waiting for underwriting.
My loan officer said that if we can get the pricing concession paperwork in by June 29, 2020, we will still be able to close by July 2, 2020. In a worst case delay scenario, my rate is locked until July 10, 2020.
Still Interested In Buying
My family still loves your home and we think we are the best-suited family and the most qualified buyer for your home. During the walkthrough with Listing Agent the other day, we did our measurements and I even pulled some some weeds and cleared some leaves in the front garden with my 3-year-old son.
We’re just worried that the pandemic will go on for longer than expected and the economy will still struggle mightily for at least another year until there is hopefully a vaccine. There are so many unknowns right now. Saving as much cash as possible feels like the right thing to do. However, a price concession will put us over the hump and give us the conviction to close on time.
Thank you for your consideration during this difficult period.
A More Aggressive Price Cut Ask
Dang, re-reading the letter now, it sure sounded like I was really worried! And I think if we're honest, many of us were during the first six months of the pandemic.
The interesting thing about this price concession letter is that I almost convinced myself out of purchasing the home. It was that convincing, if I do say so myself.
My letter ended up delaying the close of escrow by 35 days because the sellers didn't respond to my ask before my mortgage rate lock expired. They had 12 days to tell me either yes or no. As a result, I had to resubmit some paperwork to extend my mortgage. Luckily, my lender didn't charge me.
The listing agent almost got the sellers to give me a concession of $20,000, but in the end they held firm! In addition, they got a lawyer to send me a letter, threatening me to perform. Otherwise, they would keep my 3% earnest money deposit.
I was taken aback that they had ghosted me for 12 days and went the real estate attorney route. All they had to do was respond before my rate lock extension expired and say, “sorry, no can do.” Although disappointed, I would have continued with the escrow time frame as planned because I tried my best.
Got A Price Concession After all
In the end, the price concession letter bought me 35 days of extra time to prepare for my move without penalty. Ideally, I would have loved to have a 90-day close since we moved into our other house nine months earlier. A month of extra time meant that I saved one month's worth of mortgage payment and property taxes.
I also ended up talking to the boss of the real estate brokerage to see if we could work out a deal. He wanted to talk to me, so I obliged. In the end, the listing agent agreed to credit me $5,000 at closing. I accepted as it helped defray most of my closing costs.
Looking back now, it is easy to say I should have happily purchased the home since prices have gone up. However, back then, taking on a large mortgage when the world was uncertain seemed like a huge risk.
Due to the listing agent working so closely with me, I plan on giving him my listing if I were to ever sell. He earned it.
The Downside To A Price Concession Letter
If you're a poor writer who lacks emotional intelligence, you could piss off the seller. If you piss the seller off too much, they might back out of escrow. Or they might try to raise the price on you.
Interestingly, sellers have more power to back out than buyers. If a buyer backs out without valid cause, the buyer will likely lose their earnest money deposit. If a seller backs out without cause, so long as the earnest money deposit is paid back with interest, they are generally OK.
Sure, the buyer can take the seller to court and force the home sale. The seller may have to pay the buyer's legal fees and court costs if they lose. But come on.
How many buyers are willing to go through that painful process and spend more money on attorney fees? Instead, most buyers would just move on and try to buy another house.
How To Write A Good Price Concession Letter
If you want to increase your chances of getting a lower price on your next home purchase, your price concession letter should contain the following:
- Empathy with an apologetic tone
- Facts about the market, comparable sales, and remodeling/construction costs where necessary
- Reassurance you still want to buy the house
- Flexibility in being open and willing to negotiate
Remember, a price concession letter is more effective after getting into escrow. Ideally, you want to get into contract with contingencies so that you can use issues you find to negotiate down the price.
If you want to get out of escrow with your earnest money deposit intact, then you could take a much stronger tone. But at this point, without a valid reason for backing out, you should probably try to stay amicable. This way, you might be able to claw back as much of your earnest money deposit as possible.
Write out your price concession letter and read it out loud to yourself. Then edit the price concession letter and read it out loud to a trusted person. This way, you will make sure the tone of your letter is appropriate and as intended.
Finally, you must ensure that your real estate agent delivers the letter in the same empathetic and apologetic tone. Without showing a united front, your letter may fall flat. There's a great saying in real estate: money is often made on the purchase, not on the sale.
It Never Hurts To Ask Respectfully For A Price Cut
The moral of this article is: always ask for a better price when uncertainty starts to creep in. It's not the nicest thing to do once you get into contract on an agreed-upon price. However, you have an obligation to yourself and to your family to get the best price possible.
Things come up during escrow all the time. Maybe you didn't get that promotion you wanted. Or maybe your stock investments take a big hit. Worse, maybe the life you imagined with your partner is no more because you break up.
Homes fall out of escrow all the time, which is what no seller or real estate agent wants. Therefore, oftentimes, it's better to compromise and proceed with a transaction than have everything fall to pieces.
So long as you write your price concession thoughtfully and amicably, I think there's greater than a 50% chance you'll get some kind of discount. The discount could come from the seller or the seller's agent.
The same thing goes for asking to get your late credit card fee waived, asking for a raise, negotiating a severance, and so forth. If you don't ask, you'll likely never know!
Invest In Real Estate Passively
As you've just read, purchasing real estate can be a very cumbersome process. If you're interested in investing in real estate to earn passive income, take a look at my favorite real estate investing platform, Fundrise.
Fundrise is my favorite private real estate investment platform that was founded in 2012. The firm manages over $3.5 billion and has over 400,000 investors. Fundrise focuses on multifamily rental properties in the Sunbelt region, where valuations are lower and yields are higher.
Another great private real estate investing platform is Crowdstreet. Crowdstreet offers accredited investors individual deals run by sponsors that have been pre-vetted for strong track records. Many of their deals are in 18-hour cities where there is potentially greater upside.
If you want to get more surgical in your private real estate investments, Crowdstreet is an attractive solution. I've met the people at Crowdstreet on two separate occasions and came away impressed with their risk-management and product offerings.
Real estate is my favorite way to achieving financial freedom because it is a tangible asset that is less volatile, provides utility, and generates income. I've personally invested $954,000 in heartland real estate to diversify away from my San Francisco real estate holdings.
Readers, has anybody every written a successful price concession letter? If so, what type of price concession did you end up getting? What are some other downsides of writing a price concession letter? With interest rates rising, the pace of housing price appreciation should decelerate. Hence, negotiating is more important than ever if you plan to buy today.